Investing for FI: Simple Strategies That Actually Work
Why Most Investment Advice Is Wrong for FI
Walk into any financial advisor's office or read most investment articles, and you'll hear about complex strategies, market timing, stock picking, and "beating the market." This advice is designed to make investing seem complicated so you'll pay someone else to do it for you.
Here's the truth: successful FI investing is boring, simple, and requires very little active management.
The goal isn't to become a day trader or stock market expert. The goal is to put your money to work consistently and reliably so it can grow into the pile you need for financial independence.
Today we're going to cut through the noise and focus on investment strategies that actually work for regular people pursuing FI.
Note: I am going to focus on public securities today. There are other investment options, such as real estate that we will cover in depth later. Public securities are the best option for most people.
Also, some of these ideas will be new and perhaps confusing. This is meant to be an overview of investing. We’ll go deeper on each area in time.
The Foundation: Why Investing Matters for FI
Remember our FI formula: you need 25x your annual expenses invested. But here's the key word: invested, not sitting in a savings account.
Why a savings account won't work:
Current high-yield savings accounts pay about 4-5% annually
Historical inflation averages about 3% annually
Your real return after inflation: 1-2% annually
Why investing in stocks works:
The S&P 500 has averaged 10-11% annual returns since 1926
After inflation, that's about 7% real returns
At 7% real returns, you can accumulate wealth much faster
This is the math behind all those FI timelines we discussed earlier
The trade-off: Higher returns come with higher volatility. Your investments will go up and down, sometimes dramatically. But over long periods (10+ years), stocks have consistently outperformed "safe" investments.
But isn’t 7% only 5% more than 2%? In absolute terms, yes, but it’s the relative difference that matters. 7% is actually 250% more than 2%. Test the math for yourself! ((0.07/0.02) - 1) = 2.5. However, since we are dealing with compound interest, the difference is even more!
$100 at 2% annual interest for 30 years will be worth $181.14
$100 at 7% annual interest for 30 years will be worth $761.22
That’s an increase of 420%!
Investment Principles for FI
Before diving into specific strategies, let's establish the core principles:
1. Time in the Market Beats Timing the Market
Nobody can consistently predict short-term market movements. Instead of trying to time the perfect entry point, focus on getting money invested consistently and leaving it alone.
2. Diversification Reduces Risk
Don't put all your money in one stock, one sector, or even one country. Spread your investments across thousands of companies to reduce the risk of any single investment destroying your portfolio.
3. Costs Matter Enormously
A 1% annual fee might not sound like much, but over 30 years it can cost you hundreds of thousands of dollars in lost returns. Minimize fees wherever possible.
4. Simplicity Beats Complexity
Complex investment strategies usually benefit the person selling them more than the person buying them. Simple strategies are easier to understand, cheaper to implement, and often perform better.
5. Automation Is Your Friend
Set up automatic investments so you're consistently putting money to work regardless of market conditions or your emotions.
The Simple FI Investment Strategy
Here's the investment approach that works for most people pursuing FI:
Core Holdings (80-90% of portfolio)
U.S. Total Stock Market Index Fund
Owns pieces of virtually every publicly traded U.S. company
Automatically diversified across all sectors and company sizes
Low fees (typically 0.03-0.05% annually)
Examples: VTSAX (Vanguard), FSKAX (Fidelity), SWTSX (Schwab)
International Stock Index Fund
Owns pieces of companies outside the U.S.
Provides geographic diversification
Historically, international and U.S. markets have taken turns outperforming
Examples: VTIAX (Vanguard), FTIHX (Fidelity), SWISX (Schwab)
Bond Index Fund
Provides stability and income
Less volatile than stocks but lower long-term returns
Consider adding as you get closer to FI or if you want to reduce volatility
Examples: VBTLX (Vanguard), FXNAX (Fidelity), SWAGX (Schwab)
Asset Allocation Examples
These are just examples! We’ll go deeper into asset allocation later. The exact allocation has less of an impact than just getting the assets invested, so don’t overthink it.
Aggressive (Early FI Journey):
70% U.S. Total Stock Market
30% International Stocks
0% Bonds
Moderate:
60% U.S. Total Stock Market
30% International Stocks
10% Bonds
Conservative (Close to FI):
50% U.S. Total Stock Market
30% International Stocks
20% Bonds
The "Three-Fund Portfolio"
This is the gold standard of simple investing:
U.S. Total Stock Market Index
International Stock Index
Bond Index
That's it. Three funds. You can build wealth for decades with just these three investments.
Where to Invest: Account Types
We’ll go into more depth about each of these account types later, how to open them, which custodian to use, etc. For now, just note that there are multiple accounts that can hold securities.
Tax-Advantaged Accounts (Use These First)
401(k) - Employer Retirement Plan
Contribute enough to get full employer match (free money!)
Traditional 401(k): Tax deduction now, pay taxes in retirement
Roth 401(k): No deduction now, tax-free in retirement
2025 contribution limit: $23,500 (plus $7,500 catch-up if 50+)
IRA - Individual Retirement Account
Traditional IRA: Tax deduction now, pay taxes in retirement
Roth IRA: No deduction now, tax-free in retirement
2025 contribution limit: $7,000 (plus $1,000 catch-up if 50+)
Income limits apply for Roth IRA eligibility
HSA - Health Savings Account
Triple tax advantage: deductible, grows tax-free, tax-free withdrawals for medical expenses
After age 65, works like a traditional IRA for non-medical expenses
2025 contribution limit: $4,300 individual, $8,550 family
Taxable Investment Accounts
Once you've maxed out tax-advantaged accounts, use regular taxable investment accounts for additional investing.
Advantages:
No contribution limits
No age restrictions for withdrawals
More flexibility for early retirement
Tax considerations:
Dividends and capital gains are taxable
Hold investments for over one year for better tax treatment
Tax-loss harvesting can reduce tax burden
Choosing a Brokerage
The big three low-cost brokerages all offer excellent options:
Vanguard:
Pioneered low-cost index investing
Owned by fund shareholders (not stockholders)
Excellent reputation and track record
Sometimes clunky website interface
Fidelity:
Zero-fee index funds available
Modern, user-friendly interface
Excellent research and tools
Strong customer service
Charles Schwab:
Low-cost index funds
Good interface and tools
Strong customer service
Wide range of investment options
What matters most: Low fees on index funds, good customer service, and easy-to-use interface. You can't go wrong with any of these three. I have been a customer at all three and will share my experiences. I have also dealt with a few others that I would avoid at all costs!
Common Investing Mistakes to Avoid
Trying to Time the Market
The mistake: Waiting for the "perfect" time to invest or trying to predict market movements
Why it fails: Nobody can consistently predict short-term market movements
The solution: Invest consistently regardless of market conditions
Picking Individual Stocks
The mistake: Trying to find the next Apple or Amazon
Why it fails: Most individual stocks underperform the market, and you're betting your future on a few companies
The solution: Own the entire market through index funds
Chasing Performance
The mistake: Buying investments that have performed well recently
Why it fails: Past performance doesn't predict future results
The solution: Stick with your strategy regardless of recent performance
Emotional Investing
The mistake: Buying when markets are high (feeling good) and selling when markets are low (feeling scared)
Why it fails: This guarantees buying high and selling low
The solution: Automate your investments and ignore market noise
Paying High Fees
The mistake: Using actively managed funds or financial advisors with high fees
Why it fails: High fees compound over time, dramatically reducing your returns
The solution: Use low-cost index funds
My Personal Investment Approach
Here's exactly how I invested over the years. My allocation today is different and I’ll explain why later.
Tax-Advantaged Accounts:
Maxed out 401(k) contribution annually
Maxed out Traditional/Roth IRA contribution annually
Maxed out HSA contribution annually
Maxed out “Mega Backdoor Roth” 401(k) contribution annually (will explain this in a future post)
All invested in low-cost index funds
Asset Allocation:
100% U.S. Total Stock Market (VTSAX)
0% International Stocks (VTIAX)
0% Bonds (aggressive allocation since I wasn’t drawing from investments)
Taxable Account:
Same asset allocation as retirement accounts
Used tax-loss harvesting when appropriate
Automation:
Automatic 401(k) contributions from paycheck
Automatic monthly transfers to investment accounts
Automatic investment of incoming funds
Investment Strategy by FI Stage
Accumulation Phase (Building Wealth)
Focus: Maximum growth potential
Higher stock allocation (80-100%)
Lower bond allocation (0-20%)
Aggressive savings rate
Tax-advantaged accounts first
Pre-FI Phase (2-5 years from FI)
Focus: Reducing volatility while maintaining growth
Moderate stock allocation (70-80%)
Higher bond allocation (20-30%)
Consider bond ladder for near-term expenses
Build cash cushion for early retirement
Early Retirement Phase (Drawing from Investments)
Focus: Sustainable withdrawals
Balanced allocation (60-70% stocks)
Bond ladder for predictable income
Maintain some cash for market downturns
Consider withdrawal strategies (we'll cover this later)
How Much Should You Invest?
The mathematical answer: As much as possible without burning out
The practical answer: Start with whatever you can and increase over time
Common progression:
Contribute enough to 401(k) to get full employer match
Build emergency fund (3-6 months expenses)
Max out IRA and HSA contributions
Increase 401(k) contribution toward maximum
Use taxable accounts for additional investing
Starting Your Investment Journey
Week 1: Set Up Accounts
Open accounts at a low-cost brokerage
Set up automatic contributions
Choose your initial asset allocation
Week 2: Start Investing
Make your first investments in index funds
Set up automatic investing
Document your strategy and stick to it
Week 3: Optimize
Review employer 401(k) options and maximize match
Open and fund IRA if eligible
Set up HSA if available
Ongoing: Stay the Course
Continue automatic investing
Rebalance annually or when allocation drifts significantly
Increase contributions when income increases
Ignore market noise and stick to your plan
The Bottom Line
Successful investing for FI is simple but not easy. It's simple because the strategy is straightforward: buy low-cost index funds regularly and hold them for decades. It's not easy because it requires discipline, patience, and the ability to ignore market volatility and noise.
The key principles:
Start as early as possible
Invest consistently
Use low-cost index funds
Maintain your allocation
Ignore market timing and stock picking
Remember: The goal isn't to beat the market or get rich quick. The goal is to systematically build wealth that will support your financial independence.
Next time, we'll dive deeper into tax optimization strategies that can help you keep more of what you earn and accelerate your path to FI.
Until then, your homework: Open an investment account if you don't have one, and make your first investment in a low-cost index fund. Even if it's just $100, the important thing is to start.
Here's to putting your money to work,
Max
Remember: Time is your most valuable investing asset. The sooner you start, the longer compound interest has to work its magic. Don't wait for the "perfect" time. Start now with whatever you can invest.