An interview with CaptainFI on ETFs for Beginners

ETFs for beginners: Captain FI’s interview with Phil Muscatello and Ana Kresina on ETFs for Beginners where we talk about FIRE (Financial Independence, Retire Early)

Introduction

Today I was lucky enough to be invited onto the popular ETF for Beginners podcast with Phil Muscatello and Ana Kresina to talk all about my experience with FIRE. You can listen to the episode when it goes live, but there were a few questions we didn’t have time for, so I wanted to chuck up the notes I had prepared because honestly they are a gold mine of information and I really wanted to share them with everyone.

You retired quite early. Can you tell us more about what the FIRE movement is?

First up – I am not a financial advisor – just a guy talking about his experiences, so with that disclaimer out of the way,

FIRE stands for Financial Independence Retire Early.

It’s about financial security, being self-reliant and financially independent for retirement.

A lot of people focus on the investing minuta but what’s actually more important is behaviour and mindset – creating an abundance, wealth mindset and thinking long term.

It’s about diversifying your income streams, spending mindfully and then diligently investing.

The aim is to get more control over our lives.

We do this simply by spending less than we earn and investing the difference: many people interested in FIRE end up with seriously higher from job negotiation or optimisation, get really good at budgeting and optimising expenses and then look to invest the surplus into broadly diversified ETF portfolios, investment properties or alternative investments like businesses or websites.

ETFs are the most passive and typically then provide you with a mix of dividends and capital growth which you can incrementally sell down to provide an income source in retirement to supplement other forms of passive income. But they are also volatile and can go down in value. Most of my investments are in boring ETFs.

Investment properties take work so are not as passive as shares but provide rent, and grow in value. Ideally, they are cash-flow positive to provide an income stream – negative gearing is sometimes used during the accumulation phase of FIRE, but then at the ping of retirement something has to change to make them cash flow positive. For example properties can either be paid-off enough to become cash flow positive for income stream, or equity is accessed and used to invest in income producing assets – either shares or other IP’s, either by refinancing or selling. I have an IP that I have been building and is almost finished.

Businesses are great but are the most work of all three – some businesses can be highly outsourced and are semi passive, ie websites, but they can take a lot of time, effort and learning to set up. Personally, I love online businesses and have a heap of different content websites which I use to generate semi-passive income.

It’s important to realise that all investments are volatile, can go up and down, whether that’s shares, property or websites, so you need a solid emergency fund and ideally other sources of income, even potentially the ability to go ‘back to work’ if needed, as well as an ability to alter your spending (tighten your belt) to get through rough patches like the Covid correction.

Historically, we have seen over a long enough time period the market recovers from corrections. Who knows if that will continue into the future, but my personal opinion is that if it doesn’t and my thousands and thousands of globally diversified stocks lose their value – we probably have bigger issues to worry about like nuclear war or something.

Long answer but in summary: FIRE is about taking responsibility for your own financial future.

Often FIRE is calculated by saving 25x your expenses, can you talk about what numbers anyone pursuing FIRE should consider?

Yeah, there were some studies done a while ago that modelled this and safe drawdown rates – the theory being if you invested your life savings into a mix of stocks and bonds, depending on the performance of the markets and how much you took out, you could theoretically sustain yourself for your retirement.

You can google trinity studies and read for yourself – but they found that a 4% draw down rate was pretty safe most of the time for 30 year retirements. Off the top of my head it was like 90% or 95% successful, and only in a few situations did it fail – usually due to poor market returns or corrections in the first few years of retirement.

They talk about this being called the sequence of risk returns, basically if there is a recession in your first year of early retirement, you’re screwed.

All is not lost though – markets recover pretty quickly, so, in practice all you have to do is either work another few years – or go back to work, and try not to draw down any of your investments and let time and compound returns fix the issue. Then you can try again.

So yeah, there is no free lunch when it comes to RE – and of course, having additional passive income streams is really the goal, you never want to rely on one income stream, that’s what FIRE is all about, multiple passive income streams to create freedom.

Now the trinity study didn’t really cover people retiring at 30 and living to 100, that is 70 years of ‘retirement’, nor this case for a very heavily growth weighted fund like 95 or 100% stocks.

I don’t think anyone knows how it will go over this longer retirement period. However, over a long enough time period the volatility seems to even out. We have seen the market typically return around 10%, with 2-3% inflation. So a real return of around 7-8% in terms of purchasing power. This is long term data.

Actually, the fact that it’s a longer retirement makes me feel more confident to ride out potential crashes and corrections and recessions.

So some people have suggested a 4% draw down, which leaves 3-4% in the fund to grow and help deal with the ups and downs of volatility.

100 divided by 4 is 25, that’s where 25 comes from. So if you have 25x your annual expenses invested – voila – you can theoretically FIRE off this investment.

However, be warned, you also need an emergency fund – most people opt for 3-6 months, and appropriate insurances to cover your ass.

Things get trickier when you talk about bigger families, health issues, pets, and having large and expensive liabilities like collections of sports cars and other things.

It’s all about trying to balance and mitigate risks, really.

So some people in the FIRE Community want an additional factor of safety and opt for a 3% safe withdrawal rate (equating to 33x annual expenses) and potentially a year or two in their emergency funds – which could be a mixture of cash and other fixed interest securities like term deposits, bonds or even peer to peer lending.

Now, these all assume we die without touching the capital – I’m a little different, I am planning to spend my investments and aim to die with zero, to get a bit better performance out of my retirement fund and to let me leave full-time work earlier. So I opted for a 7% withdrawal rate over 25 years, backed up by being able to access my annuity at 55 and then my super at preservation age – backed up by passive income from my websites and investment property. And if it all stuffed up, I could turn to the aged pension. Thank God we live in Australia.

Finally, the time to fire is just a percentage of your savings rate. The maths checks out and it’s a really cool formula – but the assumption is no lifestyle inflation. 10% savings rate is 60 years. 50% savings rate is 15 years. 85% savings rate is four years. Mr Money Mustache published a graph which I’ve reposted on my website, check it out. The more frugal you are and the more percent of your pay you invest, the quicker you reach FIRE.

What’s your experience with financial advisors?

I think financial advisors are generally as a whole good, but there are definitely some snakes out there. I have had 3 predominantly negative experiences with financial advisors;

1 – A financial advisor with the uni put me into a conservative fund when I was 17 and first started full-time work with my scholarship. As Someone with 50 odd years before conventional retirement, this is absolutely ludicrous. The longer I had, the more aggressive I could be!

2 – When I finally had all my civil qualifications and stopped haemorrhaging money into flight training I started to want to invest – I saw a financial advisor which put me into a rubbish fund and after I double checked the math I was earning 4% while markets were up in double digits. I was also paying ridiculous fees. Thanks Barefoot Investor for the tip off to get me to switch!

3 – When my mum retired due to having cancer, a financial advisor wanted $3000 cash upfront, PLUS 1.8% annually of funds under management to organise her Super. What a fucking joke!

The issue is that many people that could benefit from a financial advisor just can’t afford it, or it doesn’t make sense to pay the fees until you are talking about managing hundreds of thousands of dollars which only really works if you get an inheritance or some kind of lump sum payment.

If people can’t manage $10,000, they can’t manage $100,000 let a million or more for FIRE.

I think as a community, we all need to take responsibility for financial education and talk about money more, this will help reduce wealth inequality and gate keeping of information.

You shouldn’t have to go and pay thousands to a financial advisor for this kind of information, it should be general knowledge. It is so easy to jump online and set yourself up with an automated diversified portfolio.

I feel like there may be a whole segment of people that believe the Wall Street propaganda that investing is too hard and scary, so they throw their hands up in the air, give up and pay someone a hefty fee to outsource it.

I don’t want to say financial advisors are bad because most of them are good, but it’s just about understanding what they do and how they might actually help you. They unfortunately get hamstrung due to regulation and I think their job is really hard between providing value and not overcharging, but then actually meeting regulatory requirements.

Another thing to consider though is your risk tolerance and intelligence when it comes to researching and understanding information – if you honestly are not going to go out there and learn all the information that is freely available, and you are scared, or you’ve had a huge life-changing event like an injury, death in the family or you have come into a lot of money then yeah, maybe you should probably go and see a financial advisor and get something in writing.

More recently I did consult a financial advisor that I was pretty happy with. The fee was very reasonable at $500 and the ongoing fees were a fixed $150 per year, which I figure is pretty reasonable for what I am getting. I was like 99% sure I was doing the right thing, but it’s just that extra peace of mind for me.

Finally, one thing I have learned in my fire journey, particularly about business, is the importance of building a good and trusted team of advisors. That is: book keepers, accountants, lawyers, financial advisors, brokers, agents and technical specialists.

FIRE often focuses on insourcing and doing it all ourselves, which is fine if you just want to FIRE according to the percentage savings rate timeline , but for those chasing fat fire or looking to scale businesses and build wealth faster, it’s important to work on the business and not in the business – this has been a massive mindset shift for me, and something we should be wary about the FIRE dogma which could be self limiting. This may be a pro argument for getting a good financial advisor as part of your team.

The psychology of investing and investing behavior are interlinked. When you think of the psychology and behaviour, how do the two work hand in hand when investing?  

Absolutely. Hands down, the psychology is the most important behaviour. I’ve heard the saying before that money in a transaction is mostly made on the purchasing side – if we can purchase at a discount, we secure value and potentially years worth of returns at point of purchase.

The famous investor Warren Buffet once said – be fearful when people are greedy, and be greedy when people are fearful.

Sounds awfully like that cliche Buy Low, Sell High saying.

Well, In practice, No one can do that. Except maybe Buffet, or a hand full of insider traders.

So, us Lowly unwashed masses should borrow a euphemism from the crypto finance bros and just say we need diamond hands.

It’s impossible to pick the dizzying top, and it feels just as impossible to pick the crushing lows, but if we think long term, decades or more, we can zoom out and realise that long term, we are holding profitable businesses that make us money while we sleep.

HOLD on for the ride.

With FIRE, a similar analogy to making money in the purchase is that we make most of our performance in the savings rate, if we can save more and invest more, we FIRE quicker. Which means we need as high of an income as possible, and as much self discipline as possible.

Whilst the amount we can save is limited, the amount we can earn is not.

Switching your mindset is hands down the most important aspect to FIRE and reaching financial independence quicker.

I know you have some philosophies on how to save money and invest more, can you share them?

I have some rules of thumb for saving money which some might find ridiculous, but which helped me build wealth quicker. Looking back, these are probably a bit extreme so you obviously can just tone them down a bit for yourself, but I always focused on the big four first – Housing, Transport, Food and Holidays.

Housing is probably the biggest area. Try to keep housing below 15% of your income. This might sound ridiculous for some people, but when I was earning around $2500-3000 a week I was spending $400 a week on rent on a small one bedroom apartment in the outskirts of Sydney. However, I was also fortunate enough to receive an accommodation allowance through work. Whilst I was able to negotiate to include utilities and shared internet with neighbours, you should be mindful of your electricity and water usage – not just from a saving aspect but it’s also kinder to the earth. Tips I followed included only doing laundry when I had a full load and using a cold cycle, hanging washing instead of tumble drying, using a fan instead of aircon, and using headphones rather than large speakers and sound systems. Just trying to be mindful with consumption.  Do you really need a McMansion? How much space do you really use?

Transport. I suggest driving a car worth no more than 5% of your take home salary. When I was earning $160K flying, after tax and I took home about $2200 a week plus allowances which worked out to be about $140k a year at my absolute peak of earning, which worked out to be a $7500 car. I don’t think I would even get half of that for my car to be honest, but it’s still an awesome reliable car. I have had it since 2012, but it is a 2006 model. Now there is always the safety argument – new cars are safer, and my response to that is to drive less. Being on the road is a risk. Period. Always try to minimize your driving and if that means negotiating to work from home or switching roles to one that you can, even part time, that will save you. Public transport is sneered at especially during covid times, but with safety precautions, it is ok, again, WFH is the best. I actually loved cycling to work and had an eBike which made it much quicker, and for most of the year it was quite enjoyable – at the peak heat of muggy Sydney summer and chilly rainy winters I did drive though. Driving technique helps to conserve fuel – just don’t be a hoon. I also did my own maintenance on the car which saved me a lot of money.   Do you really need a V8 or four wheel drive off roader? Or would a small Kia or Getz do the trick? I drive a small petrol wagon, which spends 99.9% of its time on the road, but does just fine for weekend camping getaways and has plenty of space.  

Food. I ate a majority whole food, plant based diet. When I was getting neurotic about saving, I would spend about $40 per week on groceries and was able to easily meal prep for around $1 per serve. Think lots of pasta, rice, pumpkins, potatoes oats etc. Although realistically, this doesn’t move the needle as much as Housing or Transport. Ways to supplement this in a fun and educational, sustainable manner is to grow a vegetable garden and plant an orchard of fruit trees – I grow a lot of my greens on my balcony here in Adelaide and did the same back in Sydney. It is super easy to grow lettuce, spinach that kind of thing, and tomatoes and cucumbers, zucchini etc are also a lot of fun to grow and do help save a bit of money. Nothing beats fresh produce. The biggest killer for your budget with food is two things – Meat and take away. If you cook at home, mostly plant based foods, you will be smashing it.

Lastly, holidays. I never really took holidays because I  was always travelling for work. I spent a lot of time road tripping between airports and cities whenever I moved for work, and I love domestic road trip holidays. They are also very cost-effective.  Everything would get thrown in the back of the station wagon and I would just beach bum it usually, one of my fondest memories was a mate and I just drifting our way from Newcastle to Perth via the coast, camping and surfing. The best thing – I got paid by work for that relocation, and they factored in hotels – we just camped and pocketed the cash!

But seriously, I think 2.5% of your annual net salary is a good start. When I was earning around $120k after tax, that would be about $2200. Do you know how much petrol $2200 buys? Yeah maybe less these days, but that’s easily a thousand litres, which can take most cars 10,000 kilometers. Sure you obviously don’t want to spend 100 hours in the car on the highway, and as I mentioned earlier, driving is dangerous, and there are obviously other costs such as tyres, tolls and wear and tear, but my reasoning here is solid. Camping getaways are cheap, fun, and you get to connect with nature. Also, flights to Bali might sound cliché for Aussies but they are pretty bloody cheap, I flew my sister and I return and stayed with family friends for a few weeks plus we did a week in a hotel in Kuta and it cost me about $2000 all up, including activities like day cruises and rainforest walks.  

Bonus round: Phones – get a $200 Boost prepaid sim.

Clothes – buy expensive shit that lasts, i.e. RM Williams shoes, holeproof explorer socks, and other quality items. Capsule wardrobes – my half arsed blokes take on this is to always wear t shirts and shorts everywhere, and have a minimum of dress shirts and pants. I just don’t really buy clothes.

Gym – make your own at home. Gym gear can be picked up very cheap around February when everyone gives up on their New Years resolutions.

Recreation: Just enjoy free shit. Nature walks. Swimming, Surfing, Picnics, reading, writing, playing an instrument, learning a language. Use a streaming service instead of going to the cinema.  Realise doing every single extracurricular expensive activity like martial arts, paying for dance etc adds up.

I usually always tried to give myself $50 guilt-free to spend on recreation each week though, and I have actually loosened the purse strings since leaving flying and am giving myself $100 a week now.

Remember, cheap is bad, frugal is good. The price paid is forgotten long after the quality is remembered.

What have been the most valuable sources for learning about investing?

All of this information is free and can be found in podcasts such as the Aussie firebug, Mad fientist, and the Fire and Chill podcast, She’s on the Money and Her first 100k, your podcast ETF for beginners.

Online Blogs such as Mr Money Mustache, JL Collins, Strong Money Australia, Passive Investing Australia, Life long shuffle, Aussie firebug and Money saving expert. ASIC has an amazing blog called Moneysmart which calls out a lot of bullshit, and online comparison sites actually can provide some decent info too – like Canstar and Choice.

YouTube channels such as Queenie Tan, Nate Obrien, Niel Patel, Ray Corcoran, Graham Stephan are all awesome and provided me with a lot of value

On social media girls like Queenie, Tash Invests, Money Savvy Mumma, Aleks Broke Girl Wealth, they all provide so much information and value. Literally, just go to my account and see who I follow.

Books which you can rent from your library or buy cheaply such as Rich Dad poor dad, Money school,  The Simple path to wealth, the Four hour work week, I will teach you to be rich, The Millionaire Next door series, Your money or your life, The Latte fallacy and Noel Whittaker and Peter Thornhill’s books are all amazing and honestly, it’s worth going out and buying them right now. Life changing.

The caveat, of course, is that you need to be wary of what you are reading or listening to, because some bullshit slips its way in. But in general, these have been amazingly helpful for me.

What part do ETFs play in your strategy?

As mentioned before I try to generate income and then stash it away into relatively safe or passive boring, low management expense index tracking ETFs.

Lately, I’ve been generating income for this with websites, but prior to that it was with my flying career and side hustles.

I invest into a very boring, basic three fund globally diversified split – Betashares A200 for Australian exposure, And Vanguard VTS for US exposure and VEU for global exposure.

I actually am one of the people who are fully transparent about my investments and who have it all up on my blog for the world to see (which is why I blog semi anonymously), I’ve been updating it monthly but may drop back to quarterly updates.

Income in the form of dividends I have just been getting paid into my bank account which I love, yes it’s perhaps not as efficient as DRP or DSSP but this is a psychological thing and makes me feel good – I can then rebalance by investing according to my portfolio splits which gives me a higher feeling of control and independence, and helps keep the weightings in check.

I know you’ve tried every side hustle and ways to monetize your hobbies. Can you give a bit of a rundown of why and what you tried;

I have tried a lot of different jobs, income streams and Side hustle ideas. Some of the things I have tried include;

• Full time cargo flight operations

• An aviation freelance and contracting business

• Casual flying instructing

• Warbird adventure and scenic flights

• Index fund investing (Australia, US, and Total world markets)

• Peer to Peer lending

• Property investing and real estate developments (Australia)

• Online arbitrage using eBay, Gumtree (Craigslist) and Facebook marketplace: flipping vehicles, appliances, furniture and other items

• Maintenance of a shopping center – i.e. cleaning graffiti, rubbish, gardening and general caretaker duties

• Small ‘Cashies’ for friends and family – payments for landscaping, fixing / repairing / maintaining vehicles, cleaning cars and houses, mowing lawns

• A website  portfolio that earns income from Advertising, Affiliate marketing and selling Digital Products.

• Matched Betting

• Gardening – growing plants and food to both supplement my groceries and also for sale or barter

• Tutoring students in Science and Maths (HSC and University level) as well as ‘helping’ them with their assignments

• E-commerce (such as selling Print on Demand T-shirts)

• Tutoring: Math, physics and chemistry at high school and university level, which brought me close to $100 an hour. Plus the occasional free meal from the students parents, too!

• Gardening and labour services: I used to pick up cigarette butts in shopping centre car-parks earning about $20 an hour some weekends.

• Buying and selling cars and motorbikes: I had a lot of fun doing this, I was first introduced to this by a friend who bought a Honda CBR250R motorcycle on my behalf for $1000 (and then promptly took me to an ATM to reimburse him). Three months later I sold that bike for $3800! This was a lucky find and not all the deals were as lucrative, but in general I made at least $1000 per flip, after paying for minor repairs / maintenance and stamp duties / taxes. I lost count of how many flips I did, but I had a lot of fun riding the bikes and using the cars. I also learned a heap of valuable skills such as how to maintain all of my vehicles, and how to advertise and negotiate deals.

• Buying and selling the most RANDOM things on eBay and other online classifieds. At one stage I was buying memorabilia or other antiques in op-shops and selling them on eBay. Whilst it wasn’t a huge amount of money, bargain hunting became a fun Sunday morning activity, and one of my best flips was an old and tattered first edition poetry book which I paid $2 for and sold for over $300 online. The best thing was, I lived up the street from a post office and the buyers would always pay for the postage.

Of course aviation is an area you worked in. Can you talk about how that aligned with your career goals and FIRE?  → lots of money in space engineering to advance your career

Honestly, it didn’t advance my career as a space engineer per se, but I just loved it. Lots of things I learned studying Test and Evaluation I have been able to implement in my business (websites) and on my podcast. The best thing I learned was ‘Test Often, Fail Early’. Having a positive relationship with failure is critical to success, and I have embraced the concept that FAIL = FIRST ATTEMPT IN LEARNING.

I have spent a lot of money on flight training and post-graduate education, but I consider it a wise investment. I have had numerous in-flight emergencies and multiple emergency landings where to be honest, had it not been for the quality and amount of flight training, they could have been fatal accidents you heard about on the news. Aviation is one of these tricky areas where a lot of our rules are said to be written in blood, so you take training and education very seriously.

What I did like is that I was investing in myself, in my own skills, knowledge and experience.