I guess I’ll go from what I want out of this. Probably part literacy project, part diary of events and maybe in future some nostalgia. From a Financial independence, retire early (FIRE) perspective, it’s something I’ve only recently picked up. However, the more I learn about the simplicity of it’s methods, the more I kick myself for not finding this 10 years ago. Better late than never I guess!
One of the pillar ideas behind the FIRE movement is making long term, smart investments, usually in low cost index funds or ETFs and relying on compound interest to attain significant gains. These funds work in three main ways:
Time in the market, not timing the market – the likes of Warren Buffet and John Bogle laid the foundation for what is seen today as smart investing. The principle was that investing in a market and letting it sit in an index fund, was far more beneficial than trying to time when to buy and sell. The markets go up and down, but generally speaking will go up in the long term. For example, the Vanguard Total Stock Market Index Fund has received average annualised returns of 9.74% since it’s inception in 1992.
Market wide funds – up until the mid 70s the idea of a fund stretching across multiple companies, in multiple industries, just wasn’t the norm. Then John Bogle decided to push this idea, founded Vanguard in 1975 and index funds were born! They work by ordering a whole market by their profitability, with most profitable at the top and least at the bottom. Then they split an investment across each piece, with more being invested in the more profitable. By splitting the investment into thousands of smaller chunks, this reduces the overall risk.
Compound interest – imagine if you will, standing at the top of a hill on a snowy day. You roll a small ball and push it down the hill. At first not much happens, the ball is small and doesn’t gain much weight. Quickly though the ball picks up some snow, making the ball bigger, which in turn makes the ball pick up even more snow. More snow leads to a bigger ball, then more snow, then….well you get the idea…an avalanche!
The same principle applies to investments and dividends. A company gives you money for investing in it, which you put back into the company, which leads the company to earning more money, leading to more money given back, and the cycle continues.
£1,000 x 1.09 (9% gain) = £1,090
£1,090 x 1.09 = £1,188.10
Do this 10 times and you’ve more than doubled you initial investment.
For a more detailed explanation of these principles, the first book I found on this was ‘The little book of common sense investing’. I’ll be honest, sometimes felt like it was being a little repetitive, but I think that’s mostly because it wants to help entrench these ideas. The guiding principle, was for me though, no less than life changing.
Anyway, that’s enough from me and my rambling. More finance to come!!