FI, the simple path to financial independence

Updated: Jul 30

Financial independence has always been an idea, something that I have wanted to strive for. Not many of us believe it is possible, believe we need a lot of money or it is just too complicated.

We see people on the internet showing off that they are trading and picking these winning stocks. They make massive gains and lots of money all the time. To the normal investor or even person like you and I, we don’t believe we have these skills. Maybe some of us are just more risk adverse, think we work hard for our money and mentally it would be devastating for us to loose all our hard earned cash in one fell swoop.


When it comes to investing or trading if that’s your thing, it can be very daunting. All these stocks, all these assets which have so much information behind it. When first taking a look at investing, you get bombarded with information. I know when I first started investing I went into overload. Learning individual stocks, ETFs, Bonds, Trackers and much more…just that list alone could give someone a head ache.


But investing doesn’t have to be difficult. You don’t need to know the ins and the outs of every type of investment, stock and so on. We have these brilliant investment vehicles called Index tracker funds/ETFs.

What is an index?

You will find multiple indexes across the different markets. The markets being Nasdaq (US), LSE (UK), NYSE (US), Deutsche Borse Xetra (Germany) and many more.

What the index ETFs job is to track a certain index inside these markets, for instance the FTSE has a FTSE100 (top 100 companies in the UK) and the FTSE250 (next 250 largest companies in the UK). In the US we have the S&P500 (top 500 companies in the US).

But these index trackers don’t only track those kinds of indexes, you will also find Some which track the Bond market or even a world tracker.



This is where the book called ‘The simple path to wealth’ comes in. What this book teaches you is that Investing doesn’t have to be complicated, in fact it could never be so easy!

Did you know that over a 15 to 30 year period, the index will outperform 82% to 99% of actively managed funds. [1]


“I cringe at the oft-made suggestion that an investor can read a few books on valuing stocks and go on to replicate Buffett’s results. Perhaps the best of these is The Intelligent Investor written by Warren Buffett’s mentor, Benjamin Graham. It is a great book and if stock analysis interests you, by all means take the time to read it. But remember that when Graham wrote it in 1949, Jack Bogle’s first index fund was still 25 years away. Even actively managed mutual funds were far and few between. Analysing and choosing individual stocks then was far more necessary and useful skill.” - The simple path to wealth by J L Collins.


Who is Jack Bogle?

Jack Bogle was the founder and chief executive of the Vanguard group, who is credited with creating the first Index fund. The ideal investment vehicle for Bogle was a low cost index fund held over a period of a lifetime with the reinvestment of dividends and dollar cost averaging.

These index funds was his way to become a philanthropist, by achieving his investment philosophy. It was Bogle’s innovative idea of creating the worlds first index mutual fund back in 1975. His idea was instead of beating the index and charging high management fees, the index fund would mimic the index performance over the long run. Doing so would achieve higher returns with a lower cost than associated with actively managed funds.





Did you know that even the great Warren Buffett is an advocate of the simple index fund?

“My advice to the trustee could’t be more simple: Put 10% of the cash into short-term government bonds and 90% in a very low-cost S&P 500 Index fund” he noted in Berkshire Hathaway’s 2013 annual letter to shareholders. [2]


In the Facebook group called Financial independence UK a poll was taken. Bellow you will find the results of how they are achieving financial independence.

ETF 46 votes

Do my job 33 votes

ETF & Real estate 27 votes

Investment funds 17 votes

Real estate 10 votes

Index & ETFs 9 votes


Total votes 142 Votes


You notice that out of 142 people who voted that 82 people, which is over half, are aiming or achieving financial independence via the form of ETF/Index investing. Now why is it that ETF and index investing is so attractive to the people who are wanting to achieve FI? Well, the simple answer is because…..it's so simple. Index investing is one of the simplest and safer options for investing. *to note that all investing comes with risk and you can loose some or all your money.


Investing into index funds is not for the short term and the type of index fund you choose will be as volatile as the index which it tracks. Investing in a low cost index mutual fund or ETF can be an excellent strategy but like all investments, investing into a index fund requires you to understand what you are investing in. Not all index funds & ETFs are the same, you will find they have different on going charges or have different weightings in terms of the stocks they hold. An index fund ISN’T the market but it try’s to preform and achieve the same returns or losses as the index they track.


Index funds don’t ensure the future of investment success. Index funds should be part of a long term plan of creating wealth and becoming financially independent.


What are the most traded ETFs on the market currently? [3]

SPDR S&P 500 ETF - Ticker SPY

This fund tracks the S&P 500 Index and holds 505 well diversified stocks.


Invesco QQQ - Ticker QQQ

This ETF tracks the Nasdaq 100 index and provides exposure to 103 largest domestic (US) and international companies, but excludes financial stocks.

iShare Russell 200 ETF - Ticker IWM

This ETF targets the small cap sector by tracking the Russell 2000 Index and holds 2009 stocks.


iShares MSCI Emerging Markets ETF -Ticker EEM

This ETF holds 1,058 stocks which targets the emerging markets and follows the MSCI Emerging Markets Index.

iShare iBoxx $ High Yield Corporate Bond ETF - Ticker HYG

This ETF has 989 bond holdings which average maturity comes in at 2.84 and 3.42 years and offers exposure to a broad range of US high yield corporate bonds.


In the book simple path to wealth J L Collins recommends the vanguard fund VTSAX (Vanguard total stock market index fund) and VBTLX (Vanguard Total Bond Market Index Fund).

Now let’s take a look at VTSAX. [4]

VTSAX is a total stock market index fund, the investment seeks to track the performance of a benchmark index of the overall stock market. The expense ratio is a tiny amount of 0.04% which is great as it means more of your cash can be invested into the stock market, meaning more money is working for you. A very interesting thing to see is the average 5 year return is 10.95%, which is nothing too scoff at. Even the year to date is 9.55%, you are able to achieve higher yields with individual stocks but also much larger losses. The top holdings in this stock is what we would have thought with it tracking the overall market. We have Microsoft Ticker MSFT in top position which accounts for 4.71% of the portfolio. The top 5 are as follows:


Microsoft Ticker MSFT 4.71%

Apple Inc Ticker AAPL 4.28%

Amazon Ticker AMZN 3.47%

Facebook A ticker FB 1.82%

Alphabet A Ticker GOOGL 1.46%

The top 10 holdings in this ETF account for 21.72% of the total assets held.


If you are wondering why Microsoft is taking such a large position in the portfolio, it is due to the market cap of the stock. The market capitalisation refers to the total dollar market value of the companies outstanding shares of stocks. The market cap of Microsoft is so large that its value makes up 4.71% (roughly) of the entire market.

What is interesting with VTSAX is that its beta is 1.04, The Beta refers to how close it tracks the market in terms of gains and losses. So with a Beta of 1.04 it is slightly more volatile than the over all market.


The problem with VTSAX is that with Vanguard this Index fund is something called an Admiral share which has a minimum investment of $3000 and can only be done through Vanguard themselves. But now we know what these Market index funds goals are what other ETFs & Funds are there?

Well one of my favourites is the Vanguard FTSE All-World ETF ticker VWRL.L [5]


This fund seeks to provide long-term growth of capital by tracking the performance of the FTSE All-World index. A market which capitalisation weighted index of common stocks consisting of large and mid cap companies from developed and emerging countries.

With this fund we will see that the top 5 holdings are the same at VTSAX but have less weightings.


MSFT 3%

AAPL 2.84%

AMZN 2.21%

FB 1.17%

GOOG 0.96%

This ETF was conceived back in 2012 so doesn’t quite have the history of VTSAX nor does it have the performance as the average 5 year return is 10.18% (varies depending source). This ETF has a healthy yield of 2.1% and a relatively low on going charge of 0.22%, which is a lot lower than the majority of actively managed index funds. If you want diversity, this is one of the best around as this fund has 3421 stocks in the portfolio (AS of 31st May 2020). Whats good to see is that the Beta of this ETF is 1, which means it almost tracks the index perfectly, which is the whole point in this ETF.

Investing in an index Fund or ETF can be volatile sometimes. The market likes to swing back and forth, you have to have sturdy boots when it comes to investing for the long term.


This is why J L Collins talks about a bond total market Index Fund. The reason behind doing so is to use it almost as a hedge against inflation but to also smooth out the ride of your portfolio. They are a more stable asset to have in a portfolio and creates more diversity and no better is a low fee Total bond market index fund.

“Stable or falling rate environments are good times to buy bond funds, because investors will not Survey from capital losses due to lower prices. Even though falling interest rates will eventually cut your monthly interest income, you will be compensated with higher bond prices.” - Pocket Sense [6]

If you are risk adverse then a total market bond ETF/Fund will smoothen the ride. But you have to be aware that investing comes with risk, and investing long term you will encounter many corrections, crashes and bear markets. The 5 largest one day losses have currently been in 2020 alone, so you have to be prepared to stay on course and keep investing if you can afford to. [7]


For the average person like you and I, we are more than likely not able to beat the overall market. We don’t have the time to research the next up and coming stock to beat the market. We are unlikely to pick the next Amazon or Microsoft or even become the next Warren Buffet. So with the little time most of us have in our busy lives an Index fund or ETF is the perfect option to passively achieve financial independence.


Most of us don’t have millions, or even thousands to invest. But you don’t need to be rich to make money. The saying money makes money comes to mind, but how much money does it take…


Let's look at Investing into VWRL.

With an average yield over the last 5 years of 10.18% let's look at it as if we stop having that one coffee a week and invest the £5 into this ETF. £1 minimum deposit is needed for this exercise when using Trading212.



So lets say over the next year we put that £5 a week (every Friday) into our account and invest it into VWRL. After our first year the portfolio would have a value of £269 and we would have contributed £256. How about we do the for the next 5 years? We would now have a portfolio value of £1,690 and would have contributed £1,300.

10 years? We would now be looking at a portfolio value of £4,500, with only £2,600 contributes. We can see here why investing should be considered long term, but just putting £5 a week into the portfolio we would start to see massive returns.

Maybe we are able to invest instead of £5 maybe bump it up to £10 a week, which is £40 a month. The portfolio would now be sitting at £9,010! £40 a month which is a little more than the average UK phone contract and in 10 years you could have a £9,000 portfolio. The longer you invest and leave your investment the more your portfolio will compound, it couldn’t be easier.


Investing is long term, they say minimum of 5 years, but consistency is key. We all can become wealthy with the right mindset.


If you are a little more interested in the ETF VWRL, the IT investor has written a brilliant blog about investing into it via a UK stand point. Click here [9]



[1] https://www.aei.org/carpe-diem/more-evidence-that-its-really-hard-to-beat-the-market-over-time-95-of-finance-professionals-cant-do-it/


[2] https://www.berkshirehathaway.com/letters/2013ltr.pdf

[3] https://finance.yahoo.com/news/guide-10-most-heavily-traded-150003490.html


[4] https://finance.yahoo.com/quote/VTSAX?p=VTSAX&.tsrc=fin-srch


[5] https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/overview

[6] https://pocketsense.com/time-buy-bond-funds-3752.html


[7] https://www.thebalance.com/stock-market-crash-examples-cause-impact-3305864


[8] https://www.itinvestor.co.uk/2019/06/vanguard-all-world-etf-vwrl/

 

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