This is going to be a departure from my previous works.

Now, let’s talk about investing.

This is mostly aimed for FIREees (Financial Independence Retire Early community) close to claiming early retirement. Or anybody looking to claim retirement within the next 10 years. This assumes the reader already has some basic understanding of investing and the stock market. However, anybody interested in investing for the long term will find these insights helpful as well.

I plan to make this into an Investing Series, aimed at building a case as to why it’s important to have a well-diversified portfolio, and why you should care. I will cover a few points I consider important to understand – foundations for sensible long-term investing and wealth management.

So. Let’s get started.

#1 Time Horizon (age doesn’t matter)

One of the conventional pieces of advice you hear in investing is that when you’re young, you should have an aggressive strategy: All or mostly stocks. You can handle the risk anyway because you have a longer time horizon. And when you’re older, because you have a shorter time horizon, you should lessen your risk: reduce stock allocation and diversify.

This advice is generally true. Since generally speaking, young people aren’t planning to use their retirement fund until 25-30 years from now. But for the growing minority of FIREees, people seeking to claim financial independence at an earlier age, this advice might be a bit outdated.

I think it’s important to define what time horizon means, as implied by the advice, and also how one should think about it.

Your time horizon is that span of time from now up until that point when you’ll need your investments to be ready for whatever purpose you’d like it to serve. For the FIREee, it’s simply the length of time in years from now until your target retirement year.

Here’s the dilemma: which advice should the aspiring early retiree follow? Someone who is in their 30s or 40s, and aiming to retire in the next 5-10 years or so. Yes, they’re young. But at the same time they have a short time horizon. Should they be aggressive and have mostly stocks since they’re young? Or should they reduce their risk as much as possible since their time horizon is short?

This is what I think: In the eyes of investing, age doesn’t matter. Your time horizon is more important. From a purely investment risk standpoint (the risk of not meeting your target savings by the time you plan to retire), a 35-year-old aiming to retire by 40 is no different from someone who’s 60 and planning to retire by 65. It would be sensible for both of them to reduce their risk and diversify well if they want to increase the probability of meeting their goals.

Your time horizon matters because stock markets can stay down for long periods of time. And can produce negative real return averages for 10 years or more. In the 2000s decade alone, the US Stock market returned an average of negative 3% real (after-inflation) return. That’s a 10-year average! And Japan’s stock market (though this may be an outlier, but who knows), which peaked in 1989, was on a downtrend for two decades! Of course, there were periods of booms within that, but what’s interesting is that the Japanese stock market hasn’t regained its 1989 highs yet, and it’s been more than 30 years.

This is the kind of risk you’d want to avoid if you have a short time horizon: prolonged stock market declines, and poor decade-long averages. For the soon-to-be retirees, periods like the ones stated above can be harmful not only financially, but also emotionally and psychologically.

Sure, if you’re young, you can say that you’ll be able to afford dealing with prolonged market declines and prolonged poor performances. Your planned retirement might be pushed back a few or several years, but you can afford to deal with that risk.

But the thing is, you don’t have to. You can drastically reduce the risk of having to deal with that just by having a well-diversified portfolio.

So take note of your time horizon. The shorter it is, the less risk you should have, and the more diversified your portfolio should be.

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Despite the spreading of FIRE and Early Retirement as an idea, I realize that some important ideas and perspectives behind one of its foundations – investing – have yet to gain traction. So that’s what I’m going to focus on here: the ideas and perspectives. not the math, not the endless jargon and overly complicated concepts (though I may touch on those!). I believe it’s more practical that way. And I believe this is important. Because the practical matters of investing are, after all, the nuts and bolts of how you’ll be financing your freedom once you reach financial independence.

The following is a list of points/arguments I plan to present in this series. So stay tuned!

1. Time Horizon (Age Doesn’t Matter)
2. The Conventional Wisdom Is Usually Wrong!
3. The US Stock Market is, to a Global Market, like what an individual stock is to an index fund
4. Inflation and the case for owning Real Assets (Real Estate/REITs, Gold, Commodities, IL Bonds)
5. Sequence-of-returns Risk – WTH is it?
6. Sequence-of-returns Risk: The Second Dimension!
7. Smoother Sailing
8. Pushing Conservatively Past 4%
9. Keeping the FIRE Alive

That’s it for Part 1. I want to clarify that this is not a how-to series, and that this is not investing advice. Well, not technically anyway. I hope that over the course of this series, you’ll see the importance of having a well-diversified portfolio, and also realize that investing doesn’t have to be complicated. That you don’t need to know the math or most of the jargon. A basic understanding of investing’s fundamental truths is all you need to be on your way towards financial independence. Cheers.

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