I live in Finland, the country in the north that is known for Santa Claus, Nokia, and sauna. To be fair, I don’t really know how people from other countries perceive Finnish culture or economy. Finland is typically known for its relatively high education and functional welfare system that was quickly built after World War 2. Because of these benefits, it is a common saying here that being born in Finland “is like winning the lottery.”
Except it isn’t. The public sector in Finland has grown tremendously throughout the last decades, and governmental debt is also through the roof, leading to an unsustainable situation. The private sector can’t fund the bloated public sector, whose wages are actually higher on average, for much longer. Ridiculously high taxes come with the deal, as well as progressive payroll taxes that discourage high earnings. Really puts you in the mood to become an entrepreneur, doesn’t it?
As another author noted previously, the ideology driving the whole country is plain socialism under the disguise of “social democracy.” This includes the scourges of cultural marxism, feminism, equalism, mindless immigration from Islamic countries, and all the fun stuff that runs civilizations to the ruins. I’m sure active ROK readers are familiar with these.
Digging for a solution
It becomes clearer by the day that it will be difficult to count on the government to continue handing out benefits. So what’s the best way to deal with this? I decided to make the best of it and invest my way off this shit. To accomplish this, what investing strategy should you choose, and do you have to be Warren Buffet-like mastermind to become financially independent? The answer is no, and I’m going to tell you why.
Investing is a topic far too large to cover in one little article. So I highly recommend that you get into the basics by reading books, and of course the internet is full of useful material. So I will only tell you about my strategy, why I chose it, and why I think it’s going to work in the long run.
At first I studied about investing as much as I could, and acquired vast amounts of knowledge about the topic. Basically, there are many possibilities to choose from if one wants to start investing. Stocks, bonds, real estate, and different kind of funds etc. You can choose just one of them or combine different instruments to your portfolio. Hell, you can even lend money to your friends with an interest rate. You should definitely look into different allocations because allocation itself is the one main reason that explains over 90% of the expected returns.
Enter index funds
After my studies I chose to invest in stocks via passive index funds. Index funds are basically just funds that attempt to emulate the overall performance of a certain segment of a market. ETF’s (exchange traded funds) are certain kinds of index funds, but their fund units are traded on the stock market like any other stock.
There are a lot of indexes that measure the change in different markets, so there are many possibilities to form an index fund. Basically what you’re doing is buying many different stocks at once. By buying several different index funds, you can adjust your strategy to the direction you want. That way your portfolio becomes diversified on its own. Even by buying just one index fund, your portfolio can gain most of the benefits related to diversification. I recommend that you visit http://www.ifa.com/ for further exploration.
I mentioned earlier that the instrument of my strategy is a passive index fund. The key here is “passive.” Active funds and active stock trading mean that the trader, broker, or in the case of funds a portfolio manager takes a certain view of the market which is supposed to beat the market in returns. The problem with active trading is that even the so-called professionals rarely know what they are doing, and timing the market—trying to pick the right time to buy or sell—is actually impossible. Those points have been shown in studies over and over again.
Of course there are exceptions and people who have continuously beat the market returns, but how can you know that your portfolio manager is one of those? With active investing also come the costs of activity, including trading costs, taxes, and the different fees for managing the portfolio. Passive investing lets you mostly avoid those because the fees of the portfolio manager are significantly lower, hence the bigger returns in the long term. You of course have to pay taxes after realization of the investment, but with funds one can avoid it as long as possible.
Passive index funds actually don’t even have portfolio managers per se. They just have people to take care that the fund is balanced and thus represents the index it is emulating. What most people don’t realize is that the whole financing industry and the products it offers to common people are mostly bullshit. Most investing products and active funds are just there to make money for the companies offering them via managing fees. Don’t believe that they care about how your particular investments are doing.
In fact, many funds are actually so called “hidden indexes,” where the portfolio manager is too afraid to take a real view on the market to make extra returns. So, he just makes it an index fund and still collects the higher fees related to active funds. And why would he take a real view and risk it, because if he takes a wrong view it would cost him his job. It’s better for him to go and “be wrong” along with the market indexes against which the performance of the portfolio manager’s fund is measured.
The time-saving advantage
Considering the fact that most people have day jobs, hobbies, and some hustling to do on the side there’s not too much time left to monitor the stock market, which is quite pointless anyway in the aggregate. Trying to foresee the future of the stock market even based on past returns is nearly impossible, especially without complex algorithms.
The average market return rate is considered to be from 8% to 9% per year. So from that you have to extract the fund managing fees etc., which in my case are 0.5% on average, significantly lower than in active funds. Inflation and other things should also be taken to account, but the real path to financial independence is dependent on your lifestyle choices. I have a good view of the amount of money that I need to “retire” and I try to invest as much as I can on a monthly basis. That gives a nice time-based diversification also—look up “dollar cost averaging.”
My goal is not to retire in a sense that common people perceive it, but rather to become financially independent so that I can give all my time to my real passions like music and weight lifting. The key is not to make hasty decisions based on market positions. The market goes up and down, and the basic psychology behind the behavior of most investors usually forces them to sell at the wrong time. With passive investing you ride out a depression, all the while buying cheap stocks and waiting for the market to go up again.
The key is to find your strategy and stick to it. This simple idea works because so many people really can’t commit to it—in Finland, in the U.S., or anywhere else. Determine an allocation and instruments and start investing constantly. Other sites give a decent introduction to safe withdrawal rates, the amount of money to save for retirement, and the concepts behind it. Start now, and build for your future.
Read More: I Will Teach You To Be Rich