This Is How to Choose The BEST Investing Strategy For Financial Independence 

Glad you enjoy it!

ReallyBoredMan, yes 70% might be quite a lot to put in small cap (especially since its being entirely concentrated in the small cap value subsection of the small cap space). The allocation was chosen mainly because it helped to illustrate how focusing on certain aspects of investment performance can help to maximize safe withdrawal rates. With the benefit of hindsight we know that small cap stocks historically outperform large cap ones more often than not so that's why it was used :) As far as the 50% large cap, 25% small cap, and 25% international goes it would likely be more volatile since it is an all-stock allocation and its historical long-term growth would likely be similar if slightly lower due to using more large cap in the allocation. On the bright side it would be more well-diversified (at least within the broader stock market class) given that its investing in both large and small companies in addition to overseas.

That's very similar to how my Dad approached it as well! The dividend method (or rent like you said) can be very effective :)

I agree with you 100%

Preach dude. Why stress over stock prices especially if you're retired and have to sell to cover your cost of living. Such a silly strategy. I'd rather use the dividend growth strategy and rentals too.

You are so welcome! I'm glad you've found the video and comment replies helpful :)

Thanks, Rickey!

I can certainly do a more in-depth look at the allocation! It seems like there are a couple of people wanting a more in-depth look at it so I've added it to my videos to do list. The next few portfolio analysis videos are already in the works though and I'm releasing them once a month so that the channel doesn't get too repetitive so I won't be able to upload a Max FI video right away. I also plan on doing a sort of wrap-up video after the series is finished where I compare the various strategies against each other during different time periods. I felt this was necessary as I've learned a lot while making the series and even added some metrics into the analysis that I didn't consider at the beginning. As far as the raw data goes you can find historical returns of investments/assets online in a variety of places. Or if you want to see more granular details from the ones that I've used for my videos its available on my Patreon page for those in the Investor tier or above. The spreadsheet you'd be looking for is the Asset Allocation Master Sheet. You can find my Patreon Page here: www.patreon.com/NextLevelLife I'm glad you found the video helpful :)

That's an interesting idea. Let's have a look. Based on the data set I have the inflation-adjusted growth figures for the classic 60/40 approach (using a total stock market fund and total bond market fund) are almost identical over the last 30 years compared to where they were from 1927-2020. The exact figures were average 10-year rolling real returns of 5.73% per year from 1990-2020 and 5.69% per year from 1927-2020. Based on the data set the strategy did not trail inflation for any 10-year stretch from 1990 to 2020. *I should note that the two best starting dates were 1990 and 1991 (both had 10 year real returns north of 10%) so that does inflate the average a little bit. If we ignore those two years the average drops to around 5.2% per year. The strategy actually appeared slightly more consistent with a standard deviation of around 10.9% compared to roughly 12% since 1927. It was also less luck-based according to its start date sensitivity figures (Total SDS of 16%, Average of 4% since 1990 Vs a Total of 23.6% and average of 4.8% since 1927). Its tranquility figures were fairly similar (though it had superior crash depth metrics due largely to not having to go through the Great Depression or the inflation of the 1970s/early 1980s). It tended to be more resilient over both the short and long-term (superior rebound intensity and comeback magnitude figures, didn't take as long to reach new all-time highs following crashes, and spent less time in crash or correction territory overall). So on the whole it seems like there are a lot more similarities than differences when shortening the time frame to just look at the last few decades. And when you eliminate events like the Great Depression from the picture quite a few of the metrics look a fair bit better in the Era of Low Interest. Though if we look since 1992 there is a small but noticeable drop in average long-term returns. Hope this helps :)

@@NextLevelLife Heck yeah, it helps! TY so much for taking the time to run the (shocking to me) numbers and report here in detail. Greatly appreciated. Glad to see those SDS numbers. Now that I'm doing some DIY instead of just dollar-cost-averaging index investments, it's hard to not get tangled in timing temptations. But my main takeaway is that I don't have a grand excuse to go all-in on equities just because long-term bonds died this year. Thanks!

That's an awesome position to be in, Bob! Well done and keep up the great work :)

Ronny, yes that's become something of a running joke on this channel ;) Unfortunately that's the only dice image available for me to use in the video editor at the moment, so its the best I've got :)

Yes, I would like to see a comparison with the Golden Butterfly as well.

Or JEPI

JEPI returns look terrible

They’re not for me

Generally when you're figuring out how much money you'd need to put away in order to reach financial independence you base it off of how much you'd need to withdraw from your nest egg in order to fund your lifestyle post-FI. So if you'd need $6,000 per month but social security will provide you with $3,000 of that, then you'd only need to withdraw $3,000 per month from your nest egg to fund your lifestyle. If you targeted a safe withdrawal rate of 4% that suggests you'd be shooting for a nest egg somewhere in the neighborhood of $900k (as opposed to the roughly $1.8 million that would be required without any help from social security). So on the one hand it might make a great deal of difference in the time to FI figures if you were previously assuming all of the income needed to be generated from withdrawals from your nest egg... but that's not really because the strategy's performance was any different. It's just that your requirements of that strategy changed when social security was added into the considerations :) I hope that makes sense!

That's great to hear that you'll have a pension waiting for you when you decide to make the transition into retirement. I'm not sure a full video would be necessary for the situation however as the approach doesn't really change much at all since the steps remain largely the same: First you still need to try and figure out what kind of lifestyle you want to lead in retirement life (obviously this'll be a bit of a moving target but should become easier to pin down with some specificity as you get closer to retirement. Still having a general idea of what you want is a good thing early on). Second, you'll need to determine how much that lifestyle will cost you. Third, based on those estimates you'll need to determine what amount of income you'll need your nest egg to generate each month/year to cover the remaining costs of your lifestyle after things like your pension, social security, and (possibly) income from any work you do in retirement (if applicable) is factored into the equation. And then you'll need to determine how much money you'll need in your nest egg based off its historical safe withdrawal rate. Finally, you can opt to build a little extra cushion into that nest egg just in case some unexpected things come up either in your life or the markets. This is particularly advisable if your pension/social security is going to cover a large portion of your expenses as they generally don't adjust their payments for inflation over the years, so the buying power of that income will decline over time... so the income from your nest egg would need to make up for that if maintaining your buying power in retirement is a big deal for your plans. So hypothetically if you wanted to have a $100k a year lifestyle in retirement and your pension covered $64k of that, then you'd need your nest egg to cover the remaining $36k. If we assume your asset allocation is able to sustain inflation-adjusted withdrawals of 4% that would suggest you'd want to shoot for a nest egg valued at or above $900k. Finally, if you wanted to you could adjust that target upward to give yourself some cushion and/or to help maintain your buying power over time. You could also opt to utilize drawdown maximization techniques or alternative withdrawal strategies (such as a fixed or variable percentage approach given your all-stock strategy) to help give yourself the headroom you might want but that's a whole different conversation. The point is there are lots of options out there to optimize the strategy to fit your goals but the basic process is largely the same ;)

You're absolutely right it wasn't an apples to apples comparison but that's kind of the point ;) By focusing our asset allocation on investments that typically perform better in certain metrics (in the case of large vs small cap stocks we'd be comparing long-term growth) we can set ourselves up for having a reasonably good chance of better performance in the drawdown phase of our financial journeys. You're also right in that past performance doesn't predict future results. It's entirely possible that small caps will not outperform large caps in the future and therefore its withdrawals will fall short of large-cap focused strategies. That's a risk someone would take when they devote a larger portion of their money toward small cap stocks (just as its a risk they would take if they devote the money toward the S&P 500... it's just that in that case they're running the risk that small, medium, or international stocks will outperform domestic large caps). Obviously this video wasn't my way of saying that everyone should adopt this strategy. It was just my way of illustrating how focusing an investing strategy on specific metrics of performance (growth, stability, and inflation-protection) impact safe withdrawal rates. And based on the historical data we have small caps tended to handle that growth metric as well as anything so that's why it was chosen :) Also in response to your other comment, I'm glad to hear that you're enjoying the channel so far!

@@NextLevelLife I'm a school math teacher and I thank you for your content illustrated by real life examples through running the numbers. By the way I do teach compound interest (and much more) in the classroom and it's part of the curriculum here in Israel of course we can do more by teaching financial education from an early age I do what I can.

That's awesome, Lior! I'm always really glad to hear when teachers are able to take the time to go over financial concepts in the classroom. And its great to hear that its part of the curriculum as well. I know it wasn't really when I was in school. Here's to hoping that more schools continue to include these topics going forward :)

Sure thing! It's explained in my video on Using Financial Guardrails to Make the Most of Financial Independence. I've linked to it below. Thanks for asking :) Link to video: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-VFLK8bNRP6A.html&ab_channel=NextLevelLife

It is based on total returns so yes dividends would be reinvested.

Not exactly. The savings rate is the percentage of your income that you're putting into your nest egg each month/year. If you're able to save 30% of your income the calculator assumes that the other 70% is going toward some sort of expense. So if you increase your savings rate it assumes that you're spending a smaller portion of your income. As a result, the amount you'd theoretically need to withdraw in order to maintain your lifestyle would be smaller for those with higher savings rates. And by extension that suggests that the amount of money you'd need to put away in your nest egg to generate that comparatively lower income in retirement would also be less for those with higher savings rates. For instance, if you made $100k per year and saved 30% of it the calculator would assume that you're spending the other $70,000. Since it assumes that you'd want to maintain that level of spending in retirement you'd need to have enough put away to safely and sustainable generate $70,000 in income. Hypothetically if you were able to safely withdraw 4% of your nest egg each year then you'd need at least $1.75 million to be considered financially independent based on these assumptions. If, on the other hand, you made $100k and saved 50% of it the calculator would assume you're only spending the remaining $50,000. Using the same 4% withdrawal rate you'd need $1.25 million to be considered financially independent. And obviously, it takes less time to put away $1.25 million than it does $1.75 million all else being equal. Of course, not every investing strategy is able to safely and sustainably survive 4% withdrawals. Some can only handle 3% or 3.5% at their worst while others are able to handle 5% even at their worst. Because of that the amount you need to put away changes based on the withdrawal rate you're assuming you'll be able to maintain. If you want to withdraw $50,000 a year and are using a strategy that's only capable of sustaining withdrawal rates of 3% in their worst-case scenario then you'd need something like $1.67 million to be considered FI based on the historical data we have. If your investing strategy is able to handle 5% withdrawals in its worst-case scenario you could be considered FI with just $1 million (since $1 million * 5% = $50,000). And again it takes less time to save $1 million than it does $1.67 million ;) The final table assumes that you're utilizing some drawdown maximization techniques such as cash buffers (living off of cash you have outside of your investments when markets are down so that you don't have to sell your investments at a loss), flexible spending budgets (simply spending less money during years when the markets are down by a certain amount so that you don't have to withdraw as much when your investments are struggling), and financial guardrails (adjusting your withdrawals based on a few criteria to ensure they don't get too low/high as the years go on). Utilizing these techniques allow your investment to recover from the tough times better largely because you're not withdrawing as much from them when they're down. This allows them to recover faster. For example, let's say you had $1 million put away and were withdrawing $100,000 a year in normal years. If your investments earned 10% per year your nest egg would basically generate enough for you to live on without rising or falling year-to-year ($1 million * 10% = $100,000). However, if your investments fell by 50% one year (down to $500,000) and you continued to withdraw $100,000 you run out of money pretty quickly. Even if they went back to earning 10% per year they would no longer be making enough to support the $100,000 income. If you instead adjusted your withdrawals during those times you'd be able to make your money last longer. This is a bit extreme but it'll illustrate the point. Let's say that when you're investments fell by 50% you decided to only withdraw $30,000 a year until they recovered. If, after falling by 50%, they went back to earning 10% per year going forward you would eventually get back to a $1 million nest egg since your $500,000 nest egg (the value it fell to during the down year) would still be able to produce enough income to support your adjusted lifestyle and start to recover ($500,000 * 10% = $50,000 per year. $30,000 is withdraw the rest is left to grow). Since the safe withdrawal rate figures in the video were attempting to find the most you could've started withdrawing from a nest egg without running out of money over a specific time frame (in this case 30, 40, or 50 years) utilizing these techniques significantly raised that minimum safe withdrawal rate compared to previous examples which didn't do anything to adjust withdrawals. And since those safe withdrawal rates were elevated, the amount you would've needed to put away to reach FI would've been less than for someone who didn't adjust their withdrawals :) I hope this makes sense and answers your question!

@@NextLevelLife I understand the savingsrate part but what has changed between: MAX FI with SR 50% 12m45: 14.5y MAX FI with SR 50% 14m27: 7y

Drawdown maximization techniques like cash buffers, flexible spending budgets, and financial guardrails were used. Utilizing these techniques altered what the historical minimum safe withdrawal would have been for the strategy which in turn changed how much we would've needed to invest in order to generate the income we needed to maintain our lifestyle in retirement. Since we wouldn't have needed to save as much as we would've in the scenario where we didn't use the techniques and since we were still saving 50% of our income (which obviously remained the same in both scenarios) we were able to reach our new (lower) savings goal faster. That is why the time to FI figure was lower.