How We Invest in the Stock Market for Financial Independence

A Look at our Investment Strategy

We recently provided the briefest of overviews to our investment strategy as part of a look at our risk management approach. It was no surprise that our video on this topic garnered a lot of questions about our exact investment strategy, including what we hold and why we hold it. Today we’re going all-in to share the stock market investment strategy that helped get us to financial independence.

By way of background, we are self-directed investors who have experimented our way to an investment strategy that works for us. Today our investments are a mix of fixed income and equities. For fixed income, we invest in syndicated mortgages that provide us with regular interest payments. These are what fund our day to day living expenses.

For equities we hold a low-cost global index fund, so that gives us a slice of the global market. Today we’re going to focus just on our equities and explain what our little slice of the market looks like.

A quick disclaimer here that we are not investment advisors; we’re just sharing our own approach which suits us and our risk tolerance.

Experimenting

True confession: we were not amazing investors from the get-go. We had a long period of experimentation before finally arriving at our current investment strategy. We talk more about our history with investing when we shared how we became financially independent.

Here are a few of the approaches that we tried over the years:

Like many others, we got our start by buying mutual funds that came with nice, high management fees. We had a financial advisor come to our home, do a quick survey to assess our risk tolerance and then sell us whatever was most beneficial for the company he represented.

We knew we had to get away from the high management fee structure but, before settling on index funds, we thought we could do better by trying other strategies. We experimented with investing by sector and trying to time the market. So specifically, we bought an energy ETF after a downturn in that sector, and then watched the market rise and fall a few times before we managed to sell on an upswing. Even though we came out okay, we quickly realized that we were out of our depth and it would be a really easy way to lose money.

Then, while we were living in Singapore, real estate values had been going up quickly and we wanted to get in the game. We tried investing in a few local real estate investment trusts or REITs. Some of these did okay while a couple tanked. Our takeaway was that we probably needed to be more diversified than investing in a handful of REITS in one very small country.

We also had a few other investing ideas that we seriously considered but thankfully didn’t try. For a while we looked very closely at buying individual stocks in emerging industries such as 3D printing companies. This was an industry that we knew nothing about and fortunately realized we were in no position to pick out the winners.

Our strategy

After a bumpy journey where we learned a lot, we’re now settled with a strategy that works for us. The first part of our strategy is that we are self-directed, DIY investors. That means that we don’t work with a financial advisor; instead we are accountable for our own financial planning and financial literacy. Basically we don’t invest in anything that we don’t understand.

As well, we take a buy and hold approach. When we buy, we are in for the long haul, meaning a 10 year time horizon or longer. We don’t do any panic selling or buying as the markets fluctuate and we definitely don’t try to time the market. We used to try to time the market but found that our savings would just end up accumulating without getting invested.

On that point, we also made regular contributions while building our portfolio. We invested the same amount at the same time each month, regardless of the market fluctuations. This approach is called dollar cost averaging and it helped keep our emotions out of the decision making while averaging out the price we paid for equities over the long term.

Another important part of our strategy is diversification. We know that while individual company shares can rise and fall, the market as a whole has gone up over time. So we feel the best way to ensure you reap the benefits of this rise is by holding a small piece of as many top performing companies as possible. And for us this means globally, not just one or two countries.

What we buy

Now on to what we buy. First, as you might have guessed from our strategy, we don’t buy individual stocks. And this is because we don’t feel that we’re in a position to predict the future performance of any one company. Instead, we buy funds composed of thousands of individual stocks. We also choose index-based funds, which means there’s no active management where someone is choosing the stocks on our behalf, and then collecting high management fees for this service.

Some investors feel that those fees are worthwhile because the active management can yield a higher return. But studies have shown that, over time, the returns delivered by these funds have not outweighed the fees. For us, we’re satisfied with the average return by the overall market, which is what index-based investing delivers.

So let’s talk about exactly which fund we buy and why. There are many funds available; we’ve selected the one that works for our particular circumstances.

Based on our principle of diversification, we chose a fund that benchmarks itself against the FTSE All World Index. This is a stock market index that covers over 3,000 companies in 47 countries. The exact fund that we buy is an exchange-traded fund — or ETF — that trades on the stock market. It’s a fund from Vanguard with ticker VWRD. And, as mentioned, it tracks the performance of the FTSE All- World Index. US residents who want to buy something similar could look at Vanguard Total World Stock Index fund which is ticker VT, although this is just one of many options so please do check to see what makes sense for you.

How we buy

That’s what we buy; now let’s talk about how we buy it. As we said, we are DIY investors, so we manage all our investments accounts directly. There are a number of ways to buy index funds like VWRD, which is the one we hold. You can use an online brokerage like Charles Schwab or Fidelity. You can even purchase direct from Vanguard.

We personally buy our ETFs through an online trading account with Interactive Brokers. This particular platform comes with a bit of a learning curve and is not for everyone. We chose it because aside from buying equities, we also use it to convert money from one currency to another which was important for us when we were earning our salaries in Singapore dollars.

Keep it simple

If we could start fresh from the beginning, we would keep our investment strategy simple and commit to the long term, which is what we are currently doing today. We spent too many years tinkering and trying to do better than the market. This included trying to time the market and playing with a lot of different investment vehicles. In retrospect, a lot of this time was spent just thinking about new strategies, not even taking action. This meant at times we ended up sitting on cash that wasn’t making us any money.

We have since learned that a simple buy and hold approach with a highly diversified portfolio will perform just as well or even better in the long run. That’s the strategy that enabled us to get to financial independence and it’s the one that will keep our finances on course into the future.

How We Invest in the Stock Market for Financial Independence