The History of the FI/ER Movement (2.0)

Introduction: Crashing the Gate

On New Year’s Day of 1993 I had the occasion to crash my car through a big steel gate. Crazy ex-girlfriend, murderous father, everybody all liquored up during the holidays…you get the idea.

Now…there are many defining moments in a young guy’s life, yes? Among mine were watching my little sister score the winning goal in an all-city junior high soccer tournament, my first fist-fight, and feeding bacon to our new rescue dog. But after many years I still place that gate-crashing episode at the top of the list.

A few days afterwards I was hunkered down in my icy garage replacing my headlights, ignoring the telephone, and engaging in some self-reflection, when three character insights flashed into my head.

  1. I’m not into structure.
  2. I hate being told what to do.
  3. Nobody maps out my life except me…hence why I’d crashed that gate in the first place.

Twelve years later I’d crash through another gate—a metaphorical one this time, but many orders of magnitude greater.

See, that was the last day of my last corporate job, forever and ever, amen. I’d saved roughly $1.6 million and finally achieved financial independence and early retirement (FI/ER). I was thirty-six, and nobody could ever tell me what to do again.

On the Subject of Defining Moments

Five months after the Gate Massacre, I finished grad school and went to work. It wasn’t long before I found myself standing by an office window on a brilliant sunny afternoon watching the world pass me by. My friends were out there running around drinking beer, but I was wearing a suit in cubicle hell. I thought, “I gotta get the hell outta here.”

I imagine some of you can empathize.

Standing at that window I wondered: how much would I need saved up to securely leave the workforce? It was a slow day, so I returned to my cube, sat down at my IBM PS/2, opened Lotus 1-2-3 (DOS-based!), and started crunching numbers.

A few hours later I sat back in my chair, chewing a thumbnail and staring at the screen. I’ll be damned, I thought. This is actually achievable.

Achievable, but difficult.

In 1993, the web didn’t exist. CompuServe and AOL were in their infancy. USENET, so I hear, was 90% porn. Google was the misspelling of a gloomy Russian author’s name. And in the absence of online resources it was almost impossible for those of us who’d conceived of FI/ER to find each other and share our knowledge.

And so: much of what you’re about to read is history I lived. Mind you, I didn’t invent FI/ER, but it hasn’t been that long since anyone who was pursuing it was operating in a near-total vacuum: one where you had to collect and assemble your plan’s components without much, if any, outside help. Although I can’t possibly measure this, it seems reasonable that in that information vacuum the chances of individual FI/ER plan failure were MUCH higher than today from pure ignorance.

So I want you to know that whether you’ve just gotten started on your own plan or whether you’re a ten-year veteran, I can tell you from personal experience that you’re living in a perfect storm: a moment in history when circumstances have never been more favorable for achieving financial independence and early retirement.

I should say at this point that I have a Mount Krakatoa-sized bibliography for what I’m about to lead you through, so if you’re curious about any of my sources, please let me know. Also, I’m writing this from the perspective of a little guy in the US FI/ER movement because that’s what I know best. Please forgive me for failing to transcend borders.

How It All Began

For eight hundred years little guys like you and me were effectively banned from financial markets.

Engraving depicting the Amsterdam Exchange, c. 1612

This began with the first informal financial exchanges, which went back at least to the private markets for bank debt in twelfth-century France. Little guys needed not apply. But credit for establishing the first formal stock exchange goes to the Dutch East India Company (AKA the VOC), which in 1602 received from the Dutch government a twenty-one year monopoly on the East Indies spice trade. To lay off its shipping risk the VOC began publicly issuing equity and debt through an entity the VOC itself created: the Amsterdam Exchange.

Again, though, not for us little guys. Admittance was limited to Persons of Quality, who from the little guy’s perspective would Descende from their Carriages, enter yon Ornate Building, shift Papers, and egress either Phantastikally Enriched, or else Chained and Bounde for Debtor’s Prison.

I.e., the elites were running a massive money game the little guy—who was likely poor and illiterate—wasn’t equipped to understand. It must’ve seemed like alchemy: transmutation of paper into gold.

And that wore on for three hundred years.

Early 19th Century: Bubbles and Scandals

At least the little guy’s poverty and ignorance saved him from the frequent bubbles and scandals arising from exchange under-regulation.

Typical of these was the London Stock Exchange Hoax of 1814, in which three speculators bought an enormous amount of government stock before engineering false reports that Napoleon was dead and the House of Bourbon was set to reassume rulership of France. Peace between Britain and France seemed imminent, the public rejoiced, and stocks soared.

But the cake was a lie; a pump-and-dump. The government soon sniffed out the perpetrators and sentenced them to be fined and pilloried.

They were small-timers, though… I mean, sheesh, occasionally a monarch would wash his hands of the entire national debt.

Firmer regulation often followed such scandals, and the reports in the street tabloids would’ve helped the little guy understand markets better… but those factors only increased the distance between him and them. What could possibly convince the little guy to blow his pittance buying stuff he couldn’t understand from people he didn’t trust?

Late 19th Century: Investment Clubs Move In

A watershed moment for the little guy finally came in Texas in 1898 when a railroad paymaster named A. L. Brooks realized two things.

First, railroad workers were over-dependent on the cattle industry for financial security. Cattle were the main Texan commodity, meaning a drop in the beef market could bankrupt railroads and destroy thousands of jobs. And (presumably) second, these workers were squandering their pay on faro & whores & whiskey instead of saving it for their families and futures.

And so was born one of the earliest investment clubs.

(Actually, investment clubs go back a bit further than 1898. The earliest known one is The Hamilton Trust, which was founded in Boston in 1882 and operates to this day. But it was a big boys’ club, so for the purposes of outlining the investor class’s growth I found this A.L. Brooks story more illustrative.)

Brooks, being more financially sophisticated than his workers, helped a group of them diversify their money across other business sectors; thereby decreasing their cattle exposure. They might still depend on wages, but they were no longer as dependent… a crucial development in the FI/ER movement’s history. It was an ethic that persists: “Work hard and save your money and someday you’ll have a better life.”

Early 20th Century: The Building Blocks of Financial Education

Despite the existence of small groups like Brooks’s, the investor class still largely consisted of societal elites. In 1900 a mere one in a hundred Americans owned stocks; but by 1952 that rate had only grown to one in twenty-five.

While the first investment club members were essentially hobbyists, the group model gained popularity among the curious. All shared a common goal: “making money.” The little guys might put what profits they made to different uses, or figure out how best to eat their losses…but the investor class was growing, and—more importantly—the little guy was learning.

the intelligent investorInvestment clubs weren’t the only educational opportunity available to the growing investor class, of course. A few examples: Ben Graham’s The Intelligent Investor was published in 1949, the Wall Street Journal’s circulation jumped from a self-reported 33,000 in 1941 to 1.1 million in 1967, and retail brokers were only too happy to show little guys the ropes.

However, in light of their increasing know-how, why weren’t more little guys investing?

For one thing, the aftermath of the Great Depression. In fall of 1929 stocks suffered a forty-percent beat down; between 1929 and 1932 household incomes fell by the same percentage. The Federal Reserve kept policy tight, the money supply dropped, deflation followed, and banks failed. Given that banks had made investment credit so cheap—you could borrow money at four percent and margin requirements were only ten cents on the dollar—everybody got hammered.

No jobs, no income, no cash, no credit…hence no little guys in the markets.

And for another thing, even in the post-WWII boom the little guys who had money tended to plow it into home ownership, the cornerstone of the American Dream. From 1900 to the 1940s the percentage of households owning their homes held in the low-to-mid forties, but during the postwar boom that percentage shot into the the low sixties—thanks in large part to the G.I. Bill’s mortgage subsidy/loan guarantee program. And it’s held in the sixties ever since.

Mid-20th Century: FI/ER Edges Into Pop Culture

Take a look at this book: The “Have-More” Plan by Ed and Carolyn Robinson. Published in 1943 and still available, it helped usher in the modern homesteading movement by teaching the skills necessary for a family to become self-sufficient on just a few acres. Given the success of Have-More’s theme, copycat authors were quick to capitalize on the movement, thus spreading the word.

Fourteen years later, in 1957, Life Magazine published a photo essay entitled, what else, “Early Retirement.” It was a peepshow into the daily lives of a handful of little guys in their forties who’d already retired with their families and were now enjoying an active “good life” while they were still young enough to do it.

Even though the article’s now sixty years old, the stereotypical good life was much the same then as now: lounging around pools, watching the kids’ little league games, fishing, boating in the Virgin Islands, etc.

While Life’s photo essay didn’t say whether any of these people made money investing, several of them were small businessmen—again, little guys—so they would’ve been at least familiar with the stock market’s workings.

The Golden Age of Capitalism

As the post-WWII boom, AKA the “Golden Age of Capitalism,” continued, investment clubs flourished and began reaching out to each other.

The broadest “traditional” association still operating is the National Association of Investors Corporation (NAIC), more commonly known as BetterInvesting. Formed in 1951, it’s a national nonprofit overseeing local chapter-type clubs in which “members pool their investment dollars, review studies of stocks presented by club members and select one or more stocks to buy, based on BetterInvesting’s unique investment methodology.”

NAIC is an aggregator, but also an educator. Between its inception and the seventies/eighties recession it came to oversee 14,000 clubs, but from the beginning of the recession to its trailing off in 1983, that number had dwindled to 3,200.

Which is also educational: if the number of clubs dwindled to less than a quarter of what it had been, it’s reasonable to assume the little guys bailed…showing that while it’s easy to ride out a boom, it’s hard to ride out a recession. Another valuable lesson.

1983: The High-Water Mark of Investment Clubs

In 1983 several senior woman formed a heavily-publicized investment club called “The Beardstown Ladies.” After reporting a 23.4% average annual return from 1983 until 1994 they collectively authored a best-seller entitled The Beardstown Ladies’ Common-Sense Investment Guide, as well as several other successful books. They were the toast of the financial press…until…

Well…until their return record, like that of so many other investment clubs, was proven to be bogus. Another pump-and-dump. The purported returns of clubs near and far were regularly deflated by auditors, and were sometimes found to be much lower than claimed.

Case in point: the 23.4% return claimed by The Beardstown Ladies was revealed to be in reality 9.1%—confirmed by Price Waterhouse—which was well below the 14.9% annual return of the S&P 500 across the same time period. Time Magazine actually ran an article in Y2K entitled “Jail the Beardstown Ladies!

Likewise: in early 1998 NAIC reported that 60% of its 35,000 clubs were market outperformers. But it had that percentage arsey-versey. Later in 1998 NAIC contradicted itself on its own website, reporting that “members using NAIC tools and investment principles show that 42.9 percent equaled or exceeded the earnings of the S&P 500 Index”…as if a 57.1% failure rate was something to be proud of.

And in fact, a Y2K study entitled “Too Many Cooks Spoil the Profits: Investment Club Performance” by Brad M. Barber and Terrance Odean of UC Davis, as printed in the Journal of the Association for Investment Management and Research, had an interesting statement in its executive summary (emphasis mine):

…our analysis, using account data from a large discount brokerage firm, of the common stock investment performance of 166 investment clubs from February 1991 through January 1997 (shows) the average club tilted its common stock investment toward high-beta, small-cap growth stocks and turned over 65 percent of its portfolio annually. The average club lagged the performance of a broad-based market index and the performance of individual investors. Moreover, 60 percent of the clubs underperformed the index.

Sixty percent… And to add insult to injury, even underperforming individual little guys who did their own stock-picking.

OK. Why am I telling you this?

Setting aside the problems inherent in 1) attempting to time the market through 2) merging money with bare acquaintances in order to 3) practice consensus stock-picking; as well as 4) the necessity to organize & formalize same after 5) paying somebody else for an investment methodology with 6) dollars that could otherwise be put to work for oneself, the investment clubs had proven that although the investor class was no longer small, poor, or ignorant, for the little guy to regularly beat broad index returns by picking stocks was damn near impossible.

Funny thing, though: the big guys couldn’t beat the market either.

Mutual Funds in the Post-War Boom

For a contemporaneous look at the post-war boom, I want to quote from a study that was written by Harvard Business School professor Michael C. Jensen, whose curriculum vitae is a mile long and twice as impressive, entitled “The Performance of Mutual Funds in the Period 1945 to 1964” and published in the Journal of Finance in 1967.

Jensen analyzed a basket of mutual funds from the post-war period and concluded (emphasis mine):

The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their bookkeeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses.

As mutual funds proliferated throughout the seventies and eighties, so too did findings to the effect that while individual actively-managed funds might beat broad market indices, it was impossible to forecast which ones would… and at any rate, the majority of them failed.

These days the Standard & Poor’s Index Versus Active (SPIVA) quarterly scorecard is the benchmark to use. I quote from the year-end 2016 edition:

[O]ver the 10-year investment horizon, 85.36% of large-cap managers, 91.27% of mid-cap managers, and 90.75% of small-cap managers failed to outperform [their corresponding indices] on a relative basis.

And so: if the little guy couldn’t beat the market himself, and he couldn’t hire someone to do it for him, what was left?

The Rise of Jack Bogle and Vanguard’s Index Funds

It’s silly to belabor Vanguard index funds to the FI/ER set. You know how it went: Bogle birthed his simple-mindedly brilliant babies in 1975 with the idea that if retail investors couldn’t beat the market, they might as well join it…and although market returns languished as the seventies/eighties recession dragged on, early investors, if they bought and held, caught the entirety of the eighteen-year boom that followed.

Consequently, little guys loved Vanguard and still do. Vanguard’s offerings are arguably the most popular set-it-and-forget-it investments of the FI/ER crowd because they offer small-timers full participation in the broad market’s long-term returns within a fee structure that doesn’t detract significantly from compounding.

Perfect for little guys with fifty-year planning horizons.

The Eighties and Frugality

Although I’ve focused on the grow-your-income side of FI/ER, it’d be appropriate just now to look at the shrink-your-expenses side by mentioning an eighties proto-blogger named Amy Dacyczyn.

Dacyczyn, the “Frugal Zealot,” wasn’t an investor, but my God was she the queen of saving money. She was a savvy comparison shopper and bulk-buyer and yard-saler and hand-me-downer who went so far as to examine whether sewing children’s underwear out of worn-out t-shirts was worthwhile.

And having mastered the frugal lifestyle, she monetized it with an indie publication named The Tightwad Gazette. Dacyczyn wrote in a sisterly style and placed the Gazette’s frugality tips in the context of her own daily life. It was easy for eighties housewives to identify with her, and they subscribed by the thousands.

But the Dacyczyns’ frugality was a means to an end: FI/ER.

Her husband Jim was a low-paid petty officer in the Navy and she’d set her graphic design career aside to raise their six kids. Despite their humble finances they dreamed of buying a farmhouse and retiring to the countryside…and succeeded. Then they shut down the Gazette and dropped out.

You might be inclined to dismiss the accomplishment, thinking, “Well, with a windfall like that…all those subscription fees and book royalties…she cheated.” But not so. I put that question to her in a 2017 interview, and her reply was that they banked her earnings towards the eventual benefit of their kids and grandkids and still live the frugal style they espoused back in the day.

If I sound like I’m raving about Dacyczyn and the Gazette, I am. I graduated college without any student debt at all, in part because my parents saved gobs of money stretching Dad’s paycheck with Dacyczyn’s techniques. My mom paid twelve bucks a year for monthly (paper!) issues of the Gazette, and every month when the new issue showed up in our mailbox, she practically stopped, dropped, and rolled in it.

As with The “Have-More” Plan, copycat writers climbed on board and soon there were dozens of such frugality-tip periodicals. Dacyczyn appeared on Phil Donahue and in syndicated newspaper articles, bringing the “work hard and save your money and someday you’ll have a better life” philosophy to new heights of publicity.

By holding up Dacyczyn as a typical little-guy educator and spokesperson, I’m of course neglecting to mention the efforts of many other FI/ER pioneers, including Vicki Robin and Joe Dominguez, authors of Your Money or Your Life, Paul & Vicki Terhorst, and more. By doing so I don’t mean to diminish their hard hard hard work—it’s just a matter of space. Please check them out.

The Continued Decline of Investment Clubs

Looking back, I think those very years, the mid-80s, were the exact time when the death of the investment club became inevitable.

Since the eighties boom came shortly after the establishment by Congress of the 401(k), markets democratized to an unprecedented level: the number of households owning stocks and/or mutual funds almost doubled in six years… from 15.9% in 1983 to 29.6% in 1989. The little guy needed less and less to consult his peers for knowledge.

Which finally led us to…

The Nineties through the Present: The FI/ER Movement’s Perfect Storm

gordon gekkoFrom 1991 to 1993 I was in grad school earning an MBA. My professors indoctrinated all of us with Gordon Gekko’s mantra from the 1987 movie Wall Street: “Greed is Good.”

I drank the hell out of that Kool-Aid. Shotgunned it, funneled it, did keg-stands with it.

And as I mentioned, in the summer of 1993, shortly after I graduated, I rushed straight into the jaws of corporate America.

Where I enrolled in my first 401(k).

In the early 1990s employers came to favor 401(k)s in large part because doing so enhanced their bottom lines by enabling them to cost-shift retirement plans to employees—deliberately killing the company pension in the process.

So as a young corporate wanker in the early nineties, a pension wasn’t available to me. And like other little guys who were self-funding, I needed to know how I was doing so I could adjust my plans if necessary (and also because I hated my job and was counting the years until my freedom!).

Serendipity: towards the mid-nineties the quasi-web internet service providers like CompuServe and AOL began offering near-realtime stock price data. I was one of the many little guys who for the first time had access to prices without laboring through the local paper’s business section, and let me tell you, I was hella grateful.

At the same time, PCs and DOS-based spreadsheet applications became standard. Lotus 1-2-3 and such. The concept of compound interest was always included in 401(k) sales pitches, so naturally there were little guys crunching the numbers and realizing retirement before 59.5 was possible if you had a high enough savings rate.

“Sitting in a box, checking your stocks” became a workday ritual.

The Advent  of the 4% Safe Withdrawal Rate

In October of 1994 a vitally important FI/ER development got missed by almost everybody except a few industry professionals. The Journal of Financial Planning ran an article by William P. Bengen entitled “Determining Withdrawal Rates Using Historical Data.”

Bengen—whose name I’ve only ever seen in an FI/ER forum once—was the first person to propose the retirement planning strategy he called “SAFEMAX,” which came to be known as the “4% Rule.”

I STRONGLY recommend you read Bengen’s article. His systematic analysis of worst-case stock returns since 1926 led to his assertion that:

Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent… followed by inflation-adjusted withdrawals in subsequent years, should be safe. In no past case has it caused a portfolio to be exhausted before 33 years, and in most cases it will lead to portfolio lives of 50 years or longer.

In 1998 three professors at Trinity University confirmed Bengen’s assertion. As with Bogle/Vanguard it’d be silly for me to belabor the Trinity Study to the FI/ER crowd; just know that a significant difference between their methodology and Bengen’s was their replacement of his mid-term government bond portfolio component with high-grade corporate notes.

Results were similar to within fifteen basis points, though, so the term “4% rule”—and less commonly, “The Bengen Rule”—have stuck.

And Along Comes the IPO

A lot of us little guys got our worlds rocked when a coder named Marc Andreessen, who’d spearheaded the development of the first common web browser, made something like $50 million overnight in the Netscape IPO of 1995. Andreessen’s a couple of years younger than me…if I recall correctly he was twenty-two or twenty-three at the time. So that was when I first became aware of the financial potential of the internet.

Which was true, I think, for most people. The acronym “IPO” wasn’t yet in common parlance, but little guys suddenly realized that if they played their cards right they could become ferociously wealthy; either through launching an IPO of their own, or, failing that, making money on somebody else’s.

Yet another element in the perfect storm: mental paradigm-shifting.

The Dot Com Bubble

For starters, the little guy may have enjoyed the eighteen-year boom that followed the seventies/eighties recession, but perhaps his success made him cocky.

Poverty and ignorance might’ve kept him out of early exchange scandals/bubbles like the London Hoax, but in 2001 and again in 2008, his wealth and knowledge—or at least the illusion thereof—screwed him. These two periods of “irrational exuberance” taught hard lessons to the FI/ER set.

For a great example of how the .com boom boosted the FI/ER movement (albeit in an unhealthy way), watch this commercial, where a smirking twenty-something guy is packing up his shit from his cubicle and splitting because “channelingstocks.com” showed him how to make quadzillions of dollars with only a few mouse clicks and even fewer original thoughts. The commercial was ubiquitous.

The tag line is a co-worker telling him, “I can’t believe you’re retiring…I hate you!” It was another watershed, I think. Got the idea of ER in front of anybody who had a TV. Which was again another important shift in the FI/ER mindset: “Could I do that?”

That commercial may seem cheesy at first pass, but it’s a slick and savvy piece of marketing that captures the spirit of the same few years that gave us Dilbert:

“I hate my job. There are ways out of it, but I’m missing out on them. This company knows what these ways are; therefore I should pay them for their advice. And if this smirking jackass can do it, I most certainly can.”

(Interestingly, channelingstocks.com is still around, meaning presumably its employees are still working. That’s ironic, since judging from its advertising the company’s whole raison d’être is enabling people to get the hell out of the workforce. (Which harkens back to the old, “If this advice is so valuable, why are you selling it instead of using it yourself?” question.)

NASDAQ .com spike, 1994 – 2005

But despite all the FI/ER optimism, the permanence of the dot com bubble proved to be greatly e-Xaggerated. Between 1995 and early Y2K the NASDAQ jumped from 751 to a bubble-high of 5,046; but by the end of 2001 the index had plummeted back to 1,950. And while at any other time a 259% return in a six-year period would’ve been considered a home run, investor malaise only illustrated how greedy everybody had become. Like my friend Yates, who was in many ways a typical day trader.

Day-Trading Gone Very Wrong

Yates was a momentum guy who lived with his gargantuan bull mastiff, Pontius Pilate, in a posh apartment in Boston’s Leather District. He, meaning Yates, day-traded for roughly three years…naturally hoping to get rich, quit work, and move to Maui or wherever. Who wouldn’t want a shortcut to early retirement?

On weekdays Yates would get up at two AM and assess the world situation by checking international indices and news sources. He’d watch institutional pre-market trading open at four, and at six—when his online brokerage opened pre-market trading to individuals—he’d start jamming orders into the system.

Yates only traded a half-dozen individual tech stocks, always short-term, and he felt like this narrow focus kept him “safe.” You should’ve seen his workstation: four PCs running eight oversized flatscreens. Would’ve made a great gaming station.

And indeed, this method made him a lot of money in just a couple of years. A LOT. We all envied him.

At the end of every week he’d scrape his profits into EMC, a data storage corporation based in Hopkinton, MA that’s now a Dell subsidiary. EMC was posting ridiculous P/E ratios at the time, but the stock price always went up. Since Yates was trading his half-dozen techs on heavy margin, by taking his profits into EMC he was essentially double-dipping the dot com run-up with other people’s money.

EMC peaked at $103 at the end of September of 2000, but a mere six months later plummeted to about thirty bucks. This wiped out out every penny Yates had made and then some, because while EMC was crashing everything else was too. Problem was, Yates used his EMC holdings both as a savings account AND as his reserves against a margin call…and man, was that guy over-leveraged.

Yates of course got the margin call he’d feared, but he didn’t have the cash to meet it. His brokerage liquidated all his positions as per their contract, forcing Yates to eat an enormous amount of capital losses. But he still couldn’t meet the margin call.

So he wound up in collections and court. Lost his car and his apartment. Somehow ended up getting banned from the exchanges for a while. Had to fall back on the largesse of his family.

And I eventually lost track of him. In the post-crash days I never could figure out how in hell he could afford to keep a dog the size of Pontius Pilate fed…much less himself. But at least they had each other.

Well. Hard for me to throw stones, I guess. Like many other little guys I got screwed by that craziness, or to be more truthful, I screwed myself. The dumbest trade I ever made was buying ten grand in Cisco LEAPs (long-term equity anticipation securities, if you’re not familiar—basically multi-year options) roughly twelve months before the peak. Their paper value zoomed to $40K, but being foolish, I left every cent on the table because I expected the boom to last forever. When the crash came I even lost the premium.

That taught me two things:

  1. Buy the rumor, sell the news. If you MUST trade, that’ll sometimes catch a little of the swing. But never confuse a “hot stock” with one that has solid fundamentals.
  2. Gordon Gekko was full of shit. “Greed is good” made a lot of little guys a lot of money, but they puked it, and more, right back out.

We’d all learned our lessons, right? Scarred but smarter? But six years later we fell for it all over again by getting sucked into…

The Housing Bubble

You’d think the little guy would’ve learned, but the housing market seemed invincible—it was collateralized by hard assets, after all. And the actual collapse was presaged by the likes of The Economist, which in 2005 cautioned investors that “The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.” But believed another crash could come so soon.

There were a number of sources of inflationary pressure, each of which served to make cheap credit available to little guys. They included:

  • The Taxpayer Relief Act of 1997, which increased the capital gains exclusion on the sale of first and second homes from $125,000 per couple to $500,000.
  • Historically-low federal funds rates.
  • A great deal of banking deregulation, enabling (among other things) increased availability of adjustable-rate mortgages with extremely low teaser rates.
  • Mandated loan programs, which fed the subprime mortgage market.
  • And also outright scams, notably in “complex debt derivatives”…in which high-risk loans could be whitewashed by mingling them with low-risk into bond issues that were fraudulently overrated by ratings agencies.

But when garbage loan foreclosure rates began skyrocketing after their teaser rates expired, a bunch of subprime lenders all declared bankruptcy at once, and this exposed the foundation of the housing market for what it was: bad debt.

So the bubble popped, and the “economic pain” for little guys was excruciating…although the pain of the debt-peddling financial institutions was mitigated by the “too big to fail” doctrine, thereby double-burning the very little-guy taxpayers the scammers took so badly. The Case-Schiller index fell…

Oh, hell. I could write thousands more words on this subject, but I’d only be repeating material in Michael Lewis’s The Big Short, which I consider to be the best and most important financial book I’ve ever read. Seriously: get a copy. It’ll blow your hair back.

I ran some rental housing at the time, but I never speculated; never even owned real estate investment trusts. But the housing bubble was an agonizing reminder to me that the best long-term investment strategy has been to stay the course. Dollar-cost average into broad indices, throw your purchases on the pile, and try to forget about them.

I’ve deliberately used the words “excruciating” and “agonizing”. In fall of 2008 I was visiting my in-laws when the markets crashed. I FREAKED. I was three years into early retirement, my skills were outdated, and I knew, just knew, that I had to sell out while I still had some money left, and I needed to circulate my resume despite it having a grapeshot-sized hole in it.

But a good friend of mine—I mean, a really good friend—convinced me to hang in there. “Don’t be a dumbass,” were, I believe, his exact words.

And sure enough, within two years my net worth had doubled back up to pre-crash levels. I’d gnawed my fingernails up to my elbows, but the question of whether I’d be able to stay retired for at least a little while longer was settled. Since then my forearms have grown back.

The FI/ER Movement Evolves

Having discussed the broad market’s behavior in the first decade of the twenty-first century, let’s get to how the FI/ER movement evolved in response to it.

If you check out NAIC/BetterInvesting’s advertising these days, you’ll see that the models/actors who appear are usually late in life, a sad reminder that the clubs’ target demographic is shrinking. Also, have a look at this 1995 article from The Independent. Scan it and you’ll notice that the author mentions NOTHING about the internet. Not one damned word. He even concluded:

Where, then, do investment clubs go from here? Onwards and upwards, in my view…

Which would be funny if it wasn’t such a facepalm. And how instructive is THAT? The author, writing for one of the most respected publications in the UK, lacked even an inkling of the growth of the web. (Ironic how at that time newspapers in general were completely oblivious that the monster that’d eat their business model in less than ten years had already hatched. )

But to be fair, few other people saw it coming either. A lot of us considered the internet little more than ham radio; a toy for techies.

Those techies are all billionaires now. Never mind the author of that Independent article… I was the fool. I’ve facepalmed myself over that until my nose is smashed flat.

I think it’s that exact dynamic, i.e. the explosion of tech startup mega-riches, that thrust the FI/ER movement into full national view.

The Continuing Deterioration of Work-Life Balance

Why do people hate their jobs, anyway?

The effect of one’s job on one’s quality of life is obviously a main motivator of FI/ER plans, and it’s no coincidence that awareness of the FI/ER movement is spreading in lockstep with the skewing of the work-life balance towards work.

Polling organization Gallup’s employee engagement surveys indicate a continuing decrease in the percentage of people who feel fulfilled in their work. In its 2011-2012 study (the most recent I was able to dig up for free) Gallup found that number had shrunk to 13%—13%!

Several causes:

  • Work hours for exempt employees continue to rise. The current average for full time “forty-hour” workers—depending on which study you cite—runs from 47 to 49 hours.
  • Household income, however, has eroded for a decade. While the most recent Census Bureau figures indicate that in 2015 the median household income jumped a little over 5%, those same households are still earning 2.4% below what they brought home in 1999. And this is obviously FAR outpaced by the increases in healthcare costs and student loan burdens.
  • I have no idea who came up with the open office concept, but he/she ought to be strung up and flayed with fidget spinners. Back in the day if you’d’ve told me there would come a time when people would aspire to have cubicles, I wouldn’t have believed you.

Working more for less, and in worse conditions…

Investment Clubs Go Virtual

With the rapid expansion of internet access and the new awareness of and motivation towards FI/ER, investment clubs finally went virtual.

The earliest FI/ER board I remember was early-retirement.org. I started posting there right around 2002. It was the biggest online group at the time, as I remember, and it was among the first to gather techniques and motivation and philosophy, etc. into once place for easy little-guy access.

Shortly thereafter, circa 2004, Jacob Fisker of Early Retirement Extreme started writing about his own approach to FI/ER, and since then he’s had a great deal of impact on the movement both through his web presence and his bestselling how-to guide by the same name: Early Retirement Extreme.

Fisker has described his approach as “a strategic combination of smart financial choices, simple living, and increased self-reliance,” a thoughtfully expanded-upon fusion of three of the historical tenets of sound money management; ones that Texas railroad paymaster A. L. Brooks doubtless would’ve recognized and endorsed back in 1898.

While Fisker continues having a large influence on the FI/ER movement, a Colorado blogger named Peter Adeney, writing under the pseudonym “Mr. Money Mustache” (MMM) currently garners the most national visibility. Like me, MMM got out of the workforce in his thirties; unlike me, he’s enjoyed wild success blogging about FI/ER at his website, MrMoneyMustache.com.

Adeney calls his approach “Mustachianism,” an idea he actualized by living “…a lifestyle about 50% less expensive than most of our peers and investing the surplus in very boring conservative Vanguard index funds and a rental house or two.”

MMM estimates that among the general public about one in a thousand had heard of FI/ER in 2011, but that one in fifty have heard of it now. He doesn’t claim sole credit for this, of course, but it’s worth noting that in the thirty days prior to this writing, his blog got 8.8 million pageviews.

Much like with Amy Dacyczyn and The Tightwad Gazette, and this being the internet and given the successes of bloggers like Fisker and MMM, a whole mess of FI/ER bloggers have jumped aboard.

And while I’d like to list others I consider significant, I just don’t have room. You’ll soon discover your own favorites, and hopefully mine’ll be atop the list.

But if I could editorialize: it blows my head clean off that there are early retirees earning six figures a year from blogging when their approach to FI/ER was living frugally and optimizing what money they had when they quit.

Anyway, let’s leave the blogosphere there for now. If there’s a current heir to the traditional investment club, I’d say it’s Reddit’s Financial Independence sub. As of this writing /r/financialindependence has 260,000-ish subscribers—roughly six times the current membership of NAIC.

To Sum Up

After eight hundred years of scant participation in the financial markets, during the twentieth century the little guy finally attained—if not dominance—at least a great deal of influence on the economic health of the entire world.

For good or for ill.

All this is why I say that since the 1950s the elements of FI/ER haven’t been terribly arcane; it’s just that in the pre-web days the assembly of those elements into a coherent FI/ER plan was difficult, and like-minded people were hard to find unless you joined clubs that were prone to sandbagging your results.

I harp on one point over and over: anybody who has Google in their toolbox is building their FI/ER house a hell of a lot faster than I was able to when I got started twenty-four years ago.

A Final Thought

Here’s what really concerns me about what I’ve written in this article: when I think about the history of FI/ER I think about the history of my own family, I often feel guilty for having retired so early.

My parents worked hard to give me a better life, theirs worked harder to give them better lives, theirs worked even harder to give them better lives… and so on and so forth, right back through the generations to Adam and Eve. Who, if you buy into the story, were FI/ER from day one.

So what did I do with all my ancestors’ hard work? I said, “Thanks everybody for getting me here…” and I cashed out. I might’ve had a twelve-ish year career, but the truth is that when compared to eight hundred years of FI/ER history, twelve years is nothing.

And that’s why I, and you, should spread the word. When being the beneficiary of so much help has gotten you to FI/ER, it’s MANDATORY to pay it forward.

Because when it comes down to it, nobody is truly independent… financially or otherwise.


(Thanks to J.Money at RockStarFinance.com for first publishing this article, which I’ve since expanded with a good bit more research and material.)

Author: ER Dude

Sick of your job? After a thirteen-year career, Early Retirement Dude fled corporate America for good. You can do it too! Visit http://EarlyRetirementDude.com or email EarlyRetirementDude@gmail.com.

25 thoughts

  1. Thank you for this.

    I am relatively late to the FI/ER concept. I finally finished 13 years of school and got my career underway at the ripe old age of 32.

    I figured since I was making a decent salary I would explore the, completely unknown to me, world of investing. I began on Investopedia.com (which is a fantastic resource for someone who wants to learn all there is to know about investing.)

    This eventually led me to MrMoneyMustache.com, and I devoured his entire site. I also eventually went to EarlyRetirementExtreme.com and several others that have led me here.

    I did not know that any of this was an option when I was in high school. I was raised with the expectation of going to college, getting a job, working for 40-50 years and then retiring.

    I am now ever so slowly trying to increase my savings and decrease my spending. I will never get to extreme early retirement, but I hope to retire in my 50s instead of my 60s, which, lets admit, is still technically “early” retirement.

    1. >I did not know that any of this was an option when I was in high school. I was raised with the expectation of going to college, getting a job, working for 40-50 years and then retiring.

      Hey, man…thanks for writing that. It’s one of the coolest comments I’ve gotten. Discovering that there’s an alternative to the birth-school-work-death cycle is a HUGE accomplishment. Congrats for getting started!

      1. I think the movement can only grow from here.

        It seems to me that most, not all, but most, FI/ER individuals do not have children. I have 3 and they are a seriously large expense. I love them though and wouldn’t change it.

        But, those with children are likely going to teach their children what they know. I know that I will make sure my children understand that they have options in life. Don’t get me wrong, they will also be taught that you have to work for what you get in life, but work smarter, not harder.

        Then their children will grow up know there are other options. In the future, many more people will be aware of FI/ER.

        1. Just from the Reddit financial independence sub I’d agree that most FI/ER-seekers don’t have kids, but that sub skews towards tech-field men in their early to mid-twenties, so…

          But yeah, I’m kind of in your position. We have one kid and we’ve always been able to fit her into our budget; no problem. She’s about to turn thirteen, though, so we’ll see what happens when she’s on her own.

          We funded her a 529 when she was born and it currently has ~$79K in it, so that’ll help.

  2. Tell us more about how you faced the 2008 financial crisis. Did you really consider going back to a 9-5 job ? Selling your stocks to pay the bills ? How your portfolio behaves in the first 10 years of ER is crucial, so a market crash is a big challenge.

  3. Well written! I enjoyed the financial history of this post quite a lot.

    I knew I couldn’t be the only person who started thinking of how to retire early the first day I was in a corporate job….of course since then, learning more about finance and real estate and re-calculating has lead me from aiming at age 55 to age 37 for retirement.

    1. >learning more about finance and real estate and re-calculating has lead me from aiming at age 55 to age 37 for retirement.

      Shaving 18 years of your estimate sounds like a good feeling…

      1. It was, and most importantly motivating. For me, it was realizing that I value time and experiences more than things and status and that it’s better to focus my energy on making wealth for myself versus for someone else else. It was also being realistic about what I really need and being willing to spend the extra time to learn, even when tired from my W2 job (same goes for my wonderful wife who I couldn’t build plans like this without).

        It took me three years to realize that early retirement in the standard definition of the tax code (55 by my interpretation) was not good enough and another two years after this to figure out and start executing how to accelerate this date using a mixture of real estate, additional savings, and tax rules. Funny thing is, I’m now more motivated at my W2 job than I was before because I now feel like I have something I truly value that I can achieve with what I earn; my time and ultimately freedom of choice.

  4. Holy cats, ERD! Great history wrap-up. Just discovered your blog and gotta say, you’re in my small (but naturally growing, for exact reasons you touch on in the last quarter of this piece) FI/ER blogger HoF.

  5. Do you use capital gains and dividends as your source of income or are you in less mainstream products like CEFs and ETFs with high distributions (ordinary income). I am this (…) close and this is one of the last things I am trying to figure out. It appears, oddly enough, that capital gains are the way to go if I keep my annual spending under $70k.

    Any thoughts are appreciated.

    1. Depends on the year, but I try to keep realized capital gains as low as possible. Roughly forty percent of our income is from dividends, but that’s from individual stocks, some of which I’ve been holding since the early 2000s.

      I agree that capital gains are the way to go if you’re trying to hold down your income tax liability. I do my best to keep our AGI under roughly $35K, and I do that through tax loss harvesting.

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