One of the main ingredients of achieving financial independence is growing our existing wealth passively – also known as the mystical art of investing. While I do not profess to be a practitioner of such mystical arts, I do have a good idea of how to make use of compound interest to build a sufficient nest egg which has replaced by annual income and allow me to achieve financial independence. I have achieved this through a core-satellite strategy, building up a core portfolio of ETFs with satellite bets across stocks and crypto etc.
TLDR:
- Build a core portfolio of low cost passive ETFs
- Get on the property ladder as soon as possible
- Aim for a fully paid up property + an ETF portfolio the size of your FIRE number to retire
What is a Core-Satellite Portfolio?
A core-satellite portfolio is an investment portfolio where majority of your holdings (eg. 80%) are deployed in long term holdings like ETFs, and the remaining holdings (eg. 20%) can be deployed into bets which might be volatile in nature like stocks and crypto.
What are ETFs?
ETFs stand for exchange traded funds and investing in an ETF allows you to invest across multiple stocks because it represents a basket of assets and provides diversification. These ETFs are generally managed by professionals and hence it is a good option for investors who wants to be hands-off with their portfolio.
What is a good ETF?
A good ETF is an ETF which is low cost, passive and diversified. Low cost refers to the management fees incurred which chips away at your returns. Some funds which are actively managed would incur higher investment fees than funds which are passive in nature. Passive funds seek to replicate the performance of a specific market or index and does not try to outperform it hence they charge lower fees. A diversified ETF should cover stocks across multiple industries sometimes even multiple geographies.
Putting this all together, some examples of ETFs which meet the above requirements include:
- VOO: Vanguard S&P 500 ETF
- VT: Vanguard Total World Stock Index Fund ETF
- VTV: Vanguard Value ETF
(Not financial advise, do your own due diligence)
Having established the core fundamental of the portfolio, we can then look at other satellite bets to grow our networth.
Stocks and Bonds
Stocks and bonds make up the most common investment instruments in the city. They are easily accessible across most platforms and would be most people’s first foray into the investment world. Single ticker stocks results in huge concentration risk, hence stock market exposure should be gained through ETFs as discussed above. Most Henrys would be barred from single stock trading as well due to compliance issues. Abstracting away all of the above, assuming you would like to do single stock trading, how do you pick a reliable stock?
I personally believe in Value Investing as advocated by Warren Buffett. Without going into too much detail (yet another article somewhere somehow) Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. I personally enjoy simple businesses, low debt position, strong cash flow but undervalued due to some unexpected market forces.
The same analysis goes for bonds. As this article is being written, US T Bills are trading at 5% coupon rate which is as risk free as it gets so I do recommend investing into such bills. Should you opt for a corporate bond with a higher coupon rate, the old adage of high returns generally comes with higher risks should be in your mind and whether the extra 2-3% is worth that extra risk. At the moment, US T Bills are great ways to diversify away your risks.
Real Estate and REITs
I find the FIRE community should engage with real estate investment more, especially if you are living in a Tier 1 city. I am a strong advocate of getting up the property ladder as soon as possible, even if it means liquidating some of the core portfolio as established above. Mortgages on property tend to have lower interest rates as it is secured over the property and the earlier you get a loan the longer repayment period you can negotiate. If you were to buy an apartment, either you save on rent by contributing your rental money towards your home ownership OR you rent it out and start generating some income. Either way, I generally believe that owning property makes a lot of sense.
Some readers have reflected that what if the property market crashes like what we saw in the past – that is definitely a sound concern, which is why selecting the right property to buy is highly critical. We want a property which is defensive and will retain its value even in a market crisis. (More on how to start your real estate investment in a separate article)
An alternative to owning real estate is investing in REITs. REITS stand for Real Estate Investment Trust which collects a series of properties under a trust and trades like a stock in the stock market. There is an obligation to return a significant portion of the rental cash flow generated to investors so investors get real estate like exposure which does not tie up a significant amount of liquidity.
Commodities and Crypto
While both commodities and crypto are very different asset classes. They are assets which move inversely against the stock market so they are options to provide some hedge and balance in the portfolio. As such the way which we should be thinking about how we want to invest in these assets are also quite similar.
- Market Conditions: What are the underlying demand and supply forces influencing the prices of these assets? Some examples include
- Bitcoin halving reducing total supply of bitcoins
- Central banks purchasing more gold to reduce reliance on the US Dollar
- Regulatory conditions: Are there recent regulations which influences the demand and supply forces? For example:
- SEC approving Bitcoin ETF resulting in more demand for bitcoins
- Sanctions against certain countries and locking them out of the US / SWIFT system results in stronger demand for gold and silver
- Investment mechanism: Are you going to buy the underlying asset directly or can you gain exposure to it via synthetics funds on the stock market?
If you were to only remember one thing….
There are truly many ways to build your investment portfolio. If you are a HENRY trying to FIRE, the only thing to remember is to first build a core portfolio of low cost passive index ETFs and then get on the property ladder as soon as possible. If you have a fully paid up property and an investment portfolio of ETFs which hits your FIRE number, you would be in a very comfortable position to FIRE.