.Net Programming - Financial independence

Financial Independence Q&A

Questions and Answers

1. How much time does it take to reach financial independence?

It depends on your expenses, you should try to reduce your expenses to speed up the process. You can also increase your savings rate. The target is typically to have 25 times to 30 times your expenses.

2. What should I invest in to reach financial independence?

Index funds from Vanguard and iShares mostly, they have very small fees and track whole markets which reduces the risk, calms me down and with such low fees, it decreases the fixed costs.

3. At what point are you currently in your progress to financial independence and when did you start?

I’m hovering around 80 % complete with about 2-3 years left at the most depending on the markets, I might increase my margin of failure by adding another year of salary.

4. What is the expected result of financial independence, why would someone pursue this goal?

Although the goal seems pretty simple to accomplish, the most difficult part is staying on track and contributing every time you have money. Also you need other goals because financial independence is a mean to an end, not a goal. Nevertheless, it gives a lot more options depending on what you want to do.

5. Why is investing so important to reach financial independence?

You need to invest because inflation will erode the amount you keep in cash, meaning that your money is worth less every year by 2% give or take. Investing will offset the inflation and help your money grow exponentially in the long run, it will also save you a lot of working years. You can play with this calculator if you want to see how much money the market will help you make over the long run, it’s pretty impressive.

6. What is a good asset allocation and what do you suggest in term of portfolio?

There is no good asset allocation in my opinion, it depends on your risk tolerance, I personally am 95/5 which means 95 % stocks, 5 % bonds because it seems I have a very high risk tolerance, that is, I can control my cool pretty well during market crashes. I would invest in full markets if you want to reduce the potential risk of losing money long term. In other words you will benefit from complete markets performance, good and bad stocks will affect you and you should be going up over the long run. I have a little more Canadian bias because of taxes implications in my cash investment account. I sadly cannot give financial advice but I can guide you through one of my portfolio and my thought process in building it, maybe it can help you make your own idea. Also, you could visit WealthSimple or Canadian Couch Potato if you want ideas on canadian specific investments.

7. Why don’t you invest in crypto-currency like Bitcoin?

For stating just a few good reasons why I don’t. Bitcoin does not have much underlying value except the team that is working on it. Also, Bitcoin is not secure as it’s possible to trace the transaction to a person by buying habits and other mecanisms. It takes 10 minutes to fulfill a transaction which is absolutely not usable in a real world environment. Some of the cryptocurrency transactions are very costly to make, take Ethereum where is costs about 37 $ per transaction at the moment which is just crazy. Also, what I don’t like is that it’s more of a voting system so if a party has a lot of power (hashrate), it can push back updates on the network. If there is a limited supply like Bitcoin, it deflates all the time and people are more incentivized to keep the cryptocurrency than to spend it which simply cannot work as a currency. The whole point of a currency is that there is inflation and you believe that the object or service you are buying will be more valuable than the money you spent for it. Which is why the financial system works. Out of all the cryptocurrency, Bitcoin is certainly one of the worst as it has less features, less security, less anonymity, more power consumption and so on. Its only asset is its popularity. It will increase in value because the supply is diminishing every day as less coins are available to mine and people lose keys. It simply cannot replace the currencies because it’s uncontrollable, and cannot replace gold because it’s not physical, if everyone stops mining this thing, the network won’t be able to fulfill any transactions, the decentralized ledger will not be updated anymore and everything will die with it although I admit it’s very unlikely. Finally, it’s entirely driven on speculation that is dependent on if another person is willing to buy it at a higher price. I’d rather invest in real companies that create jobs and make money. I had some ZCoin (now Firo) and Ethereum at some point that I mined for fun but I sold it all and don’t have any intention of buying back in.

8. How can I buy index funds?

To buy index funds or in our case Index ETFs, you’ll need a brokerage account. You have multiple choices if you wish to follow the same method as I do, I am using RBC Direct Investing which is not the cheapest by the way but you can use TD’s or Desjardins’ also, WealthSimple Trade can be another option. Once you have a brokerage account opened with preferably TFSA, RRSP and Cash accounts, you’ll need to transfer money and then you’ll be able to buy shares of your favourite ETF as ETFs are traded just like stocks on the stock market but they are collections of stocks. That said, for example, instead of buying BB (BlackBerry) for example, you’ll buy the ticker VUN (Vanguard All U.S. Stock Market Index).

9. For how many years have you been investing in the stock market?

I’ve been investing since the beginning of 2016 but in fact many years prior to that in mutual funds, then in ETFs. Since I started working in a real full time job in 2015, I now had enough capital to supply my investments on a more constant basis. Don’t get me wrong, you can start investing at any age but if your bank charges you large fees then for example your 10 $ in fees might not be worth as much on a 100 $ than on 10 000 $ investment.

10. Why is it so slow to reach financial independence?

In my opinion, that’s mainly because money makes money and compound interest works better with time. As I said in a previous video, you need a lot of money to make a significant gain in today’s dollars. For example, I can make 200 % which is very intense on 1000 $ which gives me 1000 $, yes the return is not bad but you cannot buy much with a 1000 $ compared to a similar return on 100 000 $ which would be 100 000 $, that is much more buying power. What I say is that you’ll start seeing the power of compounding once you get passed 100 000 $ in your portfolio, before that it’s negligible because you don’t have as much help from the market. This is why as you get more and more money, it becomes easier and easier. Which is why I am saying that as you age, you should in theory be working less and less.

11. Should I use the dividend investing strategy?

I don’t really see the point especially because it includes mostly Large+ caps and you might miss out on the lower capitalization segment. I prefer to invest in whole markets at once with index ETFs, like VUN or VTI. I find that sometimes people forget about the tax implications of dividends because they like the fact that it’s just like a salary, but a mindset change is required, if you pay yourself like you’re making normal income, you’ll pay more taxes right now, I prefer delaying the payment of taxes if I can so I have more money invested. The goal is to learn to be alright with an unstable amount of money.

12. Why do you postpone buying a house?

Mostly because I believe the housing market is mainly driven by speculation and because a house doesn’t make any money in and out of itself. It “appreciate” in value if you maintain it but this has a cost. Also the older the house is, the more issues it can hide. It’s not an investment and I will not leverage my position by 250 000 $+ in a single asset. This will drastically increase my overall risk and I won’t be able to invest as much. Not only will it reduce my diversification but it will prevent further diversification. I will buy a house when I’ll have enough money to justify it, I don’t want the house to take more than 40 % of my asset allocation.

13. Should I wait until the market is down to invest?

Time in the market is more important, you cannot time the market. What I do is invest as soon as possible whatever the price because it’s long term. This strategy served me well in the past 6 years.


Part 1

Part 2

Why it’s so difficult to reach financial independence

Disclamer: this is my opinion based on my experience and for entertainment purposes only, in other words it’s not financial advice.

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