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Introduction

It was one early morning in 2017. I was reflecting on my financial situation and asked myself a few questions:

If I am to lose my job the next morning, do I have the means to support myself and my family? For how long will my savings last? And even if I continue to work until the traditional retirement age of 65, will I have enough to retire comfortably?

I didn’t have any good answers. I realized that I was running a rat race until I’m 65 (or possibly older) with no clear plan to properly support myself in retirement. I’ve talked to a few friends and found out that I wasn’t alone. That wasn’t surprising, as I read somewhere that most people spend more time planning for a vacation than they do planning for their retirement!

This urged me to start looking for some good answers and some actionable solutions. Being an avid reader, I started reading best-selling personal finance books and learned about the concept of financial independence.

Financial Independence (FI)

How would you feel if you didn’t have to work to pay for your bills? What would it mean to you if you could have the freedom to travel the world, start your own business, or chase your dreams without having to worry about money?

Financial Independence (FI) is about achieving this level of freedom. It’s about having a lifetime source of “passive” income to cover all of your living expenses (and then some) so that you don’t have to trade your time for money for the rest of your life.

“If you don’t find a way to make more while you sleep, you will work until you die.”

Financial Independence is not just about retiring. It’s about having enough money and the freedom to do whatever you want, whenever you want, and with whomever you want. Work becomes optional. You could quit, choose a lower-paying job that fulfills you, or you could stay in your current job if you like what you do. The choice becomes entirely yours.

Is it possible for a regular person with an average income to achieve this level of freedom? Most importantly, is this something that is possible for you and me?

The Rules of Wealth

The key to riches is to make the shift from being a consumer to becoming an owner, an investor. In other terms, instead of spending your money on “stuff” and liabilities, you need to consider accumulating revenue-generating assets.

The three pillars of wealth-building and financial independence are:

• Earn more.
• Spend less.
• Invest the difference (wisely).

That difference between your earning and your spending is the seed that you need to plant and water regularly to grow your wealth. The cornerstone of financial independence is to live below your means and to regularly invest that “difference” for the long term. Once you have accumulated enough assets that generate an income exceeding your living expenses, you become financially independent.

You Don’t Need a Fat Paycheck

Let’s get this one out of the way: you don’t really earn your way to financial freedom. The proof is that several multi-million dollar earners including music stars, Hollywood actors, sports icons, and other celebrities ended up broke and in debt. They made millions, but they also spent all they earned like there’s no tomorrow. As a result, when their income source dried up, all of their millions went up in smoke due to their lavish lifestyle.

Truth be told, you don’t need a large salary to achieve financial independence. Sure, earning more definitely helps (assuming you can save the extra money you make), but if you are disciplined and purposeful in your earning, spending, saving, and investing, it is very possible to achieve financial freedom and even become a millionaire with an average income.

But how?

The Most Important Ingredient of Financial Independence

The first prerequisite for building wealth is to adopt a healthy financial lifestyle. In other terms, it’s about living below your means (regardless of your level of income) and avoiding bad high-interest debt such as credit card debt.

The difference between your income and your spending is your savings:

Savings = Earnings – Spending

Your objective is to maximize your monthly savings, or more accurately, your saving rate, which is the ratio of your savings to your total earnings:

Saving Rate = Savings / Earnings
(expressed as a percentage)

It doesn’t matter whether you’re saving $100 or $10,000 per month, it’s the percentage of your income you are saving that really counts. The higher your saving rate, the sooner you could become financially independent. Therefore, maximizing your saving rate is possibly the single most important lever you can pull for accelerating your journey to Financial Independence. 

However, stashing all your savings in the bank is unlikely to make you financially free in and of itself. Money sitting idle will slowly lose its purchasing power to inflation with today’s near-zero interest rates. Therefore, to grow your savings at a faster pace than inflation, you need to invest.

Investment Choices

There are multiple investment vehicles for growing wealth, but the three major ones are highlighted below:

• Investing in the financial markets (i.e. stocks, bonds, funds, etc…).
• Buying and then renting out real estate.
• Building your own business (ideally, a self-sustaining managed business that does not require your time or direct involvement).

Of these investment vehicles, my favorite and the most easily accessible is investing in the financial markets.

But again, the choices here are infinite: stocks, bonds, mutual funds, ETFs, gold, commodities, Forex, and lately, cryptocurrencies… Moreover, everyone around you has an opinion on what to invest in. Those giving you investment “tips” might be well-intentioned, but oftentimes, their advice is either hit or miss. You might get lucky once and win big, but you could also lose big. Therefore, investing based on speculation or gut feeling is not sustainable in the long run.

I don’t know about you, but I’m not willing to gamble with my life savings. Therefore, I would prefer a proven investment strategy that is repeatable and has worked consistently over decades.

The Stock Market Wants to Make You Rich

But wait, isn’t the stock market like a giant casino that is highly risky and speculative?

For over 200 years, the stock market has been the best place to grow wealth and compound money over the long term. With an average compounding rate of 10% per year, an initial lump-sum investment of $60,000 would grow to more than $1,000,000 in 30 years!

This is not to say that all companies’ stocks will do good over time. Some will rise while others will fall or even disappear, but the market as a whole has a long-term upwards trajectory. So while the stock market has made a lot of money for a lot of people, some others have lost money in the stock market, so what gives?

In the short term, the stock market is like a rollercoaster ride: it rises slowly, then falls sharply, then twists and turns, and then suddenly rises again… you got the idea.

“The market always, and I mean always, goes up. Not each year. Not each month. not each week and certainly not each day. But relentlessly up.“

With that said, when buying individual stocks, there is no sure way of telling if the shares of the company you bought will go up in price. However, if you could own a slice of the entire market, you shall do well over the long term… but only if you don’t get swung by the market’s short-term rollercoaster behavior.

Therefore, instead of speculating on individual companies’ stock, buying a broad market index fund (which is like a basket with thousands of stocks) means that you’re owning a fraction of the broad market which goes up over time. It takes the guesswork out as to which companies will do well and which won’t.

“Don’t look for the needle in the haystack. Just buy the haystack!”

What the Financial Industry Doesn’t Want You To Know

If you don’t know much about finance and investing (hint: I didn’t), you might think that it would be best to hand your money over to professionals; believing they’ll know better what to do with it… Except that they don’t!

First off, most of them charge you a hefty upfront commission, and their funds or products are typically riddled with layers of hidden fees that erode your returns over time. To add insult to injury, studies have shown that the vast majority of professionally managed funds underperform the broad market over the long term. Simply put, these “professionals” overcharge you for underperformance!

“In finance, you get what you don’t pay for”.

Therefore, it is best to cut the middleman and save on ridiculous commissions and fees by managing your own investments. This shall put back hundreds of thousands of dollars into your retirement bucket. The best part? It’s much easier than you might think it is and doesn’t require any prior knowledge. And no, you don’t need to follow the financial news, analyze company earnings, or trade stocks late at night in your pajamas! If you have ever bought anything online, you already have what it takes to invest on your own.

Why Most Investors Don’t Do Well

Over a period of 30 years, while the stock market returned an average of 10% per year, a study by DALBAR found that the average investor made less than 4%. Therefore, instead of that initial $60,000 investment growing into $1,000,000 in 30 years as we’ve seen earlier, it will merely grow to $195,000. That’s a difference of nearly 80%!

Why that gap in the returns? It all boils down to fees and investors’ behavior.

Fees

As we’ve seen above, the hidden fees of financial products erode returns over time. The more you pay in fees (namely in actively managed funds), the less you’ll get in returns. This is a mathematical certainty as highlighted by Nobel-prize economist William F. Sharpe in his paper The Arithmetic of Active Management.

The second factor is investors’ behavior which is usually driven by two destructive emotions: fear and greed.

Fear

As the stock market gyrates a lot over the short term, many investors get scared. Then, by hoping to “protect” their investment, they tend to sell at the worst possible time and end up making their “paper loss” permanent.

Greed

Some overconfident investors believe in their ability to “beat the market. They buy “promising” individual stocks or high-flying funds. However, empirical evidence proves that it’s extremely difficult to beat the market over the long term. Even full-time professionals fail to pick the stocks that will reliably and consistently beat the market over time. So what are the odds of success of someone like you and me?

As a result, investors that get swinged by their emotions of fear and/or greed tend to underperform the market over the long term.

Wise Investing

If researching and picking individual company stocks does not work consistently over the long term, and if handing your money over to professionals (i.e. bankers, insurance companies, fund managers, etc…) is not a viable option either, how to go about it?

The solution has to be a sensible investment strategy that works consistently over time and does not rely on any hunch or gut feeling. Plus, it needs to be easy so that anyone, including you and me, can implement it. Most importantly, this approach should have your money working for you rather than for the financial industry. 

The good news? This sensible time-tested approach exists and is simple to implement by nearly anyone. You too could easily become a Wise Investor!

Bogleheads® Investment Philosophy

The investment approach I share here follows the guiding principles of the Bogleheads® investment philosophy. Named after Vanguard’s founder and individual investors advocate John C. Bogle (aka Jack Bogle), the Bogleheads® are investment enthusiasts who adopt Bogle’s sound investment advice. This consists primarily of buying and holding low-cost broad-market index funds.

The Bogleheads® simple investment framework has been proven to produce better long-term returns than those achieved by more “sophisticated” investors. This includes full-time professional fund managers at big-name financial firms and investment banks.

“Simplicity is the ultimate sophistication.”

Index investing is backed by an overwhelming amount of empirical evidence. It has been validated and endorsed numerous times by several academic researchers, Nobel laureates, as well as by investment titans including Warren Buffet himself.

You might be wondering: how come you’ve never heard about this simple low-cost investment approach before? That’s because academics do not have the marketing mega-budget that Wall Street and the rest of the financial industry possess. In fact, the financial media constantly tries to poke holes in this simple low-cost strategy because it doesn’t benefit the financial industry (but it surely benefits you, the individual investor!).

The Bogleheads® investment philosophy revolves around the following 10 core principles:

1. Develop a workable plan
2. Invest early and often
3. Never bear too much or too little risk
4. Never try to time the market
5. Use index funds when possible
6. Keep costs low
7. Diversify
8. Minimize taxes
9. Keep it simple
10. Stay the course

Wise Investor’s ETF Plan

The strategy that I share across this blog is my adaptation of the Bogleheads® philosophy into an actionable step-by-step playbook that I’d like to call the ETF Plan (for “Easy-To-Follow” Plan).

It starts by adopting a sound financial lifestyle, avoiding debt, automating regular savings by “paying yourself first”, investing in a simple portfolio of low-cost, broad global market Exchange Traded Funds (ETFs), and sticking to a predefined investment plan regardless of market conditions. It doesn’t involve any stock picking and doesn’t require you to follow any market forecasts, financial news, or the economy. This approach is so effortless that some commonly refer to it as couch-potato investing in a lazy portfolio.

Here’s a quick summary of Wise Investor’s ETF Plan:

• Pay any high-interest debt ASAP and pay your credit card balance in full automatically every month.
• Build an emergency fund (i.e. a cash reserve of roughly 6 months of living expenses) for a rainy day.
• Develop and document an investment plan based on your financial goals: define your savings rate, know your financial independence target number and define your investment portfolio’s asset allocation (i.e. percentages of various investments in your portfolio).
• Open the necessary savings and investment accounts.
• Pay yourself first by automating your monthly savings and transferring your savings to your investment broker. 
• Buy your ETFs (typically a single global stock market ETF coupled with a single global bond market ETF).
• Rebalance your portfolio once a year (or according to a preset rule) to maintain your portfolio’s asset allocation.
• Ignore financial news and forecasts (no matter how good or bad they are)
• Avoid common behavioral mistakes, trust the process and stay the course.

That’s really all there is to it! Adopt the above ETF Plan and you’ll be on your journey towards financial independence. You shall also outperform the vast majority of investors including professional money managers without knowing a thing about finance or the economy. Bonus fact: the less you know, the better, as you’ll feel less compelled to tinker around with this rock-solid strategy that actually works!