As I have mentioned before extreme early retirement (<35) does not happen due to a prudent investment plan. It happens either by following an extreme savings plan or by being lucky (rich uncle, lottery, penny stocks, real estate, …). These reason is that the time it takes to reach financial independence, around 5 years, is simply too short for an investment plan to pan out.

Now, once you got “enough” money: $150-250k, if you are frugal, or $1,000,000, if you are not, then question becomes where to put it.

Here are a few things I have considered.

  1. Treasuries (or CDs). Invest the whole amount in treasury bonds. This was the way of Joe Dominguez of Your Money or Your Life. However, these days I think one would have to be a pretty big patriot to lend money to the government. While return of principal is guaranteed, it’s not guaranteed that said principal will have any buying power in 30 years. Treasury notes avoids locking in a low rate. On the other hand one becomes subject to the monetary meddling of the Feds. Alternatively, one could buy CDs from a more conservative central bank like the ECB. ( offers such CDs).
  2. A modern approach is just to buy a low cost index fund. According to large numbers of people, such index funds are the source of all things good and splendid. They are simple, easy, effective and they have even been rumored to cure cancer. Indices currently only provide 1-2% in dividends. These dividends could be set to invest automatically. At the same time, one could take automatic monthly withdrawals of 3-4% (Don’t forget to add the fund fee in the percentage). Historical calculations of the viability of this approach can be done using FIRECALC.
  3. Those who are reading this probably have the personal drive, talents, and miserly qualities to set up a no-cost option. No more than 20 individual stock positions will be sufficiently diversified to emulate funds with hundreds of stocks in them. Use a broker that offers a few free trades a year and sell some of the winners. And rather than reinvesting dividends take it as an opportunity to sell of a little less. The Dow Jones is price-weighted, so simply buy the 20 most expensive (in price stocks). The S&P is market cap weighted. Here you buy the 20 biggest companies for a very close approximation to the entire index
  4. Another strategy is to buy shares in solid dividend payers and then just live off of the dividends. Bear in mind that companies that appear solid now are not necessarily going to be solid forever, nor are they likely to grow much as they retain less earnings to do so (their money is being paid out). Dogs of the DOW is such a strategy. The dogs need not be from the Dow though.
  5. A more interesting strategy are high yield income assets such as junk bonds, REITs, buy-write closed end funds, convertibles, etc. These currently yield around 10%. In my opinion they are best acquired as ETFs. They are quite a bit less volatile that a pure equity strategy (betas below 0.5) and the yield is much higher than 4%. However, they may suffer from inflation whence the surplus (the 6% you’re not spending) should be invested back as an inflation hedge. Note the danger if your effective inflation exceeds 6%. On the other hand they provide a strong cash flow without the need to sell anything and incur capital gains. This cash flow could be kept sufficiently low to keep taxes a 0%.
  6. A potentially better strategy is to keep the fixed income portion at a level that only supplies cost of living. This means that if cost of living is $6000, then about $60,000 will be in high yield funds and the rest will be invested for growth/gain/inflation protection.

Personally, I’m leaning towards the last strategy. The idea of have a steady flow of cash with some potential for appreciation fits my temperament better than putting it all in the hands of extrapolating traditional market returns. (I’m scared of a Japan-like slump).

Originally posted 2008-05-22 20:11:32.