Barron’s – August 29, 2020
Financial independence for many means being able to coast through rough economic times with few worries. But for those planning to retire early, even those who have plenty of savings, the pandemic and unstable economy can stir anxieties about leaving the workforce.
Yet a rocky investing environment doesn’t mean those pursuing a strategy of financial independence/retiring early need to scrap plans,
says Mackenzie “Mack” Bekeza, a certified financial planner. Such investors just need to structure their portfolios accordingly.
“You should never assume things are going to be hunky-dory when there’s still uncertainty in the air,” says Bekeza, who specializes in helping FIRE adherents plan for lengthy retirements. “People who do FIRE are going to have really diverse portfolios.”
Maintain some liquidity: For those looking to hit FIRE within five years, Bekeza first recommends having at least one year’s worth of expenses available in cash reserves. Though that money won’t bring in meaningful returns, it can provide a safety net to prevent an investor from having to draw from investments in a crisis. If possible, Bekeza advises investors to always have up to 10% of their assets in cash or cash equivalents.
Rely on income-generating investments: Once there are robust cash reserves, Bekeza says, FIRE pursuants should then put half their portfolio in fixed-income investments that can generate reliable returns even during turbulent markets. Consider investment-grade government and corporate bonds of varying terms, he adds.
Those planning for FIRE also often invest in assets such as their own small businesses and real estate. Assets like these can help round out the type of large and diverse portfolio investors need to weather periods of volatility and for a long retirement.
For investors who don’t want the responsibility of maintaining a physical property and dealing with tenants, Bekeza says real-estate funds and real-estate investment trusts are a good alternative. Dividend yields vary, hovering around 5% or 6%, he says. These relatively high yields can either provide regular cash flow or get reinvested for compound growth.
Diversify equity holdings: Investors also need vehicles for long-term growth, Bekeza says, which is where stocks come in. He recommends those pursuing a FIRE strategy to put 40% of their portfolio toward higher-risk stocks that offer the potential for aggressive growth. While large-cap companies have the kind of reserves that generally make them safe bets,
Likewise, small-cap stocks, though often excellent performers over the long term, tend to be particularly volatile, making them less appealing to the FIRE set. “I don’t want to expose a client too much to the vulnerabilities those companies have,” the advisor says. “It’s an enhancement, but not a main act.”
Flip the script: If hitting FIRE is further off—a decade or more away—Bekeza recommends flipping the proportions he otherwise suggests: Keep 40% in fixed-income assets and 60% in riskier assets like stocks and real estate. This will let investors benefit from the longer runway to retirement even if there are bumps in markets or the economy along the way, he says: “Your greatest asset is time.”
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