A Financial Independence, Retire Early (FIRE) investing strategy can be a great way to make life-changing wealth. I’m using it to boost my ability to buy high-returning assets like FTSE 100 shares and other UK shares.
Pete Hykin, chief executive and co-founder of private pensions provider Penfold, notes that the FIRE strategy can lead individuals towards “a rewarding and fulfilling future.” And he lays out a number of key steps that people should follow, including:
- Careful budgeting to reduce costs and identify opportunities to save.
- Reducing expenses in areas like housing, transportation and dining out to boost savings. These can include downsizing one’s home or using public transport more regularly.
- Pursuing side hustles or taking on extra work to boost income and, therefore, savings and investing possibilities.
Investing wisely
As a committed investor, I was especially interested in Hykin’s comments around smart investing.
Noting that “building long-term wealth is essential for achieving financial independence,” Hykin says that “individuals should diversify their investment portfolio with stocks, bonds, and real estate, focusing on low-cost index funds and ETFs* to minimise fees and maximise returns.”
He adds that “regularly reviewing and rebalancing the investment portfolio ensures it aligns with an individual’s risk tolerance and financial goals.”
* Exchange-traded funds
Striking a balance
The importance of having a well-diversified investment portfolio cannot be underestimated.
Having high exposure to low-returning assets — for example, by having lots of cash locked up in a savings account — will significantly reduce the risk to someone’s invested capital. But this strategy won’t create the sort of wealth that helps people retire early.
Conversely, assets like UK stocks can supercharge the amount of money an investor can make. But the risks here are also higher and an investor could lose a large proportion or even all of their cash. Stock markets can go up and down and companies can go bust.
Buying FTSE 100 shares
I’ve taken steps in recent weeks to better diversify my own portfolio. I opened a position in the Artemis High Income, a fund whose majority of cash is tied up in lower-risk corporate and government bonds.
But make no mistake, I plan to keep my investment portfolio geared towards UK shares and overseas equities. This is because of the excellent proven returns that long-term ownership can provide. The FTSE 100, for instance, has provided an average annual return of 8.9% since 1984, according to IG Group.
That said, I’ve bought a plethora of different FTSE 100 companies to reduce the threat to my wealth. Beverages manufacturer Diageo, rental equipment provider Ashtead, housebuilder Persimmon and insurer Prudential are just a handful I currently own.
These are all stable, financially-healthy businesses. They are among the market leaders in their fields. And they all operate in different sectors, which protects me from sustained weakness in one or two industries.
Such businesses also operate across a range of different territories, which reduces my risk further. Furthermore, the emerging market presence of businesses like Prudential and Diageo could help me make market-beating returns as well.
There’s no set way to make money with the FIRE strategy. But I think buying FTSE 100 stocks can be a great way to build wealth over the long term.
