This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
I am by far the last person to ask about specific investing advice (for now, I hope to change this in the near future). What I can tell you is what I am looking at right now in my future investment plan and why I am going to do it this way.
I have an undergraduate degree in Economics (which doesn’t really mean a whole lot, I do not claim in any way to be an Economist, but I sometimes remember some of the stuff I tried to learn in the four years of school I was paying for) – one of the main facets of Economics is an efficient market, whether it is in a labour market, commodity marketplace or in the case of investing stocks and bonds. The efficient market hypothesis (as it applies to stocks) basically states that prices reflect all known information available. A lot of investing books use this hypothesis to tout index funds, essentially saying “the market is efficient anyways, don’t try to beat it, just own it (through index investments)”. I generally agree with this, and think that index investing is right for most people – it’s safe (or relatively safe, as compared to either keeping cash under a mattress or picking stocks based on a hunch) and pretty easy to do, I just don’t want to do this.
I’m not eschewing index investing due to its simplicity – I’m pretty lazy and would enjoy something like a Couch Potato Portfolio, where I rebalance a few times per year and generally don’t worry about my investment otherwise, compared to a dividend portfolio of single stocks, which require constant monitoring. No, I’m going to invest in things that are going to pay me cash now, not later.
Why is having cash now important to me? There are a couple of reasons:
- I’ll need cash when I retire – a constant cash flow that comes from investments such as stocks, bonds and REITS will replace my salary at some point (hopefully). Having to sell off the stock itself does not seem like a good long-term plan to last through retirement. Dividends (or interest) paid out will allow me to own the original investment (which will hopefully appreciate).
- I don’t really trust the marketplace – This may seem like a silly reason to choose an investment, but for me I would rather have cash in my pocket now and see money coming in rather than investing in a company hoping to pull my money out at some future time. I realize that I am a little crazy for this, but rather than seeing the stock appreciate, I would rather take a portion of my investment off the table.
My first reason is perhaps a little more rational than the second, but they both work for my purposes. To me, investing has a lot to do with personal preference and these are mine.
Do you invest for capital gains, or cash flow, or a mix? How do you decide (or did you decide) on the type of investments you were looking for?