After reaching Financial Independence, I am investing for Early Retirement in a low-cost portfolio that is conservative but also has some room for growth.
Investing for Early Retirement: Safety First
Rule Number One: Never Lose Money.
Rule Number Two: Never Forget Rule Number One.
Warren Buffett
The above quote from the legendary investor Warren Buffett is funny and insightful. For me, it means do not mess around with your Financial Independence (FI) money! I prefer earning a little less on my investments than taking a huge risk and incurring a significant loss.
Another reason the portfolio is conservative is that, as we like to say in the Finer household: “Why fight when you already won?”. If you are already at FI, you don’t need to take more risks to earn more money.
You only need to become Financially Independent once. No one can become double-FI or triple-FI!
But you can lose a lot of money and lose your financial freedom. This is what I am trying to avoid. It would be tough to go back after getting used to the FI life.
Why fight if you already won?
Finer Household Philosophy
A Bit of Background…
The Finer family early retirement portfolio consists primarily of financial assets. My interest and expertise are in the financial markets, and that is where our investments are concentrated. That is why you will not see any real estate in the portfolio below.
That being said, real estate can be a great vehicle to build wealth.
We own a house, but we do not count our house as an ‘investment’. Yes, it is an asset, but if we sell that asset, we will have to pay rent or buy a new house. So we don’t consider our house as an investment.
Another thing to note is that this portfolio differs from a traditional early retirement portfolio. I have no reason to believe this portfolio is better or worse than any other portfolio.
Investing for Early Retirement: Our Portfolio
Our post-FI portfolio allocation is as follows:
| Asset Type | Percentage of Portfolio |
| Stock ETF | 70% |
| Commodity ETF | 10% |
| Individual Stocks | 20% |
| Total | 100% |
| Cash | 4 years of living expenses |
So how is this a conservative portfolio, you might ask?
Well, to begin with, having four years of living expenses in cash is a lot. This is like a massive emergency fund. And cash typically earns close to nothing. In fact, cash loses money if you factor in inflation. However, this is the reason why I think our portfolio is conservative.
Plus, we have a lower Safe Withdrawal Rate (3% vs. the traditional 4%), further adding a layer of safety.
Benefits of Cash while Planning for Early Retirement
We have reached FI and are planning for early retirement. Hence we have increased the amount of cash in our portfolio. This is the biggest change we have made in our investing for early retirement. When I was on my FI journey, I invested almost all my money in stocks.
There are two benefits of having such a large portion of our portfolio in cash.
Ability to take risks: This cash buffer provides stability, and hence we can afford to invest more of our portfolio in individual stocks (20%). Investing in individual stocks can be risky – especially high-growth stocks that I invest in. Also, early retirement can be scary, so having more cash helps us sleep better at night.
Protection against a bear market: The single biggest risk for early retirement is a bear market right at the start or close to the beginning of retirement. This is also called the sequence of returns risk. Having cash on hand provides us the confidence to ride out any bear market (the longest bear market has lasted less than three years).
Investing for Early Retirement: Our Portfolio Details
Stock ETF: Vanguard S&P 500 ETF (VOO): 70%
VOO covers most of the relevant companies in the US, and it is also a very low-cost index fund. In the future, I might add an international stock ETF to get some international exposure.
Initially, I had a large portion of the portfolio in individual stocks. However, I have since moved a large portion of it to VOO.
Commodity ETF: Invesco DB Commodity Index ETF (DBC): 10%
Long term, as both fiscal and monetary policies, continue to be accommodative, inflation may pick up at some point. I know it has not happened so far. However, I like to keep 10% of my investments in a broad-based commodities fund, just in case.
If inflation never picks up – well, that is good news all around (although it may not be that great for this portion of our portfolio).
Individual Stocks: 20%
I recognize that 20% is a high allocation to individual stocks, especially after FI. However, the four-year cash buffer allows me to sleep well at night when some stocks go down 20-30% in value (which does happen with high-growth stocks).
On the flip side, this portion of the portfolio increases faster (on average) than other parts of the portfolio. One of the benefits of early retirement is that I will sell small portions of these stocks every year to reinvest in the different parts of the portfolio (while taking advantage of the lower tax brackets).
Cash: iShares Short Treasury ETF (SHV): 4 Years of Expenses
US treasuries are considered one of the safest investments (if not the safest) in the world. The short-term nature of SHV means there is minimal interest rate risk. Another way to invest in cash is to keep it in the bank, but I prefer SHV.
In Conclusion
Overall, our portfolio is conservative – four years of emergency funds and broad-based stock ETF. But it also has some commodities if inflation ever takes off, and it has high growth stocks.
Is this the most optimum or even an ideal portfolio? Of course, not. However, I think every investor needs to plan their investment based on what they are comfortable with. Psychology, after all, is one of the biggest elements of investing. I feel good about this portfolio, and ultimately that is what matters.
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