FIRE Investing – Family on FIRE 1/3 Rule

Written by Cam

How to start your snowball of passive income

Ok you have heard about the FIRE movement and want to start making your passive income stream, right?! Sitting back living off the growing rental/dividend stream without eating into the capital is the aim. However, buying shares can be daunting or don’t know where to start investing at all. Most people avoid it until it’s too late or they get burnt and don’t touch it again! We will share with our readers the simple Family on FIRE 1/3 Rule.

Share Investing – Awful Advice Everyone Gives

Taking a friend’s ‘hot tip’ to buy a single, non-diversified company share allocation when starting out is not wise advice. My wise uncle advised I should get into some shares at 14 and I was very interested in the concept of getting money working for me. When I asked my Dad about it, he said he bought a mining share once and once only in the 70’s and lost the lot – $600 which was a lot back in the day (they bought the brand new family home for $12k to put it in perspective). He advised me to call the radio station 774 on Saturday morning and ask Bruce Bond. I quickly went live on air and was told the same awful advice to buy a single share. I put my life savings on the punt ($500 from years of paper rounds, mowing lawns, vacuuming for $2, etc.). Initially it was great as I learnt to look up the newspaper to see that the share price went up and “let the money work for you”, I celebrated. This was short lived as a major asbestos claim hit the company and the share price was hit hard. Needless to say, I didn’t put any more money into shares for the next 7 years. However, 10 years later the shares were worth round $2k. If I had have put my money into an LIC share I would have been encouraged to contribute to my share portfolio over these years instead of leaving it in the bank doing not much.

If you want your money to work for you, firstly you need to pay off personal debt (non-deductable debt) and put your savings into assets that grow. Even in the example above, it was much better than doing nothing as CSR was a strong company and I ended up doing well out of my initial investment. However I could have lost the lot. That is why I wouldn’t recommend buying a single non-diversified share when starting out.

Why Is The Best Advice So Simple!

I went to the Peter Thornhill (Australian investment author and speaker) seminar recently and his opening advice was: “Spend less than you earn and borrow less than you can afford”. How could you go wrong by following this? The trick is to pay off personal debt as quickly as possible then grow your assets that have growing income streams. The share price will follow the growing income and look after itself.

Let’s start with a definition of “investment”. According to Merriam-Webster it is: “The outlay of money usually for income or profit.” The price of an investment will try to correlate to the income it produces.

Peter Thornhill said investing into companies that have growing income streams is the only correct investment and all other forms are pure speculation – i.e. property where the growth historically comes from capital appreciation is speculation in his opinion. The last 100 years of property growth of ~7.8% and similar for the last 1000 years in European history wages a strong argument against the notion it is speculation. However, dollar for dollar, investing in shares (without leverage/borrowing) has historically had higher returns.

So What Are The Investment Options?

Shares (equities):

Share investing can be a way to get a growing snow ball. However getting into the right method of you is important. I’ve list some of the common method below:

  • Single shares – Anyone can get a company hot tip and put their investment into it. The risk is too high putting into a company that is not diversified and shouldn’t be done when starting.
  • ETFs (Exchange Traded Funds). These track a particular share index and buys a weighted average of all shares within that index. i.e. The ASX 100 will a buy a proportion of each of the top 100 companies. As company’s market capital values change they will move in out out of the top 100 companies and the ETF automatically adjusts to buy or sell these companies. They often out-perform most active fund managers due to lower fees.

ETS Notes:
1. This type of trust structure is required to report capital gains or losses each year which is not good. For example, if you put money into an ETF and during the year the ETF rebalanced and sold some holdings it will trigger a CGT*. You then need to report this gain on your tax return even though you haven’t sold the ETF! In some cases you will pay tax on money you may not have as you haven’t sold the holding. However you will get the 50% CGT discount unlike an LIC or Share.
2. They work great in a booming market. However during a downturn they will also track the market. It also relies on the market being right. It’s like walking down a shopping strip and buying a proportional amount of every shop regardless if it has good fundamentals and assuming the values are correct. The rely on the market eventually getting it right.

  • Managed funds – Your money is pooled together with other investors. An investment manager then buys and sells shares or other assets classes on your behalf. You are usually paid income or ‘distributions’ periodically but like ETFs they incur capital gains/loss. They usually have higher fees.
  • LICs (Listed Investment Companies). A management team look after the underlying stocks, without your stress or risk of trading individual stocks. Similar to Managed funds your money is pooled with other investors to buy a stock portfolio.  Unlike ETFs or Managed Funds they are not subject to reporting capital gains/losses each year. This will happen once you sell the share which is the best approach as you can choose when this happens. However they also don’t get the 50% CGT discount if they do trade internally.

Property Investing

Most people will either be pro-shares or pro-property. Both have advantages for different reasons at different stages of your investing life. Investing early in your career where you can do it for ‘free’ without having any cash reserves. i.e. buying a positive geared property using the equity in your home costs you nothing in deposits or ongoing costs. Pure returns for money invested in percentages will be less than shares however, with sensible leverage can obtain good total returns. Property can also be used later to borrow against to buy shares. Banks in Australia will let you borrow against property much more than against shares with better lending rates. Hence property forms a stable base to build your property and share investment portfolio.

Super (401k for those in the USA)

This is perhaps the best long term investing vehicle as long as you are in an Industry Fund in high growth or Shares. In Australia we are now limited to a maximum $25k (now $27.5k) in each year. Perhaps a little boring but for those wanting to retire early but an essential strategy for long term FIRE.

How about Cyber/Crypto Currency? Refer to the definition above about how investments pay income. This investment will be talked about in centuries to come (tulips comes to mind). Great technology, but gravely flawed from an investment point of view (no income and new currencies can be created destroying scarcity).

Family On Fire 1/3 Rule

No one knows for sure the future other than we can say for sure markets will crash, boom and policies will change at some point. For this reason we like to diversify our income generating assets. When looking at your NTA (Net Tangible Assets) you could consider once you ‘stop working’ to have 1/3 in Super, 1/3 direct shares via LICs/ETFs and 1/3 Investment properties. This ratio is excluding your own home, you may include it if you wish. Each category will have pros and cons, subject to government policy changes and market conditions. We protect our investments within a Family Trust, allowing good income and capital gain distribution. Here is a simply summary of our strategy:

  • (1/3) Shares (LICs or ETFs) will give you good returns easily accessible for early FIRE. I also like that they self manage and if I were to leave this earth, my wife and family wouldn’t need to do anything other than receive the growing dividend stream. We like the LICs which have low MER (~0.14-0.17%), fully franked and highly diversified. They have been around for over 40 years and performed around 8-10% over this time which is good enough for us. We have 5 and our strategy is to put roughly 1/5 into each of these LICs which is decided on our current portfolio weighting and their NTA discount (we use this report from FirstLinks). We try to do this every month or so or when every we have saved up to put more into them.
  • (1/3) Super is perhaps the best tax effective retirement scheme, but you can’t access it until you are around 60 (depending on when you were born). We try to hit the maximum $25k per year (edit – now $27.5k) contribution allowed. Both ours are in high growth and exposed to 40% international shares. At this stage we can’t access it until we are 60 so it is our second stage FIRE funding.
  • (1/3) Property Investing can be leveraged to give great long term returns. We used these early in out FIRE journey and aimed to get positive geared investments as much as possible. We leveraged off our own home with little or no deposit. Our strategy was to get highly scarce properties with huge rental demands. This provides upward pressure on the capital and rental growth and has proved to be a great strategy for us. The land to building ratio needs to be at least 50% to avoid buying a depreciating asset (land appreciate, building depreciate). Most people get these part wrong and you need to research well from good mentors. I read dozens of property investment books and spoke with wise mentors who were very sucessful in this area before starting. When we retire we may sell some as the capital gains can be absorbed better when I’m not working. We will then pay off debt and put into shares (LICs/ETFs).

Our thinking is by having a 1/3 in each category, it takes advantage of each investment vehicle, but minimises a disaster when a market crashes or a new government policy is formed.

Thanks for reading and hope this helps during your research to hit FIRE!

This Post Has 7 Comments

  1. Shane

    Hey Cam
    Great article. Can I ask why you have spread your LICS over 5 investment companies. Is this strategy to diversify across managers.
    I currently only have 1 LIC and 1 ETF and am about to funnel some more cash Into the investments.
    I was about to go with another ETF which will give me international exposure but I am not concerned about the capital gains. Can you give me an opinion why 1 LIC is better than another ?
    Sorry for the questions

    1. Family On FIRE

      Hi Shane,
      Thanks for reading the article and your question. You are spot – we are diversifying across the fund managers. It creates more admin but I feel ‘safer’ but spreading to only 15-25% into any fund manager. I’ve checked the returns over 5,10,20 years and they are 6-9%. I think having 1 is ok too as most LICs spread their portfolio across 20-50 holdings so our diversification of the diversified portfolio may seem unnecessary. However depending on the size of each holding you could probably reduce to 2-3 LICs if you are not concerned about additional admin.
      Regarding International exposure if you are not concerned about capital gains the ETF could be a great option too.
      Happy investing.
      Cheers Cam

  2. Nigel

    Hi Cam,
    I really enjoyed this post! It is very similar to how we invest for our freedom. Everyone seems to be moving to ETFs. I understand the attraction of ETFs as they are low cost and diversified. I own 2 ETFs but I prefer LICs as I like the regular hassle free income they produce.
    If you don’t mind sharing what are the LICs that you hold Cam? I own ARG, MLT, BKI, QVE and FGX ( I cannot get AFI at a discount so I don’t own it).
    Do you invest internationally?

    1. Family On FIRE

      Hi Nigel,
      Thanks for your comment. I really like your choice of LICs with a couple of smaller company ones in there too. AFI has been a star performer of the last 5, 10, 20 years so has the biggest premium (8-10%) at the moment. I have this one as part of out portfolio and threw most of the chips on the table just before the last Australian election (2019) when they were at 4% discount. The talk of removing franking credits got many spooked but they hold the best companies and solid performance. As people are chasing income the big well known ones like ARG & AFI (we have these) are trading a premium and agree there are better buys at the moment (hence the reason we are also considering the international diversification too).
      In regards to our international exposure we have 40% of our super in international. I have in my watch list NDQ – Betashares Nasdaq 100 ETF (ETF I know) but don’t currently know a good LIC with a low MER. If anyone can suggest some for Nigel please let us both know!
      Thanks for reaching out and would love to hear more about your FIRE strategy too.
      Cheers Cam (& Trish)

  3. Chris

    Just a clarification with regard to reason 1, ETFs are not required to report CGT on holdings that increase, only where the fund sells holdings and actually realises a capital gain. Cap weighted index funds like VAS have exceptional low internal turn over and correspondingly low CGT in distributions. I agree not all ETFs are like this, but not for the reason you’ve described.

    1. Family On FIRE

      Hi Chris,

      Thanks very much for the clarification and you are 100% correct – thank you for your comment! Yes only the actual sales within the ETFs are subject to CGT*.

      To be fare, the LICs will also have CGTs for their own trading however the investor doesn’t need to foot the tax bill each year, the CGT is looked after them within the company but they also don’t receive the 50% CGT discount like ETFs.

      We now have an ETF (World ex Australia) to get international exposure (bought Feb2021) – thanks Nigel for your comments on this website and prompting us to balance out our exposure. I received a decent capital gains bill in July 2021 due to the capital gains from trades during the year. It’s ok we can find money to pay for it however I’d prefer to put spare cash back into the market (not pay more tax while we are in accumulation mode).

      Thanks also for the heads up on the VAS with the low turn over.


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