An investment analysis for financial independence campaigners who want to consider their options.
If you see an asset out there in the wild that you’d like me to add to this list and provide my assessment of, leave a comment and I’ll revise it.
There’s no one-size-fits-all investment
There. I said it.
Despite what you may read on any financial independence forum, subreddit, in any book, whatever – there isn’t a perfect solution.
That being said, not all strategies are equal. It’s totally viable for a seasoned manufacturer of handmade luxury bedding to invest heavily in bulk buying duck down when market prices seem lower, but if your regular person decides to YOLO £10k into duck futures contracts they’re probably being stupid.
After scouring the corners of the internet, I’ve assessed a few of the more common ways of investing and provide for your reading pleasure a quick summary of the pros and cons of each asset class.
Conclusion up front: consider diversification, maybe try a bit of everything.
Index fund investing
The darling of the FIRE community is the Vanguard FTSE All-World ETF and/or fund. The former version can be bought on most regular investment platforms that allow self-selection, the latter can only really be bought with Vanguard.
The different is that the ETF has a trading price mechanic – because it’s exchange traded – whereas the regular fund has an asset value calculated by the fund administrator based on its holdings minus its operating liabilities.
You can also pick indices, and the S&P500 is a popular one.
I’m going to include bonds into this category. As n UK retail investor, the best you can do to access bonds is to buy them from a passive fund. Some are in an index, others aren’t, but the effect is the same for the investor.
What’s great about it
- You need bugger all knowledge about the global stock markets to do it, and you barely need to consider rebalancing.
- It should get you an average growth/ loss of the entire global stock market.
- If it’s on a public market, it’s a part of the portfolio – you never really miss out.
- Lots of diversification within an asset class (public equities). The all-world indices typically have over 1,000 different companies making up part of it.
- To lose all your money, the entire world supply of public companies need to go bust. All of them. At that point, we’re probably looking at hyperinflation and the end of money as we know it.
What sucks
Ironically, the diversification and ease of access that forms the upside also creates the downside. Most stock market gains, historically, have been created by a few exceptional companies blazing a trail. With an index, you get those gains but you also have the drag factor of hundreds of lacklustre companies averaging out/ reducing the benefit.
This style also promotes zombie companies: companies who make no money, should have died but due to lots of indices/passive investors like you propping up the share price don’t go bust. Instead, they eke out a miserable existence, but also add pressure in their own industries that makes it hard for new companies to enter that could have a chance at making the world better.
Managed fund investing
Often called “active funds” or “actively-managed funds”, this is where you buy units in an investment scheme and the fund manager manually trades shares/ real estate/ commodities (well, anything the fund says it buys) to try to get a decent return.
Again, some are ETFs that have a market price dynamic and some are just based on the underlying assets minus outstanding liabilities.
There are lots of models of these. The most common is a limited partnership, where the fund manager is general partner, but these aren’t efficient for retail investors and the most common seen for individuals is the unit trust or open-ended company, generally marketed as an “UCITS” fund.
Fun fact: “fund” isn’t a defined legal term. It’s a status held by a scheme that people invest in collectively. Now you know!
Advantages
This varies heavily depending on the underlying assets, but in principle you get exposure to companies, real estate, commodities, money markets, cryptocurrencies and so on without the faff of having to choose them, rebalance the portfolio or time the market.
In theory, the fund manager does that for you.
Funds can also often use leverage and hedging techniques to enhanced returns and minimise downside.
Finally: active funds aren’t generally passive, at least not at the underlying investment level. They won’t invest into a zombie company, they are known to use their shareholder votes (which is really useful for investors who want to “go green”, because the fund manager will turn up to meetings and keep directors of companies honest), they can bail out if they catch wind of an investment failing.
Disadvantages
You have to pay for that. These kinds of funds generally have a higher fee than an index fund – think 1% or more, compared to 0.2% or less – and this eats into returns.
A manager isn’t necessarily a good manager. Managers can amplify performance, but just as often (some studies suggest even more often than not) a manager’s active decisions can leave you worse off than simply doing nothing as a passive investor.
Stock picking
Financial independence campaigners often overlook this entirely, on the premise that individual companies can go bust and take your money with them.
Which was a reasonable fear back in the day, when managing portfolios of individual company stocks was difficult and expensive.
Nowadays, there are platforms that allow you to pre-build a portfolio of individual companies whose shares you want to buy. Trades and rebalancing can be kept cheap, and you can combine this with funds.
The Intelligent Investor by Benjamin Graham – which is now quite an old book – proposes investing this way, albeit Mr Graham also proposes having an average 50% of your portfolio in (US) government bonds and the book predates index fund investing.
Pros of individual company picking
- Dealer’s choice: a lot of people enjoy taking control of their decisions, and building your own portfolio is definitely a good way to do this within the stock markets.
- Avoids passive investing. You don’t blindly invest in zombie companies, and you can exercise your votes as shareholder.
- Educational: we’ll return to this in the cons section, but you learn a lot about corporate governance by doing your own research.
Cons of making your own choices
In short: you own your risk, and that means you need to identify, understand, quantify and manage that risk.
Most people can identify volatility risk. That’s not hard. If your company has bad press, expect a drop in share price.
What most people are terrible at is understanding, quantifying and managing that risk. Is the recent board report good news, bad news or marketing spin? What do I expect will happen? How can I protect myself if it does, or what shall I do to exploit the opportunity?
There’s a ton of learning to be done to make this effective.
For financial independence campaigners, this style of investing probably doesn’t make sense. If you’re looking to be financially independent ASAP, time spent reading into company annual reports, shareholder letters, financial statements (etc) while knowing that you’re likely to make mistakes quite a lot and suffer setbacks is kind of a waste.
If you’re investing alongside a main plan, it’s not a bad idea, but best to treat it as a learning experience/hobby rather than your main path to success.
It’s actually pretty great if you’re going to be investing as a hobby and don’t plan to retire – like the average person. Chances are that you have a pension in the background being managed for you, you don’t need the money to grow to achieve your goals (it’s a lifestyle bonus later, not a necessity) and at least you get to have some fun with your savings.
Your own business venture
Statistically, most businesses fail rather than simply get closed. However, if you want to make outsized returns, your own business is definitely the way to go.
People who have their own businesses control their time – albeit they generally reinvest most of it back into the business, so take that as you will – and those 8-12 hour days you presently pay into the office to build up your employer’s capital are instead being put towards building your own business’ capital.
That capital can be quantified and sold.
Competitive strengths
Investing into efficiencies can generate an internal rate of return that’s much higher than any capital growth of a stock market asset. Think 20% internal rate of return. That’s a bit of an odd concept for most people to grasp, but if buying a pressure washer for £200 makes your car washing business 30% faster, you’re going to have a gain that dwarfs a 7% return in an index fund if you simply put that £200 into one.
You gain control of your time, here and now – you don’t need to have an investment pot that’s “big enough”.
Businesses can often be sold later, so as well as earning money it’s possible to have a capital asset that you can sell on, basically being paid twice.
Pains of being your own boss
You’re it: the alpha and omega. You need to get that work in, run the business, work in the business, then later work on the business to develop strategy and lead your people.
That’s hard.
There’s also generally a delay of 2-3 years before your business starts bringing in money, so you’re running at a loss and making investments into it without any income. It’s a big starting hurdle and it’s one that business owners generally struggle with.
The mitigation for these risks is to build a business on the side, which is also brutal because you need to run your day job in the meantime and also do things like, you know, sleep.
Real estate
There are things like REITs that are basically funds, but think of those like the managed funds above.
I’m talking about owning physical real estate. Typically, bricks and mortar. Residential buy-to-let is a common investment, but you can also own shops, warehouses, farm fields, mineral rights and the like.
I’m serious about the farm fields. You think farmers can afford the capital expenditure to buy every field their sheep need?
Benefits of being landed
- Illiquidity – the biggest downfall – is also the best feature. If you’re a person who is tempted to trade your assets, real estate is great because it forces the long-term buy and hold approach.
- Leverage is easy to obtain. You can get loans to buy other assets (such as margin loans) or trade contracts for difference or some other derivative, but getting a loan for real estate is fairly straightforward and bizarrely less risky because the price is seen as “stable” due to the lack of public market price.
- Development opportunities: there aren’t many asset classes that you can later enhance the value of by making improvements to them. Extend a house, renovated the shop windows, add water inlet to your fields or similar and the value increases.
- Rental yield is typically greater than dividend yield on public companies.
- You have physical control of the asset.
Downfalls and petty troubles of the landed gentry
Money is made on the timing and manner in which you buy and which you sell.
If you’re serious about profits, buying distressed or dilapidated assets, renovating them, then renting them until market prices hit the next high and selling the developed asset is the model for making money in real estate.
Which is a problem, because you need a ton of cash to invest and you need to have it ready at the right time.
Fees are huge, the entry prices are large, and ongoing costs of maintaining the asset aren’t as low as 1990s DIY shows on TV would have you believe. Unless you’re handy, you need professionals.
You can get around this by borrowing more money, but that puts you at the mercy of interest rate rises eating your yield.
All of this makes real estate illiquid and hard to sell. Sure, you might argue that houses are bought and sold in your area within a week, but that’s just the time it takes for an offer to be made and accepted. The sale takes weeks/months, and can fall through.
Oh yeah, and because of the costs of entry you’re probably going to own a limited number of real estate assets at any one time. Probably one or two, with portfolio landlords having five or more but even then that’s a lot less diversification than 1,000 companies in a global index.
Precious metals
I probably should have broadened this to commodities, but in reality I don’t think wheat futures and crude oil are going to make it onto many investors’ portfolios.
Gold, silver and platinum are the main assets here. Platinum is at the time of writing bizarrely a lot cheaper than gold despite its rarity, gold is enjoying a bull market (probably because of all the money printing during COVID) and silver is flatlining in price.
Actually, I wouldn’t recommend silver. I’ve traded it myself as a side hustle, but UK investors have to pay VAT on it and there’s still a fairly steady supply of silver in the world that more than meets demand.
I wrote a piece on how to buy gold a while ago if you’re curious.
Shiny upsides of precious metals
- Zero counterparty risk: you hold it, you own it. Only applies to taking physical possession though.
- Gold and silver are CGT free in UK. In the Channel Islands, there is no CGT so this is less of a problem for me.
- Still very liquid, you can generally always find a buyer for precious metals.
- A hobby of its own because you can hold it, collect coins, build date runs (etc).
Heavy metal hangups
Where the hell are you going to put this easily stolen and difficult to trace item? In your house?! Dude! Maybe you should pay for storage off site.
Precious metal prices typically trend upwards as our money inflates, but the rate isn’t constant, guaranteed or without volatility.
Despite having a diverse selection of coins, bars, old jewellery and whatever, diversification sucks in previous metals. You’re effectively oscillating around a centralised global metal price, with slight premiums or discounts.
Gold is famously criticised for not producing anything. While this is true, I don’t think it’s a fair assessment. Many companies in the world produce nothing of lasting importance, so at what point does “productivity” become relevant/irrelevant?
Bitcoin and/or crypto
I actually dislike writing about crypto on this blog because otherwise reasonable people find themselves very agitated and try to rabble-rouse on the internet to have me burned as a witch whenever I post something.
However, it’s an asset that exists and can be invested in.
The trend in traditional finance towards tokenisation means that one day we’ll need to separate BTC and other coins/tokens away from tokenised financial instruments and central bank digital currencies, but for now let’s stick them all in one bucket. This is a long post and I want to stop writing at some point!
Digital native benefits
- You can take custody, like real estate and gold, but it doesn’t take up any physical space.
- Most mainstream assets are instantly liquid, way more than shares are.
- Transaction fees are small and don’t dramatically increase with larger investments.
- Low cash barrier to entry, with most coins and tokens divisible to 15 decimal places.
- Opportunities to invest via decentralised finance applications to effectively grow your holdings.
Problems IRL
Education is vital and the learning curve is huge. Danger abounds on every corner, with rug pulls, scams and insolvencies of “institutions” being a feature of the broader landscape.
Also, if you mess up a transaction or your storage: no-one is coming to help you. You’re on your own, and most things are irreversible.
Speculation often also kills the purpose of crypto. For example: most crypto sits on exchanges, doing nothing. The whole point of coins like ETH, ATOM, XTZ and similar is to pay your fees for using the network they’re built on, but let’s be honest most of it is just bought and held onto.
Which pushes prices of use up in cash terms, then disincentivising use…
You see where I’m going with this, right?
Oh, and fun times – your bank can decide, unilaterally, that you’re a high-risk customer and close your current account. No, really. This is the pettiness of the world we live in.
Wine and whisky
Not typically a retail thing, but fine wine and whisky in the barrel/ collector’s storage are legitimate investment types that I can see being made available to retail investors in the near future.
The standard practice is to buy the wine/spirit at the point of it being made, then it’s off the maker’s balance sheets. You usually operate through a scheme and pay a share of storage fees, then as the wine/spirit matures and is bought for the next step in the process you pocket a capital gain.
Wines and whiskies are classified as “wasting assets” so are typically CGT free and may be VAT free if they’re never delivered to you. This really depends on the scheme and different schemes may not have these tax treatments.
The alternative method is to buy bottled but rare wines/whisky, which is later sold at an increased value as all the other bottles of it in circulation are drunk, dropped or otherwise lost.
Benefits of maturing wine and whisky
- There’s often decent tax treatment.
- You can always drink it!
The fine (wine) print
- Buy in is generally £10k or greater for barrels. Alternatively, you can buy bottles at £250 or so a month.
- Do you really know what you’re doing? Unless you’re an aficionado, you’re relying on an expert, who will charge you a fee.
- These things don’t store themselves, so you’ll pay for that, too.
- Stuff goes wrong, corks fail, product goes off. Ideally, your scheme will be insured against this… which you also pay for.
- If you want it delivered, you have to pay that VAT on it that you dodged when you bought it. Shame.
- Fraud is rife in the fine wine industry. Most the value is in the hype, and there’s often very little proof that the fine wines you think you bought are the ones in your cellar. Fine wine is to fraud as art is to money laundering.
Fine art
Right, now we’re getting really esoteric.
Fine art is an interesting beast. Usually, the only people who have access to fine art are incredibly wealthy, and most of what they buy is crap apart from a few pieces or a famous artist who that segment of society suddenly decrees to be genius.
I wish that the fine art market was based on something other than hype, but no.
Fraud is harder in fine art that one would think because the methods of detection are getting ever better, but it’s still a market synonymous with money laundering because artwork has no real price other than when it was last sold.
If this reminds you of the Bored Apes NFT thing a year or two ago, that’s because it’s basically the art market but on speed.
Technically, retail investors can now buy into funds and/or schemes that own fine art on behalf of those retail investors. I… haven’t used one, but they do technically exist and I’ve begrudgingly included them into this note.
Masterpiece points
Fine art tends to skyrocket in value if you get one of the darling pieces by a famous artist. I’m anecdotally aware that art dealers buy lots with the expectation that one or two pieces will do well enough to carry the whole collection.
Mistakes on the page
- Unless you’re very lucky, you could end up spending hundred of pounds on crap that never catches the attention of the hoi polloi.
- If you invest through a scheme or platform, you’re never actually going to appreciate the art because it’s never going to your place. You’re only one of many owners, after all.
- Storage and maintenance can be incredibly difficult but are both vital to realising a profit. Which means, of course, you have to pay for these and this probably means paying rent on a temperature-controlled warehouse where you never see the artwork.
Final thoughts
Look, every asset has its strengths and weaknesses, but all can be used or combined in some way.
Over time, I’ve gained exposure to most of these at some point in my financial independence campaign.
Well, not the wine, whisky or art. Fine art is lost on me and I generally drink wine or whisky. I mean, I might consider it with my discretionary funds, but I’d certainly not touch fine art because I don’t know anything about it.
I’ve omitted antiques from this list. I’d need to do a lot more research into that, and as it stands I don’t see that people buy antiques for reasons other than enjoyment. I certainly haven’t seen any schemes to specifically invest in antiques.
My inspiration for this post was the endless stream of “just put it in Vanguard, it’s that simple” posts on Reddit. While that plan will probably work, the fear here is that either:
1. Independent thought is discouraged and people don’t recognise the problems with passive investing; or
2. One day this strategy fails, and people resent not having seen or been aware of other asset classes.
This blog is in favour of taking ownership and making your own decisions. If that means I’ve covered some odd assets, so be it.
