One of my favourite financial independence bloggers is Pat the Shuffler who has done very well for himself investing purely in Australian ETFs and LICs. He currently has close to half a million in net worth. From what I know, Pat rents a place with his girlfriend, has a high-paying construction job, and manages to save a huge amount of money into Australian equity ETFs and LICs (e.g. VAS and AFI).
However, recently he wrote a post regarding his changing views. Over time, he has realised the importance of global diversification. He will be transitioning away from Australian equities and diversifying into foreign equities using VGS, which invests mostly in the stocks of the US, Europe, and Japan. In my opinion, this is a great move, and it reminds me of my own evolving views, and it has also inspired me to admit some of my own backflips and mistakes.
My views with regards to investing were very similar to Pat’s in that I believed that financial independence depended on dividends alone. If you generate high dividends, you will have enough to live off the dividends and become financially independent quickly. When I read back on my earlier posts (e.g. Dividends vs Capital Gains and 4% SWR vs Living off Dividends), I now notice that I seem quite cultish and stubborn in my views that dividends from Australian equities with franking credits was the only legitimate route to freedom and that anyone who does anything contrary to this is a slave! When I was in my twenties, I would dream of a life in my thirties, forties, and beyond flying around the world, relaxing on beaches, and living off dividends drinking coconut by the beach as I read books.
Perhaps I am becoming more mature as I head into my mid-thirties. I have since relaxed my views on a pure Australian dividend focus. Even though I did invest in some foreign equities, I had the bulk of my investments in Australian equities, and one of the consequences of that as that capital gains were not as high. Had I invested in foreign equities, my net worth today would be much higher. Things may change in the future. I will not tinker too much with my portfolio. For all I know, the Australian stock market may perform very well, but what this illustrates is the importance of global diversification. Australia only makes up 2% of global equities, which is almost nothing, and you never know what policies may be implemented within a country that impacts on every single company in that country.
Another area where my views are changing is in regards to debt and property. I am not a fan of debt, but I do have debt in a margin loan, and if you read my old posts, you’ll notice many posts that are anti-property. Property, in my opinion, is neither better or worse than shares. It is different but also somewhat similar, and there are some benefits of investing in property instead of shares. The key benefit of property is that interest rates on property are typically lower than interest rates for borrowing to invest in shares. Property is easy to leverage and great for capital gains and growth as opposed to Australian shares, which are great for cashflow but historically are lacking in capital gains. Whether now is the right time to be buying property is uncertain. Property prices have been going down for the past two years but the rate of decline has been slowing recently, leading many to believe the market may be bottoming out.
So what do I believe? If I have moderated on everything I have believed in, is there anything here of value? In my opinion, Pat the Shuffler explains it best when he says the following:
“Despite my many stumbles, poor decisions, changing of strategies and general non observance to much of the best advice when it comes to investment, I am still here and still kicking goals. So what gives? Thankfully for me…and everyone else…getting things perfect from the beginning isn’t nearly as important as getting things mostly right and just starting.”Pat the Shuffler
Basically, it is important to not let perfection get in the way of progress. Most people spend so much time trying to get everything perfect that they don’t start at all. You need to start saving and investing right away, and in my opinion there are three fundamental principles: (1) lower expenses, (2) diversify, and (3) minimise obligation.
Saving a lot of money relies on lowering expenses. Rather than focus on small expenses, we should focus on the big expenses e.g. accommodation and transport. Regarding accommodation, if you live with flatmates or with your parents, you will save far more. Regarding transportion, if you ride a bike or take public transport more, you will save far more. Do you need frequent international travel? Perhaps ride your bike around bike trails in your city.
Another key principle is diversification. Every investment or asset class has pros and cons. Property has cheap leverage and potentially high growth, but poor cashflow; dividend stocks may have less capital growth but good cashflow; tech stocks have low dividends but potentially high growth; gold generates no income and questionable capital gains but may perform very well during a market crash or a period of prolonged economic uncertainty. Rather than feel that you must invest in or feel attached to one asset, it is best to simply diversify across everything. Where there is uncertainty, diversify, and where you feel certain in any asset, it is important ot test that certainty by exposing yourself to the opposite viewpoints. Getting into the habit of challenging our views and diversifying accordingly is a check against our natural psychological biases.
Another key principle I feel I have not let go of is the idea that freedom depends ultimately on the absence of obligation. An obligation is something that compels you to do something in the future e.g. debt compels you to work to pay the debt. Obligation can be non-financial e.g. if you feel you must follow a particular social custom. Obligation is everywhere, and many obligations give people meaning and satisfaction in their lives e.g. obligation to their family or children. However, obligation is indeed the enemy of freedom, so if you want more freedom, you need to minimise obligation. I am a big believer in what I call the “do nothing” test, which is the idea that you are truly financially free when you can do nothing and everything is fine. If you must work to pay the bills, you are not free. There must be automated income coming into your bank account to cover all your obligations.