Essential Skills For Early Retirement: Be A DIY Investor

Do you have what it takes to retire early?  Believe it or not, it takes more than just money to be successful in early retirement. (Although a lot of money does help!)

What skills are necessary to make a success of a financially independent life?  This continuing series looks at the essential skills for success in early retirement.

In part 1 of the series, we discussed the an essential way for early retirees to “maintain energy levels”.

In part 2 of the series, we covered how early retirees might deal with adversity that arises from this unusual lifestyle.

Now, in part 3 of this series it’s time to talk about managing money — Specifically, managing it yourself.

It’s no secret that most of us who reached financial independence at an “early age” did it by Being DIY Investors.

Why Be A DIY Investor?

To make a broad generalization, it would be accurate to say that the vast majority of the world’s population has very little interest in managing their finances.  Most people would rather hand-over their hard earned cash to a professional.  Why?

They would rather be watching Netflix, instead of reading a book on investing.

Managing money can be stressful.  Most people have no formal training in finance, and very little time to study it.  Not to mention the repercussions of investing mistakes can be devastating —  A wrong move can wipe out years of hard earned cash.

Back when I worked a job inside the corporate machine, financial advisors were all the rage with busy people.  You did the earning and the financial advisor handled the investing….essentially passing the buck on all that financial stress.

But, (in my opinion) using financial advisors is absolutely the wrong move if you want achieve financial independence and/or retire early.

To explain why, I think it’s best if we start with a classic investing story…perhaps you’ve heard it before…

The story inspired a classic investing book called Where Are The Customer’s Yachts by Fred Schwed.  If you have the time, it’s a very entertaining read.

By asking that simple question, the story itself reveals one of the great truths about the world of investing — Wall Street feeds off humble Mom-and-Pop investors like ourselves.

Financial advisors, stock brokers, and many mutual fund companies exist simply because they can scrape management fees and transaction fees from small investors.  Collectively, this amounts to billions of dollars every year.

Ever wonder why there are more mutual funds than publically listed companies?  I think that fact says it all — The financial-vampires need to feed.

“As your financial advisor I think we need to talk about your asset allocation. We should get you into some better performing funds.”

Without those small 1% annual management fees and $5 per trade transaction fees, many financial vampires would die of hunger….

Think about it — When you’re just starting out, 1% looks like nothing.  A few dollars per year.  But think about that 1% in the context of millions of dollars — That’s $10,000 per million, per year.  More than my family of 4 spends on groceries for an entire year!

Want to get wealthy?  In my opinion, give as little money as possible to those blood suckers.

The impact of fees on small investors isn’t new territory of course, the subject has been written about extensively by many other personal finance bloggers.  No need to repeat it here!

The simple truth:  You’ll become far wealthier investor by avoiding the fees of “investing professionals”.  DIY investing is the best way to do that.

Of course I’m not saying it’s IMPOSSIBLE to reach financial independence with financial advisors…it IS possible.  It’s just takes longer.

Individuals who reach financial independence early are well aware of the pitfalls of high fees.  We avoid them, and simply choose to invest our funds in the most efficient manner — as DIY Investors.

Big Savers Win Big

Rather than trusting the traditional advice, DIY investors also invest a lot more money.  Where a traditional retirement plan might call for 10-20% annual savings to be invested, most FIRE bloggers frequently cite savings rates well over 50%.

We write our own retirement investing advice!!!

Most years, Mrs. Tako and I saved somewhere around 50-70% to reach financial independence in our 30’s.

This excess savings not only super-charges retirement funds, but also drives individuals to invest beyond standard employer sponsored retirement plans.

Mrs. Tako and I easily exceeded the limits of our tax-advantaged plans.  We literally had to invest in taxable accounts to keep investing.

Having a taxable brokerage account is a huge advantage.  Why?  Suddenly you’re in complete control of what you invest in, how much, and when.

I imagine investing much like learning to ride a bike.  Employer sponsored retirement plans are like training wheels.  They are simple, and easy to get started.  But what you can do with those accounts is limited.

With taxable brokerage accounts, the training wheels are taken off.  They’re an incredible education in DIY investing.  You can do practically anything — buy mutual funds, invest in individual stocks, buy or sell options, borrow money, short shares, and even purchase preferred shares, MLPs, or REITs.

The sky is pretty much the limit…

Yes, it is entirely possible to screw-up investing with taxable accounts.  You can get yourself into trouble once the training wheels are off… but a scraped a knee (or two) can be an excellent financial education.

Multiple Paths to DIY Success

The great part about DIY investing is that it’s such a wide open field.  There are many possible paths to investing success — If you don’t like stocks, you can invest in rentals, small businesses, or any number of other investing possibilities.

The limits are only set by your imagination — DIY investing means finding an investing vehicle that works for you.

If you know real estate, then invest there.  Small businesses?  Go right ahead.  It’s a completely personal journey.  Pick whatever works for you.

You don’t have to stick with just index funds.  There’s a gigantic world of investing possibilities out there that has absolutely nothing to do with index funds.

Don’t want to take my word for it?

Just look at the other FIRE bloggers out there (the ones who actually achieved FI).  All of them are DIY Investors and they ALL managed to achieve financial independence through different methods:

Mr. 1500 @ 1500days — Tech Stocks, Flipping real estate, and index funds.

Michael @ Financially Alert — Real estate, and stocks.

Joe @ RetireBy40 — Stocks, real estate, blogging income, and index funds.

Go Curry Cracker — Seller Financed Mortgage, blogging income, book publishing, and index funds.

Justin @ Root of Good — Retirement consulting, blogging income, and index funds.

Millennial Revolution — Children’s book publishing, blogging, and index funds.

None of these bloggers have “day jobs” anymore.  They’ve all “made it”.  They live off their investments, and they are all DIY investors.

Furthermore, each and every one of these incredible bloggers has some kind of unique investing skill they’ve built up over years that helped them reach financial independence.

If we can be DIY investors and find financial independence, than so can many other people….I find that really amazing and inspiring.  I hope you do too.

[Image Credit: Flickr1, Vampire]