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The Road to an Early Retirement Deserves a Good Map

The ebbs and flows of profits, property valuations and share markets can muddy someone’s ‘clear’ vision of their path to FIRE, but there are strategies to help, writes Mike Taylor.

9 January 2024

The desire to have enough money to retire early isn’t a new one, but the number of roads you can take to get there has definitely grown in the last decade or so. The advent of new technology has created a lot of opportunities for entrepreneurs and generated increased discussion on the idea of being financially independent and retiring early (FIRE).

But an element the discussions sometimes gloss over are the truths about getting to that point. You can do as much forecasting as you want, plugging figures into calculators and projecting returns, but you won’t be able to forecast shifts in markets, crises or the rise and fall of companies.

It’s important to remember you aren’t guaranteed a 10 per cent annual linear return. The ebbs and flows of profits, property valuations and share markets can muddy someone’s "clear" vision of their path to FIRE.

Some people try to address this by mapping out a more conservative overall return estimation, but that still leaves you potentially vulnerable if all your eggs are in one basket. Some years will be better, some may be quite worse – it’s important to plan ahead to try and handle these situations and ensure a drop in one area won’t torpedo your retirement goals.

Diversification so important

This is where diversification comes into play. By splitting your money across several different areas, you reduce your risk. While this may be touched on from a high level by proponents of FIRE (or those discussing retirement in general), the details of what diversification looks like are all too often skimmed over.

Anyone worth their salt that’s covering FIRE or retirement should be hammering home the idea of diversification, and the right kind of diversification at that. It’s about investing what you have wisely, across several asset classes – including property, shares in different markets, cash, bonds and even alternatives – you can find just about anything in an ETF these days.

And you should do all this without overly exposing yourself to one particular area. Don’t just put all of it into a single tracker fund and close your eyes.

This diversification is also important from a global perspective. Economic cycles happen at different paces across the world, meaning a lull in one market can see great opportunities in another. An example of this is how tech stocks in the United States essentially wrestled the S&P 500 back into a bull market in June, while NZX and ASX markets lagged. So, when looking at managed fund providers, be sure to find one that has exposure to different global markets.

The importance of due diligence cannot be overstated. If the company you’re investing in or the house you’re buying isn’t fundamentally sound, your money can quickly turn to smoke. For us, we use five key principles to guide our investment choices. These principles are designed to help us ask the right questions, allowing us to determine the suitability of assets and investments.

Due diligence

And just like with the theoretical house or company, you need to do your due diligence when picking a fund manager. Talk to those you’re considering entrusting with part of your retirement nest egg, read reviews and find out as much as possible so you can be confident they’ll have your best interests at heart. You want to make sure they’re focused on long-term growth and don’t just follow the latest trends.

Planning for a safe and secure retirement isn’t a pipe dream, whether you end up retiring early or decide to work well into your 70s.

But the key to securing it is to look at all your options, ensure your eggs are wisely spread to avoid potential risks, and to try to work unexpected volatility into your planning. So, whether you’re embracing the FIRE concept or are just looking to safeguard your retirement, putting some of your money into a managed fund is a wise option, along with investing in other areas.

*Mike Taylor is the CIO and Founder of Pie Funds. You can view our disclosure documents on the Pie Funds website. For personalised financial advice, please speak to a financial adviser.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.


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