3 Reasons an Early Retiree Invests Heavily in Index Funds – Business Insider

Brandon, a blogger and podcaster known as "Mad Fientist," achieved financial independence six years ago at age 34 and has been dedicating his time to passion projects ever since.

He hasn't had to withdraw much from his portfolio for retirement yet, because his expenses are fairly low and he still has a stream of passive income from a credit card search tool he created as a software developer several years ago. That said, Brandon (who uses only his first name online) told Insider that he has always been "obsessed with money," and that he's done a lot of research into how to achieve the highest returns from his portfolio.

"Mad Fientist was a purely selfish endeavor in the sense that when I started it, I thought that I was going to become a better investor by researching investment strategies and things like that in order to be an active investor," he said. "It was early on in my research that I realized that passive index investing has the higher likelihood of success."

Active investing means buying and selling regularly, buying low and selling high to try and time the market for optimum gains. Passive investing in this case, through index funds means taking a hands-off, longer term approach, leaving money in the market to weather its ups and downs over time.

Brandon added that particularly for people who are interested in retiring early, it's crucial to keep your investments as simple and standard as possible because of how much longer you need your portfolio to last than the typical retiree.

"Maybe I could figure out some investing strategy that would maybe outperform by 1% for a year," he said. "Doing it for the next 50 or 60 years is going to be near impossible."

Brandon cited three reasons why he feels so strongly about keeping the vast majority of his investments in index funds.

Brandon said that the two most important qualities for his investment vehicles is that they are "simple and cheap."

He told Insider that he currently has 95% of his portfolio invested in Vanguard Total Stock Market Index Fund, Vanguard Total International Index Fund, and Vanguard Bond Index Fund.

"The stock portion is split between international and total stock market index funds," Brandon said. "I try to keep that at roughly a 70/30 split."

He emphasized the importance of keeping fees as low as possible. "That's just money that's never coming back," he said.

"I also try to be as diversified as possible so that I'm not going to be worried in case, like, Enron 2 happens," Brandon added. "And then have it as automated as possible so that my brain can't try to sabotage itself because it always does."

Automating his investments setting up regular deposits into his investing account so he doesn't have to decide when or how much to invest helps Brandon remain as hands-off as possible, which is also important to him as an investor. "I've learned a lot over the years that I really like trying to time the market," Brandon said. "So I need to just automate as much as possible and set rules for myself that I don't sabotage myself when I think I know better."

Nearly all of Brandon's portfolio is invested in index funds, but he still allows for a 5% allocation to investments in specific stocks he believes will succeed. He calls it his "fun portfolio."

"That's where I can if I think I know better than everyone else buy certain stocks, and stuff like that," he said. He's been keeping track of this portfolio in a spreadsheet to see how it measures up against the market.

As it turns out, Brandon said he "doesn't know better than anyone else, because I would've been better off keeping it in Vanguard total index fund ."

A.J. Jordan

Personal Finance Reporter

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3 Reasons an Early Retiree Invests Heavily in Index Funds - Business Insider