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Finding the best SAFE investment to fund YOUR dream of early retirement can seem hard. In this post we make it simple. You’ll learn about the 7 best SAFE Index Funds for F.I.R.E. – for Europeans and everyone else.
In the last post we shared with you The 7 Best Ways For Parents To Invest Little Money and how to invest your money – safely and successfully. In this post I will tell you where. After reading this post you will know the 7 best SAFE stock market investments to set up your own investment portfolio for financial independence: specific well-diversified Index Funds or ETFs, short for Exchange-Traded Funds.
Before we dive in, we will first look at the 7 types of investments you can choose from in the stock market in general so that you know what an Index Fund or ETF actually is. That will also reveal which investments are SAFER than others and why.
Contents
ToggleBonds and bills are debt securities. You borrow money for a certain time (= maturity) like 20 years to the government of a country (= treasury bond/bill) or a company (= corporate bond/bill) who guarantee you a certain return for doing so. Most investors think of government bonds when considering investing into bonds even if corporate bonds are offered by many companies. Similar to these kind of securities are Certificates Of Deposits (CDs) which I mention quickly here as those investments have nothing to do with the stock market itself. With a CD you simply put your money into a special bank account where your money is locked into for a specified period of time. Therefore you get a smaller interest rate.
If you buy a stock of a company, also known as a share or equity, you buy a portion of the company and own a piece of it. You become a shareholder. The more people are doing this because they believe in the success of that company the higher the stock price will go. Stock returns are very individual and so are stock prices depending on the market conditions. Unfortunately, it is very hard to predict the future of a company and a stock, especially when thinking and investing for the long term.
The past performance of a share price cannot predict its future. Just keep that in mind when investing into individual stocks. But there are riskier stocks than other ones. Income stocks can be less riskier compared to growth and value stocks. An income stock is also known as dividend stock providing regular dividend payments for the investor. Most dividend or income stocks show lower volatility at the stock exchanges. Many of them are blue-chip stocks being large companies that are well-established and have a long history of stable returns and dividends.
There is a saying: Buy silver if you’re investing for when times are good. Buy gold if you’re investing for when times are bad. Silver is linked with the industrial economy. So, it’s more volatile and cheaper than gold. Gold and silver are both commodities being raw materials. Other examples are agricultural products or even energy itself. But all of those are very sensitive to global events as well as supply and demand. Also, investing in those is more complex. You either do it with a special contract, Exchange-Traded Funds or stocks in individual companies producing or trading these kind of commodities. Depending on your choice you are invested more directly or indirectly into metals.
That is an alternative digital form of payment where you don‘t need any financial institution. It uses an encryption algorithm so that the payment is kind of locked. That algorithm is secured by cryptography making it nearly impossible to hack it. You can buy cryptocurrencies at so called crypto exchanges like Coinbase. Bitcoin was the very first cryptocurrency. Return rates can be negative or 5 Million % like it was with Bitcoin.
REITs pool together capital from their investors to then invest in the underlying properties like medical facilities or hotels. All REITs earn income from rent or property sales or investing in mortgages – those are sensitive to interest rates changes. REITs have to pay at least 90 % of annual returns as dividends to its shareholders resulting in high dividend payments. A REIT can be a REIT stock or a REIT ETF bundling several REITs from one or a couple of real estate markets like the US.
Mutual Funds mark the beginning of funds investing in 1924. Those are actively managed funds by investment professionals. A fund manager consistently decides which stocks will make it into the mutual fund and which not. You pay the highest fees of all funds, around 2 %, for their investment advice which reduces your yearly returns pretty significantly. So, investment professionals have to beat the market to raise that return back again for the investor. But as the data shows, over the long run only a few manage to do this so that you have to find the “needle in a haystack”.
An Index Fund or ETF is always passively managed and low-cost as it just copies an index of the stock market. It pools together stocks from that index in one fund and replicates the same amount and value of the stocks within that index. So, if you buy one fund you buy hundreds if not thousands of stocks in one product. Funds can be stock funds or bond funds. Investment professionals now don‘t need to make any selling or buying decisions. They simply buy the market instead of trying to outperform it by.
Nowadays that is automated which reduces fees to < 0.2-0.07 % of your account balance per year. Exchange-Traded Funds, short ETFs, have one big difference: they can be traded every second if the stock market exchange is open. The price is the actual price in the market. Index Funds cannot be traded “live”. There is a price calculated for the Index Fund for one day.
Let’s revisit the topic of fees. Refer to the graphic above to clearly see the difference between the 2% fees of mutual funds and the 0,07% fees of an Index Fund or ETF. If you’re aiming for a retirement portfolio of 750.000 EUR, this means paying 15.000 EUR in fees annually for mutual funds, compared to just 525 EUR per year for an Index Fund or ETF. That’s a yearly difference of around 15.000 EUR once you hit your target. Imagine all the other things you could do with that money instead of spending it on fees. This doesn’t even account for the significant opportunity costs of losing 15.000 EUR each year.
Additionally, it will take an extra 5 years to reach your 750.000 EUR goal because of these fees. This is due to the fee payments and the lost compound interest from not having that extra money invested. So, you end up spending 32 years instead of 27 years to reach your goal. With the lower-fee portfolio, you could have around 1.200.000 EUR after 32 years and save over 150.000 EUR in fees (156.407 EUR vs. 7.728 EUR). Be careful not to overlook seemingly small fees, as they can have a significant impact.
Now, we want you to figure out what is right for YOU. We want you to choose the best SAFE investment option out of these 7 to fund YOUR dream of early retirement and achieve financial independence.
Therefore, we need to ask what makes an investment SAFER than others? Feeling safe is always a personal feeling. I feel safe when:
If you agree with me, that reduces your SAFE investment options from 7 to only 1: funds. See in the table below a simplified overview of typical average returns and diversification potential of the different investment options. Internalize that higher returns, aka capital gains, always come by with more volatility as well so that you need a higher risk tolerance in terms of enduring ups and downs at the stock exchanges.
Investment option | Average annual return rate (over decades) | Diversification |
Bonds / Bills | 3-6% | medium |
Individual Stocks | 0-170% | low |
Precious Metals | 7-8% | low |
Crypto currencies | 0-5 Mio.% (or negative) | low |
REITs | 8-19% | low |
Index Funds & ETFs (f.e. MSCI World Index) | 9% | high |
Disclaimer: Please note, that we are not financial advisors and have no special education in investing into the stock market. The following 7 „safe“ indexes are „safe“ in our opinion after our personal years-long investing journey. We experienced many ups and downs while investing at different stock exchanges and even a crash but the Index Funds from our portfolio not only recovered, they went higher than before. And they still do. Our return on average was > 20 % so far and we‘re very grateful for that. There is another Blog post from Marc further exploring mechanisms within the market and why we feel confident in investing into funds.
Where we personally invest? We hold the MSCI World, the S&P 500 and the S&P IT in our personal investment portfolio for financial independence. You find details of all 3 indexes down below. We also hold some individual stocks (the biggest part is from Europe, Germany and the US) and crypto currencies (Marc is a bit nerdy about those as an IT guy). But both make up only a small part of our portfolio. And the crypto part is not counted into our F.I.R.E. portfolio since it is high risk.
However, the following 7 indexes include 6 „worldwide“ Indexes and 1 US Index + 1 „bonus“ US Index (as one of our favorites). We choose the US as it’s today‘s dominating economy that also dominates some of those worldwide indexes. I refer to the data from www.msci.com and www.investopedia.com in the table below.
Index Fund | Average annual return rate (rounded since inception) | Diversification |
MSCI World | 9 % (1975) | 1.500 companies from 23 countries = 73 % of all shares worldwide |
MSCI ACWI (All Country World Index) | 8.1 % (1987) | 2.800 companies from 47 countries = 85 % of all shares worldwide |
MSCI ACWI IMI (All Country World Investible Market Index) | 7.3 % (1994) | 9.100 companies from 47 countries = 99 % of all shares worldwide |
MSCI ACWI All Cap | 6.5 % (2007) | 15.300 companies from 47 countries = 99 % of all shares worldwide |
MSCI Emerging Markets | 9.5 % (1987) | 1.300 companies from 24 countries |
MSCI World Small Cap | 8.8 % (2000) | 4.300 companies from 23 countries |
S&P 500 | 10 % (1957) | 500 US companies |
S&P 500 IT (our „bonus index“) | > 21 % (1996) | 65 US companies (only IT sector) |
Which index seams right to you? If you want to know even more about how those can help you funding YOUR family‘s dream of early retirement, stay tuned. We‘re about to share everything you need know in a F.I.R.E. workbook to come, especially designed for European families.
However, even if Index Fund Investing seams like the Holy Grail of SAFE investing for financial independence I understand everyone who still wants to hold individual stocks. We do that too. It might seam contradictory to what I mentioned so far but we just like this kind of investing too. I personally believe in the success of a couple of companies out there including the one I‘m working for.
I like to call this „value investing“. Others name it a „core & explore” investing strategy. However, both refers to this: You focus on one „core“ Index Fund or a couple of ETFs and define a certain percentage – like 10% – of your portfolio to “explore” individual stocks. But no matter if you buy a stock or an Index Fund always make sure to know what you’re buying. Do your own research besides everything I‘ve mentioned so far.
When you walk away today with at least one new idea to improve your personal financial journey towards F.I.R.E. I’d love to show you some more in the next post. If you haven’t already, you can apply to become a part of the community to not miss any new release. For that you can subscribe to our Newsletter below in the green footer.
As we regularly try to cover topics, requested by a large part of the community, I’d love to hear: What is your favorite Index Fund or ETF? Let me know in the comments below!
Title image source: Gilly on Unsplash
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