It is difficult to be pessimistic and be on the Financial Independence journey. Even though I am an optimist, there were some areas where I had to temper my optimism on my FI Journey.
Optimism and Financial Independence
Most people pursuing FI are, by definition, optimists (although pessimists may doubt this assertion)! People on the FI journey are making the implicit or explicit tradeoff that saving today will benefit them in the future. This requires an inherent optimism about the future … starting from the mundane optimism that one will be alive in the future to the quixotic optimism that the future will be better and hence worth sacrificing today for.
Although optimism is a great trait, it does create some unique hurdles for the FI journey. This is not to say that optimism is bad. However, sometimes I had to temper my optimism or learn not to be overoptimistic. Below are three such examples from my FI journey.
An Optimist and a Pessimist meet for coffee.
Optimist: Things cannot get any better!
Pessimist: I agree!!
1. Investing Optimism
I was pretty sure I could beat the market. After all, how difficult can it be?!? At the start of my FI journey, I invested in individual stocks and promptly learned my lesson. Not that I lost money or anything like that. In fact, I made some money on my stocks.
However, when I took a hard look at the results, I was surprised. I compared my portfolio returns against a broad low-cost index fund (like Vanguard S&P 500 Index Fund – VOO). The result was that my portfolio had underperformed – it had not grown as much as VOO.
Not just that, I had also spent countless hours researching individual stocks – when to buy, when to sell, and so on. The net result of all my effort was that I made some money. Great! But I would have made more money had I just put my money in VOO (and would also have saved a lot of time in the process).
Then, there was the additional consideration that whatever gains I had made were being taxed (since I was buying and selling shares). Instead, I should have invested the money in a low-cost index fund and left it there (without selling). That way, I could have sold it after reaching FI.
The benefit of selling after reaching FI is that the profits would be taxed at a lower rate (due to lower income after retirement).
Since then, I have grown wiser. Now a large portion of my portfolio is in low-cost and index funds. However, I am an eternal optimist. So I do still invest in stocks. However, I make sure that it is about 20% of my portfolio. That way, even if things do not go as planned, it will not impact the rest of the 80% of my portfolio.
2. Time to FI
After learning about FI, I could not wait to get started. I focused on investing (although, as I mentioned above, I was trading rather than investing back then). The initial optimism and excitement soon faded as I saw the meager progress I had made in the first few years. I also started focusing on saving more. My savings improved, and the investments were also increasing, but just marginally.
The reality is that FI can be a long journey, and I was aware of that. But knowing it will be a slow journey and then actually seeing your savings grow at a slow pace are two different things!
Eventually, the magic of compounding kicked in, and things started moving faster. The journey got easier after the first few years. Finally, I did get to FI, but looking back, I think I had underestimated how much patience is needed.
There were times when I looked at the little progress I was making and thought of giving up. The decision not to give up in the early years (even when progress seems very slow) was the key reason I achieved FI.
3. Planning for Life After FI
The biggest area where I was naively optimistic was that life would suddenly, miraculously, somehow work itself out / get better once I reach FI. I focused only on achieving FI, and I did not focus much on what life will look like after FI.
I had a vague idea of what I might want to do after FI, but nothing planned out. Figuring out my post-FI life after getting to FI was not a great idea.
I should have spent the last two years before FI on what I wanted to do after FI. Or taken a sabbatical / break to experience life without a job.
That would have given me more perspective and helped me plan my post-FI life better. Sure, this would have delayed my FI journey. But it would have been beneficial to experience post-FI life for a period of time.
Retirement is wonderful if you have two essentials — much to live on and much to live for.
There are two essentials for a wonderful post-FI life. I was focused on the former (making sure I had much to live on) and should have spent time thinking about the latter also.
All of this is not to say I am not happy with my post-FI life. However, it always helps to know / experience what FI looks like before getting to FI.
In Conclusion
An optimist is a person who creates an airplane.
A pessimist is a person who creates a parachute.
The above quote is definitely funny. However, it is also very insightful because it highlights the value of both optimists and pessimists. Blind optimism can be dangerous, and it is good to temper our optimism at times.
I am an optimist, but it does make sense to ‘hope for the best and plan for the worst’. It is also why I am taking a lot of time to plan for my early retirement.