Back in 2011, a friend spoke of these magical financial vehicles called “index funds”. At this point, I’d already build and sold a website that was sold to some website investors.
What was news to me at the time sparked immediate deep research and eventual action.
Index funds have seen massive traction in the “FIRE” or Financial Independence, Retire Early community. And while there are many funds that track many indexes, the most common recommendations made tend to track the following indexes:
- S&P 500
- Total Stock Market (the entire US equity market)
- FTSE All-World
- MSCI World
- Other local indexes, such as the ASX200, FTSE Developed Europe, TSX60, and so on.
Whether right or wrong, the general consensus from this community is that for every $100 invested today, it will pay you back $4 every year, for at least 33 years.
This is known as the 4 percent rule, and is the “safe withdrawal rate” that finance bloggers have been rehashing over and over.
In this post, I’ll walk you through my issues with the four percent rule, and why I think investing in websites for profit might be a better option, where returns of 40% and more are not uncommon.
The Problem with the Four Percent Rule
While the four percent rule sounds great in theory, there’s an issue for most people. You need a shitload of cash to make it work.
As a general rule, if you’re a high income earner by international standards, chances are your local cost of living is also high.
If you live where the cost of living is very low, chances are your salary is equally as low.
High salary + high cost of living = a long time until you can retire
Low cost of living + low local salary = a long time until you can retire
Of course, plenty of clever people have found ways around this:
- Live on noodles, live in a share-house and work a high paying job in a major city, save almost everything you can, then move to a country town to retire.
- Earn in a major economy, invest everything you can, then retire in a developing country with lower cost of living.
- Live in a country with low cost of living and work a high-paying job remotely, investing the difference between cost of living and your pay cheque.
There’s a load of options, and to some extent I’ve subconsciously done a bit of a combination of all of these, and more.
What kind of annoys me though, is how easy, fast and enjoyable many of these money bloggers make it seem.
- Not everyone enjoys cycling to work in Toronto in the middle of a miserable winter to save $12 per week.
- Not everyone is earning $200,000 a year in a tech job that can be worked remotely.
- Not everyone is willing to retire in South East Asia.
- Not everyone is willing to work a high-stress career for 12 of the best years of their life.
The Problem with Early Retirement
Similarly, the early retirement community has its own problems. Some core issues (with similarities to entrepreneurship) were talked about on this podcast.
When people work their ass off and scrimp on every cent to retire at 37, they often take 3 months to relax, begin exercising again, sleep a lot, and then realise they don’t have much to do with their time.
Many entrepreneurs also do this; working 14 hour days for years, earning next to nothing, only to get their large cash pay day after selling their business. After the initial ego boost and splashing of cash, they often realise they’re now bored out of their brains.
So, Do You Really Want to Retire?
While many of us say we want to “retire young”, what we really want are:
- no money stress
- freedom of time
- freedom of location
- no or few meetings
- to work on things we care about
- to work at a slower pace
…and so on. We’re mostly seeking freedom, security and the time to enjoy everything else in life that actually has nothing to do with money.
So for a moment, let’s pretend you live next door to me in Andorra where the cost of living is reasonable, but not “developing country” cheap. My wife, son and I can live fairly comfortably on around $40,000.
Using the 4% rule, this means we only need to invest $1,000,000. For most readers, that’s probably a 15-20 year plan, assuming you are starting out with no debt, and you can manage to stay away from adventure and live a frugal life in that time.
GETTING TO THE POINT
Well, I think there may be a better way.
My hypothesis is that it’s possible to make around 40% annual return on investment by investing in websites; “digital real estate” or “digital assets”.
Sceptical buyers may ask “if these websites were any good, why would they sell them?” The thing that I’ve realised from selling a website myself is, plenty of people sell perfectly good businesses for not always good reasons.
These types of businesses are typically:
- income generating websites, earning through:
- SaaS businesses
- digital products such as Kindle books sold on Amazon
- eCommerce and dropshipping businesses
At this rate of return, assuming I need $40,000 for myself and my family to live, I only need to invest $100,000. Yes, that is one zero less than the previous scenario. I call this the 40% rule.
The 40% Rule
There are some key differences however. While the 4% rule is used by people wanting “Financial Independence and to Retire Early”, the 40% rule is more along the lines of “Location Independence and Semi-Retirement”.
Where a Bogle-style “lazy portfolio” with only two funds will require you to rebalance as little as once per year, a portfolio of digital assets may require you to work anywhere from 1 hour a month to 40 hours each week.
While you can invest in Hong Kong property through a REIT and emerging market bonds through a fund with absolutely 0 knowledge in either areas, buying a website that generates income with no prior knowledge is obviously a steep learning curve.
One of the things you’ll realise early on is the importance of having a framework for website due diligence. Nobody’s going to tell you if you’re about to pay too much or if the website you’re about to buy is a ticking time bomb—it’s on you to do your own due diligence.
Oddly enough, most people believe in others more than themselves. It’s why most are happy to work for an employer, where they have the illusion of security. It’s why they’re happy to invest in a company they know nothing about more than their own.
To use the 40% rule, you’ll need to back yourself, but as you’ll see that has a long term benefit, outside of your investments.
This Isn’t a Bad Thing…
None of this is a negative.
Whether you’re retiring at 30 or 65, you don’t actually want 24 hours each day with nothing to do. With a small portfolio of websites that need maintenance or marketing to grow at a modest rate you may need to commit to, say 10 hours per week.
However you can do this work when it suits you, from whatever country you please, in your underwear if you so choose.
Unlike a job where the boss dictates the terms, you can build your digital asset portfolio around your goals. If time is most important to you, you’ll want the most passive website you can find (~1 hour per month). The more you outsource, the less hours you need to work.
If a greater return is important, maybe you’re looking to swap out the current 40 hours that you work each week in an office for 40 hours on your own portfolio, as it brings freedom of location.
While operating these websites may not be in your wheelhouse yet, knowledge is easily gained. Rather than sleeping 12 hours a day once retired, this time can be used to gain a new skill which can keep you engaged with the world.
It also allows you to lean into your strengths. For example, I’m a technical SEO consultant by day which means I’m generally looking for sites that I can improve using that skillset.
If the site has previously been owned or operated by a search engine optimization wizard, there’s less value for me to bring to it, so I’ll probably give it a pass.
Similarly, if you’re an efficient writer you could consider buying sites that will benefit from a lot of new articles.
Similarly, the lesson in psychology is that security in the workplace is mostly an illusion. Your boss, no matter how noble, won’t fight as hard as you will to put food on your family’s table. You can be damn sure that the CEO’s of the S&P 500 companies you’re invested in won’t either (they don’t even know who you are).
Websites are Financial Instruments
Someone once told me:
Websites are financial instruments. Buy low, sell high, take the income.
This statement made it all “click” for me.
I was thinking too deeply about them—websites were keyword research and sessions and conversion rates back then.
Now they look more and more like assets every day. Buying and selling websites happens every day through online business marketplaces, brokers, and in Facebook groups and forums. You can buy them, hold them for income, flip them for cash, roll them up for a bigger earnings multiple and so on.
The truth is, 40% isn’t a rule as such, it’s a hunch. Website investors may be buying sites returning more along the lines of 20% (which is still a damn good return for most people), while others are pushing well past 100%.
2020 Update: Actually, last year I bought and sold a site with some investors. We owned it for an 8 month period of time where our total return on investment was 134%.
Making Money by Investing in Websites
What I love about this form of investing and business is that it’s accessible to people of all demographics, locations and experience, so long as they are willing to learn.
Those with more money than time can invest more in safer digital assets that require little to no time, and take a smaller return in exchange. Those with less funds can buy a starter site and invest their sweat to grow it month-on-month.
But from what I’ve seen, for most investors, 40% annually is around the norm.
Next month I’m heading to Bangkok to speak with some clued up people in this space to learn from their experiences on this topic. I don’t know where it’s heading from my point of view but, as always, I’ll do my best to share any useful findings.
Update: Bangkok was awesome, and it’s fueled my fire. This is, as far as I can see, a huge opportunity, and I intend to take advantage of that.