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Financial Independence Strategy: Planning the Endgame – The Bubus The Bubus Our journey to early retirement and what we do withal the way HomeWell-nighus Life Hacking Financial Independence 0 Financial Independence Strategy: Planning the Endgame by MrBubu · February 23, 2016 In the last post we got an overview on where we need to get, in order to be on FIRE. To summarize: Under unrepealable assumptions, which we think are good enough, we need virtually 500 000€ in today's money or 675 000€ in 10 years money, to imbricate our predicted expenses of 27 000€. How exactly is a stash of money going to imbricate your expenses? As we will see in the post well-nigh Investment Strategies, there are mainly two ways: Selling some of your resources - usually stocks or bilateral funds; Living of the dividends. In the first specimen you want your resources to increase its value by increasingly than your withdrawal rate. So you can withdraw your money and still have increasingly than before. This allows for inflation adjustment. In the second specimen you don't have to sell anything. The dividend gets transferred to your wall account. For inflation welding you rely on the companies to increase their profits, so they can increase their dividends. Selling your resources This is the route a lot of early retirees take. During your unifying phase you put all your investments into low-cost alphabetize funds. It is easy, you don't really have to think well-nigh it and you outperform most bilateral funds managers, due to the upper costs. TheZippyvs. Passive debate goes on forever and you can (and I indeed did) spend myriad hours reading well-nigh it. My impression is that most of the data-backed, science-y approaches favor lower financing which leads to alphabetize funds. Read here for some spare technical information First of all: As I said whilom (and I will repeat myself later), fees are your enemy. If you have a 500 000€ portfolio plane 0.5% fees p.a. are 2 500€. That's what I spend in 3 months. So if you want to build your own portfolio, and you think you can ratherish do so, then you will have no fees. Here I am talking well-nigh the comparison between zippy and passive funds. Now with this disclaimer out of the way, let's get when to topic. Since I do not know of any meta-studies comparing zippy and passive investing, let me pick one for you (if you know of any such studies please share them with me). Here is the MorningstarZippyPassive Barometer. I hope we can stipulate that Morningstar is pretty unbiased. They divided "the market" into variegated segments, like "U.S. Large Blend" or "Foreign Large Blend" or "U.S. Large Value" or "Intermediate Term Bond" and so on - you reservation the drift. Next they looked at 1, 3, 5 and 10 year time periods. If I understand it correctly they all ended in December 2014. In each time period and segment they compared ALL ETFs and open-end bilateral funds in their database (except funds-of-funds and money-market funds). The success rate in this paper is specified to be the percentage of urgently managed funds that survived the period and outperformed their passive counterparts.  I like this tideway considering instead of having an alphabetize as benchmark they used very passive funds, in which you could unquestionably invest. However they don't factor in how big the difference was. They did not superintendency if an zippy fund outperformed the passive benchmark by 1% or 10%. Finally they used two variegated methods to summate returns (Asset-Weighted and Equal-Weighted), but this gets too technical.Withoutreading this you could just go on page 2 of the pdf and squint at "Exhibit 1", and you should be worldly-wise to read the table for yourself. I wouldn't be unliable to reprinting it into this blog, would I? But if you don't want to do this let me pick out some numbers and facts for you: In only one category ("U.S. Mid Value") was the success rate whilom 50% (it was 54.4%). If you stick to lower forfeit zippy funds you have largest chances to outperform the passive benchmark in all but one category (and in this one only 1.5% higher) However plane the lowest forfeit zippy funds only had success rates whilom 50% in 5 out of 12 categories. If you want to go to zippy funds you should stick to value funds. There are fewer passive funds and they have a far largest Survivorship Rate. The dangers and downsides of this tideway Passive investing works fine and it can sustain a 4% withdrawal rate. Long term studies have showed this. But the key is the long term part. Over a long period of time you will tideway the expected rate of return. But if you have to sell in a withstand market (i.e. when prices are down), those resources don't "experience" the pursuit manful market (i.e. the upward trend). Usually if stocks crash you smile and buy increasingly resources for cheap. As a retiree you probably won't be worldly-wise to do this - without all that money that is once invested in resources is the source of your income.Flipsidedownside is that if the markets are lanugo in the year when you plan to retire you could eat up a large permafrost your money. Possibly too large to recover from it. This is part of the ongoing 4%-rule-debate and the strongest points of the opponents of this rule. A 4% rule is fine most of the time, but you personally only have one try! The upsides of this tideway It. Is. Easy. If you are quite new to investing or you don't really like reading well-nigh the technical side of investing, this gives you a very good endangerment of largest returns than you could otherwise get.Moreoverif you invest on a monthly or bimonthly basis, and you want to pick stocks, you might not be worldly-wise to crunch any numbers for a few months. During that time you can just buy a low-cost alphabetize fund. Lastly it is a proven method. This is only one short sentence but the weight of an treatise does not correlate to its length. You automatically buy a widely diversified portfolio with just one product, that has outperformed most zippy fund managers in the past. Living of dividends This is usually tabbed the dividend growth strategy, and there are other blogs defended to this strategy alone. The idea is to buy stocks that have a long history of paying and increasing their dividends. (Also the early-retirees I have seen endorsing this strategy only consider undecorous chips. So for our purposes this includes a form of value investing.) When you can live entirely on your dividends, and they increase with inflation, you are financial independent. I don't want to get any increasingly technical here, this will have to wait for flipside blog post. We are once over 1 000 words, and we have quite some material left to cover. The downsides of this tideway You only own individual stocks, and whether any given visitor continues to pay and increase its dividend is unclear. It is plane unclear if is standing to exist! In the typesetting "In Search of Excellence" the authors T. J. Peters and R. H. Waterman analyzed 43 companies and marked them as excellent. However 5 (I think) are unclothe and over half is performing under the market average. This is tabbed Survivorship Bias.Flipsidefactor is regression toward the mean. You have to pick the stocks by hand and stock picking is hard. You have to go through a list of candidates, decide on criteria, collect data, unriddle it, and so on. It can wilt a lot of work. You might get a rate of return unelevated the passive approach. The upsides of this tideway The biggest upside of the dividend strategy is that you don't have to sell in falling market and thereby realize losses. Dividend payouts are much increasingly robust than stock prices. The dividends can be used to re-balance during the unifying phase. Once your portfolio is set: No increasingly fees! This is unquestionably huge. As once mentioned above: A 0.5% fee on a 500 000€ portfolio is 2 500€ a year. Your passive income is not dependent directly dependent on the value of your stocks. If I buy a 4% yield stock now, that increases it's dividends by 5% every year this gives me virtually 8€ of dividend income in 10 years. But I still only spent 100€ once. "So what is your endgame, bubus?" , you might ask. At the moment my plan looks roughly like this (all amounts in today's money): Spend 20 000€ per year Get 10 000€ from dividends Diversify: own stocks of virtually 50-100 companies With a 4% yield this would be virtually 250 000€ Get 10 000€ from selling resources With the 4%-rule this would be 250 000€ in low forfeit alphabetize funds. Have an emergency fund of 30 months Those are 2 years to imbricate expenses if the stock markets crash, so we don't have to sell resources for a time plus 6 months "usual" emergency fund This would be virtually 50 000€   Remember that we don't have to save 550 000€ to get there. As explained in the last post we would need to save 400 000€ ourselves and the remaining 150 000€ would come from the return on investment.       Share Tags: finance You may moreover like... 0 Financial Independence Strategy: Saving 8 Mar, 2016 0 Financial Independence Strategy: Getting an Overview 14 Feb, 2016 0 Mr. Bubus Savings Rate of Aug 2015 - Jan 2016 30 Jan, 2016 Leave a Reply Cancel reply Your email write will not be published. 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