For an extended period, I had the intention of creating a blog about one or several of the passions I have. This weekend the decision has finally been made. It will be my first post for the new blog.
A little introduction: I’m a dutch working man in my 30’s. I have an average wage as an employee at a midsize corporation. Although my salary only rises with the inflation-rate, perhaps a promotion isn’t impossible shortly. Since the beginning of 2014, I started getting interested in optimizing my finance and how to grow my wealth from my savings. The rates of my banking and savings account started dropping, and I was seeking for another way to get a higher financial return. My parents taught me that savings are a good thing when the rates are above the inflation level. But when I grew up, the percentages kept falling. I finally graduated and made some serious cash. I no longer wanted to put all my money into savings accounts; there had to be something else.
When I read about investing, I did some research and eventually signed up at a dutch discount broker where I bought my first stocks. I chose a discount broker because I was experimenting with single stocks, and there wasn’t a massive amount of money involved. I found a broker who’s fees are low-cost. Therefore, the ratio of costs with my smaller transactions wasn’t a bottleneck for my potential returns. I’ll address the broker in another post, as I will write a review about them.
My stock-picking was based mainly on American based mortgage and real estate companies since they have had a high return and mostly pay a dividend. I was attracted to a monthly or quarterly payout schedule. I intended to reinvest those dividends, and (without any knowledge) creating my little snowball effect. But when I took further research, this was a risky business in two aspects. First, I came to the conclusion I wanted to diversify a lot. Second, investing in only one sector is the opposite of hedging. With this strategy, a correction or recession like the one that took place in 2008, would have a big hit on my portfolio. So I wanted to expand my stocks portfolio. I didn’t have any knowledge of other instruments on the market yet. I did what I thought was right: Buying additional shares from different sectors and based in my home country.
When I analyzed those stocks in my home country, 25 big corporations are in the main index, the AEX. But individually buying these 25 stocks is such a hassle. Suddenly in my search topics, I found a man named John C. Bogle, the founder of the Vanguard Group, and thereby the founder of the index funds or ETFs in particular.
An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds follow their benchmark index no matter the state of the markets.
An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.
I couldn’t believe my eyes. Diversification in one single product, liquid, with a relatively low-cost fee. What’s the catch?
The only catch that is my concern when buying such a fund is that you don’t own the underlying assets. Therefore you don’t have real voting rights. Still, the corporation which issues these ETFs (i.e., Vanguard Group) has the voting power. Not a big deal, if it just a small portion of the market. Except, what happens when every person and company doesn’t buy the stocks individually, but through ETFs? As long as I don’t have millions of euro’s contributed, I won’t make a difference. But statistics give an inevitable rising change in the gap between individual stocks and ETFs. But that will be a discussion for another post.
Even with that catch, that I figured out at a later timeline, I started investing with ETFs in 2015. Before the PRIIPs in 2018, the low-cost ETFs traded on the US markets lured my eye the most. I didn’t choose the broad all-world index ETFs, but instead, I decided the following index’s and sectors:
- US REITs
- EU REITs
- Preferred Shares
- High Yield Dividend
- US Treasuries (Long term)
- EU Government Bonds (Long term)
- High Yield Corporate Bonds
Later on, I got rid of some when I thought they were not profitable and lucrative enough. Other ones I sold when that specific sector had a correction. Especially the biotechnology sector cost me a substantial average return. Also, with so many ETFs in my portfolio, I lost track of my financial administration. In 2018, therefore, I chose to minimize my collection of ETFs. After all, the average return for those three years was mostly the same as the All-World Index.
Here and now
In late 2018 I browsed to some blogs where I searched for benefits of keeping All-World Index ETFs in my portfolio. Quickly after that, I found out that there was a whole scene of people pursuing the same lifestyle I was searching for: FIRE (Financial Independence Retire Early). I started joining groups on Reddit and following all sort of blogs about FIRE, finance and frugality. Firstly, I just started reading what my fellow FIRE-people recommending, learning and trying new forms of saving, investing and p2p-lending.
I got rid of my confusing extended ETF portfolio, with new rules I set. And now, I only have 3 ETFs left, with the consideration to keep at most 2. I consider these ETFs as a mediocre risk at the moment. In prospering times, it’s tempting to search for higher returns. And with higher yields, comes higher risks. My high-risk investments are the p2p-lendings. And only a part of my portfolio will be invested in these loans.
All these new forms opened my eyes and widened my horizon on my primitive way of growing wealth from savings. I got excited, and I’m positive this stays because, with this blog, I can share it with others.
With this blog, I’m going to inform you about my journey of becoming more financially independent.
Returns of the past are not a warranty of the future.
Nobody knows what the (financial) future will bring. I’m positive that with the right strategy and attitude you can reach financial independence. There are still a lot of things to learn, and there are certainly will be things to change. Along my way of becoming financially independent, I would like to share this with monthly updates, reviewing the platforms I’d like to use, give tips of a frugal lifestyle and savings.
Are you familiar with Financially Independence Retire Early and with what sort of strategy are you investing for your future?