Investing is a diverse subject with many different aspects to it.

To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series. We hope these little discussions provide you with helpful insights to further your thinking as you progress towards your goals :)

Just so you know, in many cases there’s often not a “right” answer, so be sure to think carefully how to adapt any information to your own circumstances.

If you have a burning question you’d like answered, feel free to leave it in the comments below, or post it on the Pearler Exchange.

In this Q&A session, we’re tackling:

– Does FIRE only work without kids?

– When to sell an investment property

– How to keep a ‘balanced’ portfolio

– How to balance home ownership, travel and FI

– Real estate trusts (REITs) and what drives them

Lots of great topics lined up, so let’s get started.

Does FIRE only work without kids?

It’s a common observation that many people in the FIRE community are young folks without kids.

The assumption is that this demographic must be the only group for whom Financial Independence is possible. After all, these are the people you see making content online, right?

Well, firstly, those are the people who naturally have more time to make content and share what they’re doing! I can assure you that there are many people out there doing it as families and singles without huge incomes (I’ve met plenty of them).

I haven't written much about building wealth as a family, since I don’t have that experience. But a reader of my blog wrote a thoughtful article on the topic here.

The key principles are exactly the same. The difference is, you probably have higher expenses and/or possibly lower income than those without kids. Therefore, all else being equal, it will take longer to build wealth and reach FI, unless you can make up for it by earning more or spending less in other areas than the average person.

Will it be easy? No, of course not. But why would it be? And you probably chose to have kids for non-financial reasons. So even if it takes a bit longer or “slows you down”, don’t worry about it.

Enjoy the life you have now while you work towards the life you want.

When to sell an investment property

Many Pearler investors also invest in property alongside their share portfolio.

If they’ve owned the property for a while, and made a decent capital gain, they might wonder if they should sell to invest that money elsewhere.

Of course, everyone around them will scream: “NEVER sell property, are you crazy!?”But there are often valid and smart reasons to sell. Here’s how you can think through that decision… – Is it a decent time to sell? Maybe the market has been hot for a few years, and you’ve made a sizeable capital gain. If you are planning to sell at some point, it’s far better to do so in a strong market than one which is lukewarm or cold.

– Do you want more cashflow? If you’re hoping to scale down work soon, offloading a property and reinvesting that money into your share portfolio can work wonders. Not only does that often remove a source of costs, but it can add greatly to your investment income.

– Is there any equity in the property? If not, then there’s very little opportunity cost to keep it. Well, aside whatever you’re tipping in each month to top up the mortgage and cover costs. If that’s not much either, it may be better to keep it until a later date.

– If you have two properties, you could sell one and keep one. This can simplify things, improve cashflow, while hopefully achieving the best of both worlds – cashing in now whilst also keeping one for future gains which can be cashed in later.

Property can produce great gains due to leverage. But not always. I know how frustrating it can be to tip in money every month for an asset that hasn’t increased in value in five years.

Think about if and when it makes sense to sell based on your own situation. But just like with shares, think long term and don’t make rash decisions based on short-term factors – an election, bad industry news, a weak market, etc.

What does keeping a balanced portfolio mean, and how do you do it?

We’ve all heard that maintaining a “balanced” portfolio is a good idea. But what do people mean when they say that?

In my experience, most of the time, it means two things: Portfolio balancing. And portfolio re -balancing.

The first means maintaining a “balance” between different funds and assets. It’s really just another way of saying “diversification”.

Reason being, diversification helps to avoid relying on a single outcome, spreads risk, and improves the odds of success for an investor by owning a larger, more diverse group of companies.

For example, keeping a “balanced” portfolio could mean having allocations to both Aussie and global shares, even emerging markets too. Taking this further, some define “balanced” to mean keeping a spread of various different assets: shares, property, cash, gold, and so on.

Let’s stick with shares for now. We’ll assume we’ve got what we determine is a “balanced” portfolio. Now we just need to maintain the balance in our portfolio. This means keeping our portfolio in line with our chosen allocations, eg. 50% A200, 50% IVV.

Most long-term investors will have a target allocation they try to stick to over time. As the market is constantly moving, over time the portfolio will stray from this target.

Re-balancing is bringing the portfolio back to target. This is usually done by buying more shares of the one that is “underweight” or under target. But in some cases where this isn’t possible, or perhaps in retirement, it could mean selling some of the one that is over target.

There’s no right or wrong way to do it. But you want to be mindful of paying unnecessary capital gains taxes and transaction costs in order to keep a balanced portfolio . In my view, it doesn’t have to be perfect all the time; just close enough and “in the general range” will do.

How do I balance travel, home ownership and FI?

Tricky question. Having conflicting goals is not an easy thing to grapple with.

Here’s what I’d say…

— One approach is to set aside a certain portion of your ongoing savings for travel, plus for a home deposit. Remember, a paid off home can eventually contribute to FI, so that’s worth keeping in mind.

— Consider: which of those priorities is the most important to you? This requires some soul searching and serious consideration. It can be tempting to try to do everything. But often when we do that, it just means very slow progress on everything. It’s more powerful to get clear on priorities and then focus on 1-2 things at a time vs having a more scattered approach. Not only that, but faster progress is motivating in itself which creates a strong positive feedback loop.

— If your debt is a relatively low-cost debt like HECS or similar, it can be fine to leave this in the background. But if it’s like a personal loan or car loan, it’ll be more beneficial to get rid of this quickly. This can create more surplus cash each month to begin focusing on those more important areas.

— The smart move for your finances is to simply work on growing your income and creating a solid savings habit. That will see you through the worst of problems and make it much easier to ensure those goals don’t feel as hard to achieve.

— In my view, it makes sense to front-load the financial stuff. The more you’re able to put towards either a home or investments now, the more you can travel later. All else equal, it will create many more travel dollars over time vs more travel now.

It will take time and a lot of energy to achieve all of them. Be willing to cut out things that don’t get you closer to one of these three big pillars. Finally, remain focused and don’t get distracted by fancy sounding investing strategies or tax schemes to try and ‘speed up’ the process. Beware the short-cut.

How REITs work, and what drives them?

Real estate investment trusts, or REITs , are typically portfolios of commercial real estate, which are owned and managed for shareholders.

They vary a lot from fund to fund. There are tons of different types of real estate that REITs invest in: office, retail, healthcare, industrial, petrol stations, childcare centres, and more.

Just like other real estate, you benefit from the rental income and the capital growth of the portfolio over time. What’s interesting about commercial real estate is it provides much higher rental yields than residential property – say, 6-8% after costs compared to 2-4%.

There can be anywhere from 10-500 buildings in the REIT’s portfolio, so it’s worth doing a lot of digging through the company’s annual reports to find out exactly what you’re investing in before you buy.

REITs tend to move in line with interest rate expectations. As rates went up, REITs struggled badly. In the last few months, many REITs have bounced back on the hopes that rates will now stay flat or be cut over the next year or two.

The share market also moves with rate expectations, but REITs have a more amplified exposure to it because of the debt they carry.

Many people mistakenly think they move in line with residential property. And that, by investing in REITs, they’re giving themselves a similar exposure, because “property”. But in reality, REITs are an entirely different beast with their own set of supply/demand forces at play.

If someone doesn’t own any residential property, there’s no specific benefit they’d get by owning REITs. It’s not a replacement or replica of home ownership, other than the fact that there’s buildings involved.

REITs suit an investor who wants more of their money parked in bricks and mortar, and likes the higher income, but is also comfortable with the management risk and volatility of shares.

And while REITs have the same risks as other shares, the underlying assets won’t go to zero like a business can. A mismanaged brand can become worthless. A half-decent piece of real estate, not so much. Just like everything else, there are tradeoffs and risks involved.

Personally, I own two real estate trusts currently (CLW and COF – not a recommendation!), and while they provide pretty decent cashflow, I’ll probably sell them sometime over the next few years. I just like the simplicity of investing in index funds and have basically lost interest in owning other shares.

Final thoughts

I hope you enjoyed this Q&A session, and these answers gave you food for thought.

Remember, if you have a question on a topic you’d like some more information on, feel free to post it on the Pearler Exchange. They’ll be answered by fellow investors in the community – like myself, someone more knowledgeable, or someone from the Pearler team.

You can also post a question down in the comments selection and we’ll cover it in a future Q&A article.

Until next time, happy long-term investing!

Dave