This is a guide on how to try to sound smart at a party while talking about FIRE. Given that this is in the context of a party, half of it will be nonsense. You, as a reader, will decide which half. If you read it twice, you may realize that the other half is nonsense too.
Having said that, let me also increase the prestige of this blogpost by reminding you that I am not a financial advisor.
There will be two sides of the story, for and against the FIRE movement. If you feel neutral about either and you just want to impress someone at the party, voice the opinion that people have heard less but they can still confidently follow. If you have already form an opinion, just read the point of view that is closer to what you already believe, as we usually do on the web nowadays.
Having explained the setup, let’s proceed to the guide which is in the form a question/answer. It has the potential to significantly expand your social circle when you talk to your acquaintances about FIRE. And by saying potential, I mean it is very likely that it will do nothing. It definitely hasn’t helped me. At any party. Not that I am invited to any, anyways.
FIRE stands for Financial Independence, Retire Early. Sounds lit? It is basically the idea that you can make enough money at some point in your life so you don’t have to work again.
For: You save money. Put it in something that gives a high interest rate, and withdraw only once you reach a goal. People have done some maths (Trinity study, later studies) and it works. No need to rely on external factors or wait for an official retirement age. You can be free to do whatever your heart desires after you reach your goal.
Against: This is a DIY privatized retirement plan with uncompensated risk (you die early). A lot of the mechanics are heavily disputed (SWR — Safe Withdrawl Ratio) and essentially is for people who don’t know what to with their money.
- What is Financially Independent?
Financially Independent is the person who doesn’t need to work for the rest of their lives. (Insert joke here “I have enough money if I die tomorrow”).
For: If you hate your job, you have the opportunity to do something else. Even if you like it, you don’t have to worry much about outside factors (what your boss thinks of you) that may diminish your motivation to do it properly.
Against: Being part of the society means also doing work that you don’t really enjoy. Even if you are financially independent, this moral obligation doesn’t change. At the end of the day, someone has to do the work that no ones wants to do.
- What are the mechanics of FIRE? (practice)
There are long books that essentially will tell you things are complicated. Follow this strategy. They may also explain a little bit why they are complicated. Nevertheless, they are not THAT complicated, but in any case, not the most fun thing to explain in a party.
- Make sure you have no debt, unless that’s very cheap (mortgage).
- Save enough money in case of emergency (3-6 months).
- Buy the ETF called VT until you come close to (early) retirement.
- When you are getting closer to your retirement, start increasing your allocation to bonds (perhaps reaching 40%).
Live your life now. You may die sooner than you think. You will definitely never be as young as you are now. Your memories that you take in your retirement are more important than your money.
- What are the mechanics of FIRE? (theory)
You save a lot of money. Saving money means that you earn more than you spend. If you have risk tolerance (e.g. you are young), you put your money in stocks which historically and averaging long enough periods of time have returns of about 7%. Otherwise, you put your money on bonds (2-3% returns) which are more stable. If you are really risk averse, you can have them even in cash in a bank account.
There are other strategies too, like using structured products, which usually make more sense for institutions because they involve fees that don’t scale well at individual level. There are also markets of other assets classes (precious metals like gold) or private companies that go beyond what is fun to explain during a party.
There are also strategies that are a mix of stocks, bonds, and cash.
For: You have worked harder or smarter than others. You take advantage of the exponential nature of the returns (compound interest) and you are being rewarded for being proactive and understanding our financial system with the option of being able to retire early.
Against: Your life is sustained by the work of others. The stock market is a way aggregates way too much capital back to the people who already have it, under the false pretense of return for assumed risk. The argument that capital allocation reflects prioritization to social beneficial initiatives is … (sip some drink here and quickly skip to another topic. If someone insists, see further points below. The trick is to not make your audience tired with too many financial details and you don’t want to sound like a communist. Waving hands can go a long way to a drunk audience. Much better than starting a 10 minute monologue.)
ETFs are stocks. Essentially ETFs are special companies that the only thing they do is to own shares in other companies. Because they also need to make some money, they charge you some fees, called TER. Because they also want to make some more money, they also lend their shares to short-sellers but that doesn’t really affect you.
By buying an appropriate ETF, you buy a little bit of many companies. A popular strategy is to buy a little bit of (almost) every company in the world. That’s what you do by buying VT. Of course, in practice it is impossible to buy a bit of every company in the world (due to lack of liquidity for small companies among other practical reasons) so they are some kind of approximation to that.
For: ETFs is the only investment that you need to make, apart from bonds. You don’t have to worry about companies going bankrupt or losing a lot of value, because you have a little bit from many of them. Just buy an ETF with low TER and you are set for life.
Against: ETF is one of the surest ways to make guaranteed money in the stock market… by creating them. By creating them, you charge the people who buy them, you make money by lending their shares and you also keep the voting rights for yourself (or charge extra to lend your shares to those who want the voting rights).
Bond is a loan. There are bonds issued by governments and by companies. That means that a government (or a company) asks for some money now and promises that they will pay you back later. Bonds in theory help you diversify further and therefore decrease your systematic risk. Nevertheless, in practice their performance recently has a quite high correlation with stocks.
For: Bonds are more stable than ETFs because their return is guaranteed unless the government (or company) goes bankrupt. Nevertheless, their returns are smaller, especially nowdays.
Against: Bonds are an alternative way of financing a company without diluting the voting rights of the current stockholders or making them share with you their future profits. The company essentially bets that your return will be smaller compared to that of the current shareholders. You are fine with the smaller return only because you want to decrease its volatility.
Stock is a piece of a company. Buying a stock gives you (partial) ownership and with that some voting rights on the decisions that the company makes. By buying stocks to specific companies, you are exposing yourself to the risk associated with the destiny of that company.
For: Only buy ETFs. Buying a stock of a company is too much trouble and likely you will get it wrong. There are way too many stocks, you are competing with professionals and the chances that you can outperform them are minimal. That’s why choosing an ETF with a low TER and tracking error are so important.
Against: To replicate a market capitalization index fund can be done relatively easy with some automation if you care enough or alternatively manual rebalancing should be good enough for practical purposes. Nevertheless, it may be too tempting to spend time on things that make small difference to the world (or your world) that it may not be the most advisable path.
Day trading is the activity of buying and selling stocks in short period of time. Some people call it speculation instead of investment because the time horizon makes a difference on the mentality.
For: No. Not worth the trouble or the fees that this may incur.
Against: No. Not worth it.
- How does really buying a stock (or an ETF) work?
You open an account with a service called broker. This is a website (or an app) that shows you stocks, ETFs and other stuff you can buy (or sell). Once you choose something to buy, this service forwards your order to another service called wholesaler. A wholesaler aggregates many orders and tries to match them internally. That is, if for a stock they see an offer to buy for 200$ and to sell for 100$, they will execute internally. Then, they will split the difference with all participants (including them, the broker, you, your counterparty, the other broker…). If they don’t manage to do that for some reason, the order will go a stock exchange where it will be matched against other orders. On top of the fees that you pay based on the splitting of the spread difference, you also pay commission fees and taxes for your purchase (or sell). If you are interested in this topic more, you can search terms like “dark pool”, “odd lot” and so on.
For: It doesn’t matter. As long as you buy and hold, the mechanics of a single transaction don’t go beyond the level of noise.
Against: There are too many intermediates that make money out of a system that they purposefully keep obscure.
- Amazing! How do you know all this stuff?
If we reached this part during a party, which I highly doubt since you are from the people who are still reading this blogpost, it means the above worked! Congrats! Now you have the self-confidence to also make up some financial “facts” to impress at a party!
For: What is your phone number?
Against: What is the phone number of your friend?
You may have noticed that above I didn’t include any links. That’s because I just made up this blog post. Don’t take it too seriously. Feel free to leave a comment with your opinion or made up facts in the comments though. I promise not to take them seriously.