Financial Freedom With ETFs (Will and Fog)

usowebb@gmail.
com 15
Sep 2021
Financial Freedom with ETFs

Do it yourself
Will and Fog
February 17, 2021

Sixth edition
usowebb@gmail.com 15
Sep 2021
General index
Foreword 12
Introduction 11
1.1. What is this book about? 11
1.2. What is Financial Freedom? 12
1.3. Why Write this Book? 13
1.4. Who has Written this Book? 14
1.5. Who should read this book? 14
1.6. Are there other people doing the same thing? 15
1.7. Why is what this book discusses so unusual? 15
1.8. But Is This Morally Acceptable? 16
1.9. Our history 18
Planning 22
2.2. Importance of Savings 25
2.3. Some Ideas to Save 26
2.4. Saving, for what? 28
2.5. Personal Economy Diagrams 29
2.6. Have a plan 35
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2.7.3. Financial Companies 41

2.8. The Distribution Pension System 44
2.9. Create a Company by Achieving Freedom Fi financial 47
Theory 59
3.1. How much can we save? 60
3.2. How much can we spend? 64
3.3. Combined Effect of Savings and Spending 67
3.4. Simulations 70
Investments 77
4.1. What Form of Investment to Choose? 78
4.1.1. Types of Passive Income 79
4.1.3. Pension plans 83
4.1.4. Investment Funds 88
4.1.6. Types of Public Debt in Spain 104
4.1.7. Types of Fixed Income in the US 105
4.1.9. Investment in Index Funds 107
4.2. Investments that don't work 113
4.2.4. Companies That Provide Dividends Grow you 120
4.2.5. Act According to Dates or Events 121
4.2.6. Economic Cycles 121
Invest in ETFs 126
5.1. A little history 128
5.2. What are the Main ETF Managers? 134
5.3. How does an ETF work? 135
5.4. How to Measure the Efficiency of an ETF? 148
5.5. Are ETFs Made for Kids Investors? 150
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5.6. Have ETFs Grown Too Much? 151

5.7. What Are the Risks of ETFs? 154
5.8. ETF Indices 155
5.8.1. Index Calculation Methods 155
5.8.2. Classification according to Dividend Treatment 160
5.8.3. Classification by Themes 161
5.9. Some Specific Types of ETFs 163
5.9.2. Asset Selection 163
5.9.3. Inverses and Leveraged 164
5.9.4. Real-estate market 165
5.9.5. Emerging Market Stocks 165
5.9.6. Global Indices of the World 166
5.10. Losses from Taxes Paid by the Fund 168
5.11. Typical ETF Expenses and Commissions 171
5.11.2. Trading Expenses Like Shares 172
5.11.3. Expenses for Being Listed Securities 172
5.12. How to Follow the Evolution of an ETF? 173
5.12.3. ETF Managers 174
5.12.5. Economic news managers 174
5.12.7. Specific web pages 175
How to Build a Portfolio 195
ETFs 195
6.1.
Core/Satellite Investment System 196
6.2.
The long-term 197
6.3.
How Long-Lasting is an Investment in Investment? you
say? 200
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6.4.
Examples of Portfolios 201
6.5.
The Age in Bonds 210
6.6.
How many ETFs in Portfolio? 212
6.7.
Dividends: Accumulation or Distribution? 213
6.8.
The Benefits of Diversification 214
6.8.1. A Practical Approach to Diversification 214
6.8.2. Diversify by Number of Assets 215
6.8.3. Diversify by Asset Types 216
6.9. The Benefits of Rebalancing 218
6.10. Which Fixed Income ETF to Choose? 223
6.11. Emotional Errors and Investment Contract Zionist 224
6.12. Methods to Withdraw Capital once Financial Freedom
Achieved 226
6.12.1. Extract “the inverse of the number of years we have
left” 226
6.12.2. Extract at ”constant purchasing capacity” 227
6.12.3. Extract a ”constant percentage of the portfolio” 227
6.12.5. Variable Percentage Withdrawal 228
Crisis 235
7.1. When Will the Next Crisis Come? 236
7.2. Ideas to Protect Us from Crises 237
Epilogue 239
Thanks 240
Recipe book 241
A.1. Steps to follow 241
A.2. How to Choose an Online Broker? 243
A.3. Example of Investor Contract 244
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A.4. How to Choose which Stock Market to Trade? 246

TO 5. How to Choose an Index to Follow? 250
A.6. How to Choose an ETF that Tracks an Index 251
Certain? 251
A.7. How to Decrypt an ETF Token? 254
A.8. How to Purchase an ETF? 258
Deduction of the equations 262
8.1. Savings equations 262
8.2. Expenditure equation 269
8.3. Combined savings and spending 273
Resources 285
Books 285
Articles 285
Websites 286
Contact the Authors 293
1.1.1.
1.1.2. Classification according to Dividend Treatment . . . 175

Foreword............................................................................................12
Introduction........................................................................................11
1.1. What is this book about?.....................................................11
1.2. What is Financial Freedom?................................................12
1.3. Why Write this Book?.........................................................13
1.4. Who has Written this Book?...............................................14
1.5. Who should read this book?................................................14
1.6. Are there other people doing the same thing?.....................15
1.7. Why is what this book discusses so unusual?.....................15
1.8. But Is This Morally Acceptable?.........................................16
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1.9. Our history...........................................................................18

Planning.............................................................................................22
2.2. Importance of Savings.........................................................25
2.3. Some Ideas to Save..............................................................26
2.4. Saving, for what?.................................................................28
2.5. Personal Economy Diagrams..............................................29
2.6. Have a plan..........................................................................35
2.7.3. Financial Companies....................................................41
2.8. The Distribution Pension System........................................44
2.9. Create a Company by Achieving Freedom Fi financial......47
Theory................................................................................................59
3.1. How much can we save?.....................................................60
3.2. How much can we spend?...................................................64
3.3. Combined Effect of Savings and Spending.........................67
3.4. Simulations..........................................................................70
Investments........................................................................................77
4.1. What Form of Investment to Choose?.................................78
4.1.1. Types of Passive Income..............................................79
4.1.3. Pension plans................................................................83
4.1.4. Investment Funds..............................................................88
4.1.6. Types of Public Debt in Spain...................................104
4.1.7. Types of Fixed Income in the US..............................105
4.1.9. Investment in Index Funds.........................................107
4.2. Investments that don't work...................................................113
4.2.4. Companies That Provide Dividends Grow you.........120
4.2.5. Act According to Dates or Events..............................121
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4.2.6. Economic Cycles........................................................121

Invest in ETFs..................................................................................126
5.1. A little history....................................................................128
5.2. What are the Main ETF Managers?..................................134
5.3. How does an ETF work?...................................................135
5.4. How to Measure the Efficiency of an ETF?......................148
5.5. Are ETFs Made for Kids Investors?..................................150
5.6. Have ETFs Grown Too Much?.........................................151
5.7. What Are the Risks of ETFs?............................................154
5.8. ETF Indices.......................................................................155
5.8.1. Index Calculation Methods........................................155
5.8.2. Classification according to Dividend Treatment.......160
5.8.3. Classification by Themes...........................................161
5.9. Some Specific Types of ETFs...............................................163
5.9.2. Asset Selection...........................................................163
5.9.3. Inverses and Leveraged..............................................164
5.9.4. Real-estate market......................................................165
5.9.5. Emerging Market Stocks............................................165
5.9.6. Global Indices of the World.......................................166
5.10. Losses from Taxes Paid by the Fund...................................168
5.11. Typical ETF Expenses and Commissions.....................171
5.11.2. Trading Expenses Like Shares...............................172
5.11.3. Expenses for Being Listed Securities.....................172
5.12. How to Follow the Evolution of an ETF?.....................173
5.12.3. ETF Managers........................................................174
5.12.5. Economic news managers......................................174
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5.12.7. Specific web pages.................................................175

How to Build a Portfolio..................................................................195
ETFs.................................................................................................195
6.1.
Core/Satellite Investment System.....................................196
6.2.
The long-term....................................................................197
6.3.
How Long-Lasting is an Investment in Investment? you
say? 200
6.4.
Examples of Portfolios......................................................201
6.5.
The Age in Bonds..............................................................210
6.6.
How many ETFs in Portfolio?...........................................212
6.7.
Dividends: Accumulation or Distribution?.......................213
6.8.
The Benefits of Diversification.........................................214
6.8.1. A Practical Approach to Diversification....................214
6.8.2. Diversify by Number of Assets..................................215
6.8.3. Diversify by Asset Types...........................................216
6.9. The Benefits of Rebalancing.............................................218
6.10. Which Fixed Income ETF to Choose?...........................223
6.11. Emotional Errors and Investment Contract Zionist.......224
Achieved.......................................................................................226
left” 226
6.12.2. Extract at ”constant purchasing capacity”..............227
6.12.3. Extract a ”constant percentage of the portfolio”....227
6.12.5. Variable Percentage Withdrawal............................228
Crisis................................................................................................235
7.1. When Will the Next Crisis Come?....................................236
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7.2. Ideas to Protect Us from Crises.........................................237

Epilogue...........................................................................................239
Thanks..............................................................................................240
Recipe book......................................................................................241
A.1. Steps to follow......................................................................241
A.2. How to Choose an Online Broker?.......................................243
A.3. Example of Investor Contract...............................................244
A.4. How to Choose which Stock Market to Trade?....................246
TO 5. How to Choose an Index to Follow?..................................250
A.6. How to Choose an ETF that Tracks an Index.......................251
Certain?........................................................................................251
A.7. How to Decrypt an ETF Token?..........................................254
A.8. How to Purchase an ETF?....................................................258
Deduction of the equations..............................................................262
8.1. Savings equations..............................................................262
8.2. Expenditure equation.........................................................269
8.3. Combined savings and spending.......................................273
Resources.........................................................................................285
Books............................................................................................285
Articles.........................................................................................285
Websites.......................................................................................286
Contact the Authors.........................................................................293
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Foreword
Dear reader, thank you for reading this book.

We have written it according to our vision of the world, according to what we wanted to do,
because we believe it can be useful to other people.
At the time we asked ourselves how we could save for retirement. lation, and we went looking
for information. As we were training, we took notes as a reminder. After time we realized that we had
learned a lot, that all this information could be useful to other people, and that it made sense to
publish it. At least as a challenge, because we both have our jobs that have nothing to do with writing
books.
By the time we realized it, we were very into the idea of Financial Freedom. We were saving a
lot, investing and receiving passive income, so we could consider things like changing jobs or moving
without worrying about emptying the checking account. And passive income grew year after year,
what is the limit?
For our plan, we have used ETFs (also called exchange-traded funds), but the reader may have
other ideas. There are multiple ways to earn passive income, income that comes with minimal effort
on your part, while you do something else. In our case, we save most of our salary and then invest it.
You search, compare, and if you find something better, buy it.
You can consider this book as an introduction to Financial Freedom ra. We hope to leave the
reader wanting to continue searching for more information on these topics, and that is why we have
included countless links to websites, articles and books to continue delving deeper.
Good luck!
Warning
The reader should note that this book is not intended to make you buy a certain any product or
hire the services of a specific company. No. We have no relationship with any particular financial
company, we do not give recommendations in that regard and we certainly do not take commission
for any product or suggestion provided.
We also have no ability to predict the behavior of the stock market. The value of investments in
the stock market may fall. In fact, at some point it will, for sure. Therefore, the reader remembers that
"past returns do not guarantee future returns."
This book only shows the vision of its authors, it is written with the best of intentions, and with
the information available to a small investor. But we are not qualified financial advisors, what is
shown here is what we have learned in finance courses, reading books and documenting ourselves
internationally. net. This book only shows the opinion of two citizens who have been educated on the
subject.
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If you are thinking about following the path of Financial Freedom, you are welcome, but do not
forget to document and prepare for it. It's your beef responsibility.
We place a lot of emphasis on ETFs as a form of investment, as ob have information about them
and how to use them. This is the route we have chosen, however the reader may have other ideas.
Be that as it may, educate yourself, never stop reading. We have chosen ETFs for multiple ple
reasons, fundamentally because they are very transparent and we feel safe by minimizing the
possibility of being deceived. Furthermore, no one can guarantee that ETFs will remain a good idea
forever. Nobody can guess the future. Be aware that what is great today may be a disaster in the
future. Prepare for changes, just in case.
During the text, we also write some expressions in English. Keep in mind that in a globalized
world, it is best to take advantage of the language in which most documentation is written. This
allows for more abundant and updated information. We recommend that the reader make one of their
first investments in learning the English language, if they have not already mastered it.
We have done everything possible to provide reliable information and review this book a
thousand times, we hope you find it useful.
And finally, if you think that what is discussed here is interesting but you don't feel completely
sure, ask an expert. But be aware that experts have their own interests, which do not have to
coincide with yours.
Website with Links
This book contains countless references to websites, articles, videos, etc. To make your life
easier, we have grouped the most relevant links on the following web page:
https://losrevisionistas.wordpress.com/enlaces-sobre-libertad-financiera
The following QR code will take you directly there:
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Chapter
Introduction
In this chapter we provide general information about the book, about what we have done, how
we have done it, and why we have done it.
1.1. What is this book about?

This book is about the so-called Financial Freedom, the ability of people to be financially
independent and not depend on third parties. This idea is related to early retirement as we will see
later.
It is important to emphasize that the reader will not find a way to get rich here. No. There is no
easy path to it, and this book is certainly not about that. In this book, however, a way of living is
explained that allows people to have a fuller life, without depending on others, and especially without
depending on the state.
This is not a direct path, it is not a clear route that must be followed. Each person will have to
make their decisions and choose within their own margins.
Regarding the book, each chapter contains the following.
• Chapter 1 (introduction) is this same one.
• Chapter 2 (planning) presents an overview of what oars to get. What is the objective, and how
to achieve it. Details are presented in later chapters.
• Chapter 3 (the mathematical theory) presents the arguments related to savings and
investment. This chapter may be a little dry for many readers, but it is of great importance
because it justifies mathematics. ethically that what we want to do is possible and realistic.
• Chapter 4 (investments) gives a brief overview of the different ins savings instruments
available to a small investor.
• Chapter 5 (ETFs) explains how ETFs work. By knowing their strengths and weaknesses we
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can take better advantage of them.
• Chapter 6 shows how to use ETFs as building blocks for build an investment portfolio.
• Chapter 7 (crisis) brings together ideas related to overcoming crises. It is something important
in itself, so we have decided to dedicate an entire chapter to it.
On the other hand, there are several appendices that provide auxiliary information.
• Appendix A (recipebook) provides steps to follow for several common situations. The
objective of this chapter is to serve as a reference, as a quick guide.
• Finally, Appendix B shows how the equations in Chapter 3 have been derived. This is
probably something that the reader will not want to read, the goal is simply to demonstrate
mathematically that the steps to follow are well founded.
Note, the reader, that we provide an enormous number of references. This book tries to
comment on many topics, leaving the doors open for the reader with interest to follow the links or
read the indicated books. Educate yourself, these sources are a good first step.
1.2. What is Financial Freedom?

This is the objective of the book, to show that it is possible to achieve Financial Freedom. But
what is this?
Financial Freedom is the state that a person reaches when they consider Have enough income
to cover your needs, regardless of whether you work or not. That is, automatic income, without the
need to work.
This freedom is, as we will see, proportional to the time that one can live on what one saves.
And it is very interesting to know that there is a limit to how much we have to accumulate, because if
we managed to save 25 years of expenses, we would no longer need any more. In other words, a
capital equivalent to 25% of expenses, invested in passive funds, generates an amount per year
comparable to a year of our other expenses. Put safety margins and all the precautions you want
now, but that doesn't change the mathematics.
This passive income, generated independently, without having to work for it, can be obtained in
several ways. Some examples are renting apartments, rights to books or music, financial income, or
simply mind being a retiree and collecting a pension. In this book we focus on one type of financial
income: investment in passive funds, in particular exchange-traded funds, known as ETFs in English
( Exchange Traded Funds ). This has been our choice as it best suits our needs.
In this way, working becomes optional. Something that makes us feel better, or complements our
income. Or better yet, it allows us to choose what we want to work on.
This topic of Financial Freedom has two branches: on the one hand, the te of the income, but on
the other hand the part of the expenses. The fewer needs we have (less expenses) the less income
we will need, and the sooner we will reach Financial Freedom. This book is not written for the rich ,
but for middle class people who can change their way of acting, save, and change their destiny.
This also implies the possibility of stopping working, of retiring. Western society is built around
work. Not having a job, being unemployed, is something negative. Society pursues full employment.
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Therefore, the fact that someone considers stopping work because they don't need it is something
shocking. We will discuss this topic later.
When we refer to stopping working, rather than retiring we mean retiring . Well, retirement has a
negative meaning, of being apart, and that is not true. What we want is to have the freedom to do the
things we like in our free time, because working is no longer obligatory for us. Retirement for joy,
celebration.
Why does everyone buy a house? And if they do well, why do they continue to buy more
houses? Why do we have to buy more and more things? Everyone criticizing consumerism and
everyone spending every last euro they earn on anything. Why work until you're 67? Why not stop
earlier, or later?
You see the people around you, friends and family. Almost no one feels satisfied with their job,
and yet almost no one does anything to change. This book serves to indicate an escape route,
something we can do to modify our lives and be happier. We proposed it and we get And in this book
we are going to tell it.
This is not for the rich, anyone can get it. There is nothing more than spending less than what
you earn for a number of years. Save a lot, invest simple, spend little.
1.3. Why Write this Book?

The ideas that we have described in these pages are not studied in school, they are not common
topics of conversation, they are not debated on television talk shows. It is a knowledge that is largely
outside of society. Talking about money is frowned upon, and the financial world is pure evil.
That the state prefers to prevent these issues from being discussed in schools and institutions.
tutos causes countless problems. This leads us to the fact that deception ends certain things are on
the agenda, that the average citizen is not clear about the meaning of general economic and financial
concepts. For example, stock options or preferred bonds, or if a percentage of profitability of a
financial product is normal or suspiciously high.
This knowledge has taken us authors a long time to achieve. Learning, in any aspect of life, is a
slow and random process. It has required effort, and this book serves primarily as a summary. In it
we have been writing the things we have learned, with the intention of always having them on hand
as a reference manual (and the best example is the recipe book in Appendix A).
All of this came about as a way to save for retirement. We had to plan how to save if we were
going to live in another country and this made us have to consider the regulations of different
countries in the European Union. The different legislations are very local, relatively arbitrary, and can
change at any time; and in the end we made our decision: ETFs that are simple, predictable and easy
to move from one country to another.
At some point we were discussing these issues with those around us. Slowly, with caution, after
all one does not want to involve third parties in an adventure that may be frowned upon. Having to
explain different topics and argue against common objections is when you realize how much
knowledge you have. Which is not five minutes, but takes time.
Shortly after, the idea of making it public arose. If the information available here is valuable to us,
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it may also be valuable to other people. It would be a great joy if this book was useful to others, and
for other people to achieve Financial Freedom.
We also wish to encourage debate about the ideas, methods, and objectives shown in this book.
Maybe in this way we will get a better route to Financial Freedom.
In any case, we have no other way out. We, citizens, cannot Let us leave something as
important as our own judgment in the hands of others. bilation. If we did so, our conditions would
worsen year after year. This has been happening for decades with public pensions in Spain. Letting
ourselves go and leaving this responsibility of providing us with a pension in the hands of the state is
the route that requires the least effort from us as people, the most comfortable, but nevertheless it
also leads us to dependency and to a certain extent to poverty.
Finally, Western society has achieved a level of freedom that was unthinkable for our parents.
Today an average citizen can set goals in his life that would have been impossible a few years
before. In the past we citizens had to be content with surviving, today however we can choose what
to do with our lives, our time, our resources. Today's young people, even with their difficulties, have
tools at their disposal that their parents could not even dream of (internet, mobile phones, modern
medicine, low-cost flights, etc.). And the offer available to invest has never been so wide and cheap,
and here come passive investment and ETFs, which have revolutionized the financial world. ETFs
represent “do-it-yourself” investing. Diversified, simple and cheap; ETFs are to investing what IKEA is
to furniture.
1.4. Who has Written this Book?

This book was written by a couple who, like everyone else, at one point asked ourselves what
would become of our retirement. What retirement pension are we going to have? How can we save
for old age? After much thought, we reached the conclusion that we show in this book.
Without great financial pretensions, retirement seemed like a distant and unattainable dream.
Delaying year after year, as we grew older. To the concerns common pations is added to the fact that
we have lived in several countries, and the way to save for old age is always different, complex and
to a large extent arbitrary. ria What can we do? This book shows our conclusions, our answers to
these problems. These answers will vary from person to person, but it seemed reasonable to put
them down in book form, initially for ourselves, then because it might be useful to someone.
1.5. Who should read this book?

At first we were taking ideas for ourselves. Ideas that we saw that were useful to us from a
financial point of view, answers to questions questions we all ask ourselves. Should we buy a house?
Is it better to buy or rent a house? If we save, how much could we accumulate? How should we save
for retirement? Trying to answer these questions tas, we realized that we have had to learn many
things. That financial knowledge (spend less than you earn, save, don't worry) debt) is very rare. That
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it is not complex, and that a little effort gives great benefits (not necessarily pecuniary, but valid for
life). gives in general). Then we realized that what we have learned can be useful to other people. So
we have ended up writing this book thinking about sharing everything you will find in the next
chapters.
We would say that this book is aimed at people who are beginning to worry about retirement,
which happens when you are middle-aged and have already been working for many years. But on the
other hand, it is also true that both the style of the book and the approach to the problem and the
solution are younger. And in fact, the sooner you think about this problem and establish a plan, the
better. So the reader is probably an adult at work but young at heart, or simply a precocious young
person.
We would say that this book is aimed at all those people who feel dissatisfied with their work,
that does not fulfill them. Also to those who plan teen what is going to happen to their retirement, that
they see it as unattainable. We hope that this book serves as a reflection, as a starting point to read
more on the subject. I hope it helps you!
What is certain is that this book is written for normal people. Per ordinary people who make
extraordinary savings and investment decisions. People who notice that they spend a good part of
their salary on a car to go to the office, a suit, a telephone, food in the office canteen... all to receive a
salary in exchange for work, with which to pay for all those expenses... that are necessary to work.
Can we escape from this whiting that is eating its tail?
1.6. Are there other people doing the same thing?

As will be discussed in the text, Financial Freedom is not something new or strange. There are
many people who are already following similar precepts. lares in their lives. For example Jacob Lund
Fiske rXXVII and Mr. Money Mustache . They both live in the US, where these things are easier to do.
In Europe, considering English-speaking blogs, we have Econowiser (Dutch), No More Waffles
(Belgian), What Life Could Be (living in Ale mania and very good at creating community with their
Financial Independence Week Europe ) and many others.
In Spain, for example , Homo Investor, Sergio Yuste of Gestión Passiva and the blog “Impuestos
Libertad Financiera” among others.
The idea of using ETFs (also called exchange-traded funds) largely comes from the Bogleheads
blog. On its website the reader will find a multitude of people who use them, either as a way of saving
or to live off the dividends they produce.
And there are a huge number of people who invest looking for the di company videos. To buy
shares of selected companies, and live off the dividends. Section 4.1.8 provides an interesting list of
bloggers. We have similar goals and problems, so it's good to keep your eyes open to what they say.
XXVII See his excellent book Fisker, Early Retirement Extreme
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1.7. Why is what this book discusses so unusual?

This is a good question and there are several good reasons.
As we have seen in the previous section, in the US there is more room for citizens to solve their
problems by themselves. There are many people there who have already chosen this path. But in
Europe it is the state that provides basic services such as pensions, and we are not used to saving
for pensions. The thing is that the state has not educated us for it.
Given the lack of efficiency of the public pension system, citizens given us we have to try to
solve our future. Since public pensions fail recurrently (since every few years the state changes the
conditions unilaterally, and always for the worse for the citizens), we have to do something. This is a
great incentive, because doing nothing is a perfect recipe for disaster.
Until a few years ago there were no investment banks that worked with small investors. Or we
had a few large banks that had no competition, a monopoly situation, where they had no incentive to
provide good service to their customers (section 4.1.4 details what you get when you trust a bank).
However, today, thanks to online banks, there are many possibilities, and which one is better.
Before in Europe we did not have a common currency, so the mo Money transfers were slow
and complicated. Now with the euro we can invest wherever we want in Europe, in the company we
want. Or me Even better, hire any European company to provide the service. Many more options,
better for citizens.
Globalization had not been widespread at all levels. This made investing internationally very
complicated, and this is one of the strong points of financial markets: the ability to invest around the
world.
The Internet is now ubiquitous and omnipresent, this has changed everything. Being able to buy
or sell through web platforms, at any time, almost instantly, and with ridiculous costs.
Information is now available to anyone and at any time. At all levels, for example the value of
financial assets, news or training courses. Details about any financial product are quickly accessible
through the web. And also through the web you can find infinite information about economics,
finances, blogs and forums about Financial Freedom.
Furthermore, the emergence of ETFs is relatively modern. The first ETFs emerged in the US and
Canada in the early 90s, and arrived in Europe in the early 2000s. After a decade available in
Europe, they have gained strength, and it is now that small investors can take advantage of their
advantages.
In short, there have been a series of events that have revolutionized the way in which people
can seek savings and investment. We have reached a situation in which citizens have many more
possibilities. abilities than a few years ago. Now we can be self-sufficient, solve our problems
ourselves. It's the do-it-yourself philosophy. Nun Almost before, we citizens have had so much
capacity to achieve our dreams. Now is the time to take advantage of it.
1.8. But Is This Morally Acceptable?

What is explained in this book is very simple: save to invest in money sa, to obtain passive
income so that it replaces work income. And someone might wonder if this is legal, or on the contrary
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reprehensible.
On the one hand, there are those who could argue that “living without working” is immoral. ral.
Given a work ethic to which we are accustomed, not working is a bad thing. We don't see it that way,
since if there is capital today it is because work has been done in the past. It is not capital that comes
from nowhere, but has been saved. Therefore we do not want to encourage lazy drones, no, the
basis of our capital has been achieved with a lot of effort over the years. The work has come first, the
investment later.
Furthermore, we could squander all our monthly income greatly from cars, trips, whims,
restaurants, etc. But if we don't do it this way, if we save our income, we will be better protected
against future unforeseen events. Saving is a responsible attitude, and not doing so would be
immoral.
If investments generate passive income, it is not because they are immoral, but because they
receive compensation for the risk taken. If I did not receive If we were compensated by investing then
no one would invest. And that would be very negative for society as a whole, because investment in
pro-business companies is ductive which improves the economy and leads us to live better. The
investor is contributing to society, and not in an ethereal or confusing way, with hard cash. Therefore,
investing is very positive for people (by receiving dividends) and for society (by improving the goods
and services available).
It can also be argued that the company does not receive profit or per judgment of the fact that
we buy your shares. That when purchasing shares, except in the exceptional case that it is a public
offering of shares, they are always purchased in the secondary market (that is, they are always
purchased from another investor who owned them before). And in the same way that when buying a
second-hand car the car manufacturer does not receive any money, if someone buys its shares on
the secondary market the company does not receive any money. While this is true, we must not
forget that the value of the shares is like a thermometer of the state of the company, and that
companies want there to be demand and high prices for their shares. For two reasons. First, because
if the company wanted to do a capital increase, they could offer new shares at a price similar to the
current ones, and in this way, the greater the demand for their shares, the higher the price, and a
greater source of financing for the company. Secondly, the total value of a company is its
capitalization tion in the stock market minus its debt. If the value of the shares remains at zero, that
means that in the event of bankruptcy all the value of the company would go to pay debtors and
nothing to shareholders. And the last thing a company wants is to imply that it has excessive debt,
that it may go bankrupt, and that it is not going to pay its owners (shareholders). So they are very
interested in him going The value of their shares is as high as possible, offering incentives (dividends)
so that there is interest in buying them.
On the other hand, approaching the problem from another side, we could also ask whether all
investments are morally acceptable. In this case We enter the field of “Socially Responsible
Investment” and ESG ( Environmental, Social and Governance ). This topic is very discussed, nor
badly by people of religious convictionsXXVIII , or in more recent times due to interest in caring
XXVIIIWilson, “Islamic Finance and Ethical Investment”
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for the environment. There is a huge variety of possibilities to invest according to moral principles
.XXIX . So if what you want is to focus on a group of positive companies, or avoid negative ones, what
you have to do is invest according to the appropriate index. More on this topic in chapter 5.
1.9. Our history

Before starting the central chapters of the book, it may be interesting for the reader to know
about our lives. How did we come to write this book? You will surely find parallels with yourself that
will help you get to the task.
We are modest, let the reader refer to ourselves as Will and Fog.
To begin with, we will say that we are a couple belonging to the Erasmus generation, so through
"h" or "b" we have been able to travel a lot around Europe. Whether for studies, for work, or simply for
backpacker tourism.
Looking back, you could say we were good students. One of those pure sciences, beautiful
mathematics! And then when we started our professional lives we entered the world of science and
technology. nology.
We met as co-workers, in the years before the 2008 crisis. Everything seemed to indicate that
we would spend our lives in the same place, so we started buying an apartment nearby. We didn't
like the idea, but it seemed reasonable, after all it was what everyone did. This has been the worst
decision of our lives, at least to this day. Buying an apartment traps you in one place, forces you to
have fixed expenses and on top of that it suffered a loss in value due to the crisis (we discussed this
in section 4.1.2) . But unfortunately we learned all this after the fact . Just a few years later it is worth
half as much. It is a unique experience to pay monthly mortgage payments for an apartment that is
not worth it.
Fog wasn't satisfied at work, so she started searching. He saw a vacancy in Holland, applied for
it, and got it. A certain carom that we did not expect. What to do? Give up the security of having a
permanent position in exchange for the uncertainty of a new job? And with a newly started mortgage?
It didn't matter, it was an adventure, and away Fog went. So Will started looking too, and a few
months later he found a job in the same city.
Holland is a charming, small country, and very open to the outside world. Life there is very easy.
You learn the local language out of courtesy, but everyone speaks English, and since there are many
foreigners you never feel alienated. So living in Holland was very easy and a highly recommended
experience.
In fact we have good memories, especially at work. With labor deals as God intended (goodbye
scholarships!). Finally the right to unemployment, pension, health insurance and even vacations.
The world of science is curious. One comes to accept absurd working conditions and even work
for free. At the end of the day, “you work on what you like,” as they told me. Or the "dinosaurs" of the
place also remembered "so much talk about vacations and social security, because in my time when I
started we didn't ask for so much." This will perhaps be a topic for another book.
XXIX MSCI, Setting the standard in ESG Indexing
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Years passed and Will exhausted his temporary contract. So before it was over he started
looking for work. After traversing Europe from north to south and east to west, a possibility arose in
Germany. Once again a decision had to be made. Fog had a permanent position. Was it worth the
risk of moving to another country? Well yes, there we went.
One thing that has made things a lot easier is that we have a rule as a couple: we will live where
the best job of both of us is, and the other will follow the one who got it. And so far it has worked for
us.
So Will went to Germany. And again, Fog started looking, and after 4 months he found a job in
the same city. All perfect.
During the German stage there have also been changes. If there were problems in the company
and there was no way to solve them, there is nothing better for mental health than looking for another
job. And iterate until you find the solution.
And so many changes have turned out well in the end. And if they didn't go well the first time,
then try again. Because taking risks has a reward. They always told us that we had to look for a
permanent position for life, get into a good company, and then stop worrying about work. Well, that
can be done, but it is not of interest to us. We have resigned from a few permanent positions, and
each change has been better for us. If we had settled for what we had, where would we be now?
Certainly not writing this book.
Furthermore, people tend to think in a linear future where we progress step by step towards a
predetermined goal. That's how we also thought when we were younger. However, the decisions we
have been making have taken us along routes that we simply could not imagine, that were outside
the range of possibilities that we believed would lead us. we were Being open to new ideas has
allowed us to go further than we could ever dream of, and looking back is dizzying.
An interesting argument is that although changes improve, changes are not free. Moving,
rebuilding life in a new country, flights to see family, new friends, paying a new rent while paying the
mortgage on the empty apartment in Spain; All of these are costs. It's worth it, true, but in the short
term it is exhausting and an economic disaster.
At a certain point we started to worry about retirement. What could we expect in the future?
Where have we contributed and how much? And of course, this was worthy of the House of Terror.
Small contributions from country to country, with public and private systems. Will, for example, never
contributed to the public pension in Spain. This is very important, because you will never be able to
contribute the 37 years required to collect the maximum pension (and this can only get worse). Even
considering the 25 years of minimum contributions, it would have to be entrusted to some saint for
Spanish social security to recognize the years of contributions in other countries. Be that as it may, it
doesn't matter, because we neither want to contribute nor receive from the system.
Given the uncertainty about pensions, we were training, read doing and attending various
courses on investments. They did not specifically address mind about pension plans, but they were
very good at learning how the union works. And with that information you can then review your own
pension plans, and then scream in horror.
For example, thanks to knowing about investments we realized that the advisor had slipped it on
us. We had contracted a pension plan not recognized by the German government (without tax relief),
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Sep 2021
which is It was charging 6% of each new income (of every 100 euros sent to the plan, only 94
reached the fund, 6 were kept as a commission) and then the management expenses were 2.5 %
annually. Maybe this doesn't mean anything to you, but it doesn't matter, we already told you: it is
roughly 10 times more expensive than what you can do yourself. Imagine that you have a coffee and
pay 2 euros. Now imagine that you go to the bar next door and pay 20 euros for the same coffee.
What do you think? Well that. And to top it off, the fund manager decided to govern according to
German legislation, which requires that these commissions have to be estimated for the entire life of
the plan and paid during the first 5 years (that is, during the first 5 years practically only expenses are
paid, nothing is saved). Does legislation help citizens or does it really trap them? And even more so,
because only with a lot of effort did we manage to find that the money was invested in passive funds
with a fixed time horizon (somewhat relative usual mind: part in bonds, the rest in stocks, the
proportion in bonds increasing as the years go by; all very general and passive; easy and cheap to do
yourself). With such an expensive cost and being largely invested in bonds, we lost purchasing power
year after year. For something we could do ourselves up to 10 times cheaper (which is what we are
doing now, what we talk about in this book). It was absurd.
Also thanks to having learned about investments, one can talk on an equal footing with
salespeople at bank branches. Talk about expenses, investment security, what you invest in, past
returns. We have done it on several occasions and have been shocked to see that they could not
answer our questions. And the person you talk to will surely be a salesperson , not an expert . But
don't take these words at face value, it may be different for you, so educate yourself and do the
testing yourself.
So here we find ourselves, hopping from country to country, thinking about how to save for a
pension when we retire. And by chance we discovered the world of Financial Freedom and passive
income.
On the other hand, we have always been very savers. When I was little I remember that my
parents told me that the Three Wise Men couldn't bring expensive gifts, like a Spectrum computer,
and that in any case the shipment could be delayed to the following year. And I accepted it!
Perhaps more than savers it should be said that we do not have expensive tastes. A very
characteristic example: going camping. We love going camping, whether in the mountains, the
Camino de Santiago, bicycle routes or whatever. We did it as teenagers, going to the mountains with
the tent. Now time has passed and when we say we are going camping they make strange faces at
us. Hold on! they tell us. It seems that it is a way of spending the summer that has gone out of
fashion. People generally go to an apartment on the beach, or take a plane to see distant places.
Very good for them, but we like to go camping.
We are happy to spend less than we earn, and thanks to this we have savings. These savings
give us freedom. Freedom to live where we want, to work where we want, to learn what we want. It is
always possible to spend a little less than what you earn, and if not, you only have to think about what
your parents' standard of living was, which was surely lower than yours now. If you can live like your
parents lived, with the equivalent expenses that they had, then you can save. And if you save today,
you will be free tomorrow. It is what we have done in our lives, that we have been able to make the
decision to change jobs or change countries, without being limited by how to pay the bill for the
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change.
We also want to write this book to infuse energy. Another world is possible. Nobody is
completely happy with their life. Ask anyone, almost everyone complains about something.
Unpleasant things happen to everyone. But after time, with effort, that was left behind. Everything is
overcome, how far away are youthful concerns!
And it is true that everything can be improved, but it is also true that it will never be perfect.
Rather than looking for the best in absolute value, we have done well looking for the best relative ,
within the options we had available at that time. There have never been more options than there are
today. The current generation can now travel, work, shop, learn more than any previous generation
could. The range of possibilities is almost infinite. Geography is now irrelevant, because with the
Internet you have access to all the information in the world wherever you are. Life has never been
better than now, optimism is not an opinion, it is a fact.
The ability to choose that today's citizens have, together with the do-it-yourself philosophy, is
what allows you to have this book in your hands. Educate yourself, study your situation, act
accordingly, and good luck. Passive investing and ETFs in particular have worked for us in different
countries, they can be useful for you too.
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Chapter
Planning
One day Diogenes of Sinope (412–323 BC) was dining on lentils when the
philosopher Aristippus, who lived comfortably, saw him. stably by flattering
the king.
Aristippus said to him:
– If you learned to be submissive to the king, you wouldn't have to eat
lentils.
To which Diogenes replied:
– If you had learned to eat lentils, you wouldn't have to flatter the king.
In this chapter we show a global vision of our objectives, and some indications of how to carry
them out. In the next chapters he delves deeper We will work out the details to achieve it.
2.1. Aim
This book focuses on achieving freedom to do what you want, without having to depend on
others. In this case, a boss enters for whom you have to work and in this way get a salary at the end of
the month. Or clients if one is a small businessman or self-employed. Another example is the state,
which by the time we reach retirement, those of us who are currently working will not be able to
provide us with a pension that maintains our current standard of living.
Here we focus on showing how to solve the warehouse problem ing of resources during life. How
when young people convert income into wealth and, over time, undo the change and convert wealth
back into income.
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But how to get a salary for life? It sounds like a television commercial, but it is possible. The first
thing to note is that there is no easy path. We are of the opinion that if this is achieved it is because we
have previously worked hard for it.
Images of lottery prizes, substantial inheritances, and wealthy families will come to mind for the
reader. Any of these cases would be very good come and that well-spent capital would undoubtedly
contribute a lot to retirement. These extraordinary resources could be invested in the same way that
we will explain in the following pages. But we don't want to talk about mila here gros, of strokes of luck
that change our lives. No. We want to talk about ordinary people who save. We want to talk about
planning, effort and reward. To make a plan, follow it, and finally enjoy its result.
J.L. Collins comments on it very well in his book.XXX . It's all about spending less than you
earn, investing what you save, and avoiding debt. Easy.
A common criticism is that all this can only be done by a private person. privileged, a person who
has high income. That a “normal” person cannot aspire to Financial Freedom. We don't see it that way.
Or at least, what is meant by “normal” should be defined. If the normal thing is to change cars every 5
years, live in a chalet with several bathrooms, spend the summer in an apartment time on the beach,
going on a honeymoon to the Caribbean, or having the latest electronic gadget in your pocket; So
okay, that's hardly possible guide Financial Freedom. But if you have a utility vehicle that uses less
than a cigarette lighter, that you bought years ago, you live in a simple apartment, you spend your
summer camping, and your mobile phone is a generic Android; then you have Financial Freedom at
your fingertips. In this case it is true that it is not enough to be normal, you have to be exceptional, to
make decisions that reduce the cost of living day to day.
What to do if you had extra income?
Imagine that the end of the month arrives, you have already paid all the expenses. tuales, and
now comes the next income from his work. You have 1000 euros in your account that you have
left over, money that you have not needed this month. What would you do with it?
• You could spend it. For example, on a vacation somewhere exotic, something exceptional,
you deserve it. Or a new mobile phone, since yours is already old. Or in elegant clothes,
because the ones you have in your closet are already out of style. In all these cases the
money is consumed, and will not return.
• You could buy something on credit. It could provide the down payment to buy a new car,
for example. A car that will use less fuel, that will require less maintenance... in the future.
Because what it is now requires you to pay the initial loan and then a monthly amount.
This is the worst decision, the one that ties you and makes you a slave.
XXXCollins, The Simple Path to Wealth

You don't have to be an engineer or a successful businessman selling your company to make a
living doing anything you like, without having to go into the usual 9 to 5 job. There are many bloggers
who have already done it, for
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• You could invest those 1000 euros. In the bank on a fixed term, on the stock market, or
buying a house to rent. A typical return (for example from rental) could be 4% per year
(see section 3.4) . That percentage would become 40 euros a year that you could spend
on whatever you wanted. It seems little, but keep in mind that it would be inexhaustible
income for life.
• And you could invest those 1000 euros, and reinvest the profits, to continue accumulating.
Letting the investment grow fully, as quickly as possible. In this way, your investment
would grow exponentially during a savings phase. In the long run, if you've accumulated
enough, that 4% may be enough for your expenses. We are no longer interested in 1,000
euros, now we want half a million, because 4% of half a million is 20,000 euros per year,
about 1,600 gross euros per month.
What matters is not what your money can buy, but what you earn. ences that your money can
generate.
for example Mike and Lauren (a self-taught computer scientist and an administrator), or Gone with the
Wynns (a makeup artist and a photographer).
And if you have questions, please ask a person who comes from a less fortunate country. Ask
them what they think about poverty in Europe and in Spain in particular, and if they see any possibility
of prospering in Spain (or whatever developed country it is). We have had several of these
conversations, and they are most clarifying.
In fact, compare a person who is rich and famous but without any relevant skills, with someone
with valuable skills (for example a doctor or an engineer). One is predisposed to assume that the rich
are better. However, note that this person with great purchasing power is going to lose his wealth
sooner or later. If you do not provide extra income you will end up depleting your fortune. However, the
person who has valuable qualities can offer more in the job market, and has greater chances of
success in the long term. This book is not aimed at people with high purchasing power, at least not
only at them, but at people who work and with their efforts achieve the goal of Financial Freedom.
What we want in this book is to show how to “live off income.” Ah or save enough during the first
stage of life, to later be able to live off what has been accumulated.
The expression “living off income” has an undeniable pejorative meaning in street language.
There are always those who claim that it is unfair for someone to live this way, and that these people
should be expropriated. If you live in a country like this, we wish you good luck. Try to change your
country or immigrate to a better place. From now on we assume that the reader lives in a country
where private property is respected and where citizens are not expropriated at the discretion of the
politician in power.
Living off income is not a negative thing. On the contrary, it is very positive. On the one hand
because the citizen "has earned it." Thanks to his efforts, he himself has achieved it. On the other
hand, because an investor "contributes to society." It is capital, delivered to productive companies, that
allows society to continue advancing. It is not stolen money, on the contrary, it is invested capital that
reverts to society.
Having accumulated income for years, the reader will have a ca pital. This capital will not simply
be accumulated in the bank account or under the mattress. No, this capital will be wisely invested,
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which will bring you benefits, for example in the form of dividends.
A parallel way to consider this capital accumulation is to think about the purchase of a home. It
requires an initial investment to purchase, but if this home is later rented, it provides a profit to its
owner. And furthermore, we can count on the fact that in principle the value of the house varies with
inflation, so no money is lost in the long term (although this is only an approximation).
The most important parameter in this equation is not how much is invested and how it is invested.
The most important thing is savings, and that is what the next section is about.
2.2. Importance of Savings

This is the most important parameter to achieve Financial Freedom ra. Its importance is such that
the fraction of what is saved with respect to the total income (or its equivalent, what is spent with
respect to the total income) is the main parameter to take into account.
Savings act in two ways:
• Because, obviously, you save more. By spending less, a greater profit Portion of income goes
to savings. This will allow us to take less time to accumulate a given amount of capital.
• Because you need less to live. Having smaller needs, a smaller amount of capital is necessary
to cover them. This is the fundamental argument, since it is not the richer who has the most
but the one who needs the least. Or, in other words, expenses must be controlled or expenses
will control you.
Both effects are detailed mathematically in chapter 3, both separately and jointly.
The concept of savings is closely related to that of preferen Temporary savings: you save today to
enjoy more tomorrow. It is a problem of attitude, of thinking in the long term.
In fact, this thinking about the future versus day-to-day life is one of the great differences in
mentality between the rich and the poor. People who define themselves as poor normally think in the
short term, about satisfying their immediate desires. This is a culture of poverty, of living in the
moment, carpe diem , because tomorrow we will be dead. However, if you can live below your current
means, you can save and invest, and enjoy much more in the future. This is not intuitive and the usual
thing is to spend everything one earns month after month, where each salary increase implies an even
5
increase in spending, and in this way one ends up being poor because one does not save r
6XXXIXXXIIXXXIII
. The personal economy diagrams we show in section 2.5 take much of this view.
Do your own math. If you and your partner have about 2000 eu net monthly income, that is
equivalent to about 24,000 euros per year, which totals more or less one million euros after a working
life of 40 years. Does that seem like a lot to you? Does that seem little to you? That's what it is, there is
no magic, the capital you have is the income that is not spent. Save first and then we'll see how to
XXXIKiyosaki's book, Rich Dad Poor Dad

XXXIIV Regil's video, How to predict your Financial Future
XXXIIIVideo of Bastos, The Paths and Ways Out of Poverty
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invest it.
But it's not all about saving and investing money. The average citizen does invest in the purchase
of a house, as well as their children's studies. Both are forms of investment, of time and resources,
that used today will bear fruit in the future.
2.3. Some Ideas to Save

This section shows some things you can do to spend less. We are not revealing anything new to
the reader, this list is nothing more than what we are making. You are probably already doing the
same thing, it is at least useful to comment on it and reconsider.
There are many websites that provide information on how to make a budget orXXXIV .
Adopt a frugal way of life. This is the most important thing, because the savings we achieve will
basically be what we do not spend. Ne Do we really need the car? Is it worth going on vacation to a
beach thousands of kilometers away and then not leaving the resort ? When was the last time you
went camping?
• Live close to work. Going to work is the main reason for Let's realize that we have people. We
can minimize both the time spent and its cost. Yes we can go to work by public transport co,
we can thus avoid having a car, with all that this implies in gasoline and parking. Going by bus
or train is cheaper and eliminates a lot of worries (ITV, maintenance, parking, etc.). guro). In
fact, compare how much it costs to take a taxi or rent a car occasionally, it is a fraction of the
annual cost of the car. Ade Furthermore, if instead of buying a car for 15,000 euros, that
amount were invested, that fund would produce the equivalent of 50 euros per month
(according to the rule of 300, see text box on page 73) ,
• Continuing with the theme of getting around, a very useful means of transportation is the
bicycle. It is very common in central and northern European countries, especially Holland. For
example, to do the shopping, it is easy to carry the weekly shopping if you put two saddlebags
in the back. Furthermore, for short trips, it takes practically the same time by bicycle as by car.
And on top of that it is healthier.
• Not smoking, just for health reasons, is a good idea. Furthermore, if you calculate We calculate
the cost of buying a pack of tobacco a day every day of the year, the end result may well be
equivalent to the net salary of a month of work. And three-quarters of the same applies to
drinking alcohol. In both cases the cost of these goods is fundamentally that of the
extraordinary taxes they bear.
• Fixed monthly expenses are also something to avoid. Or at least minimize it. For example,
magazine subscriptions or telephone expenses. According to the rule of 300, spending 1
euro/month requires around 300 euros invested.
XXXIV For example Wittwer, How to make a budget .
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• Food for domestic animals. In ancient times, in towns, animals have always eaten leftovers. Or
worse yet, they had to bus make a life for themselves. This is what happened, for example, to
cats and dogs. Nowadays, however, we think of them as if they were people, and we even
feed them our food. Curious, since that has never been their diet.
• Well insulated house. If you are buying or renting a home, this is an important point. Especially
if you like to leave the window for the cat to come and go out, heating costs can be very high in
winter.
• Buying the latest tech toys is very expensive. mobile phones vile, computers, etc. When
purchasing a latest generation device you are paying a premium to compensate the company
for the development of the product. It is those who adopt new technologies who pay the cost.
You can buy devices that are not the latest in technology, but that fulfill their function perfectly.
For example, a mobile phone that is not a well-known brand.
• Nowadays everyone has traveled by plane. For example, to go on vacation to beaches

thousands of kilometers away. A generation ago it was He talked about the jet set , the part of
society that could afford to travel by jet plane. They were few, only the wealthiest. Since this
luxury is accessible today to practically all citizens in rich societies, everyone affords this
luxury. But what does traveling so far do for you? If you are going to do the same things you
would do in your region, speaking the same language, eating the same food and drinking the
same food, maybe you can think twice.
• Pay all outstanding debts (for example, car). Interest rates on consumer loans are very high.
Look for a loan simulator on the internet, indicate the capital borrowed and the interest rate,
and be amazed at what you end up paying the bank. Debts are a drain on money, the less
credit you have the better.
• Commit to never buying consumer goods (for example, household appliances) on credit again.
Minimize credit card use.
• When you're saving, or when you're done saving, you may want to live in a cheaper area. But
not just moving from the city center to the outskirts, but rather changing region or even country.
The so-called “geoarbitrage”. This is a relatively common expression among the globetrotting
community, those who go backpacking to Thailand or travel the world by bicycle. Implicitly, we
all know that some places are cheaper to live than others. So it would be nice to earn income
in a country where high salaries are paid and live in another country where shopping is cheap.
An internet search will show you many websites of people who are doing it. An interesting
website to start with could be Numbeo, where you can compare the cost of living in different
cities and countries.
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And, very importantly, all this can also be achieved with children. Bloggers like Jacob Lund Fisker,
Mr. Money Mustache, and Econowiser are doing it.
Methods to Repay Loans
It is possible that you have several loans open right now: perhaps the mortgage on the house, a
car, a washing machine that you needed, credit card expenses, etc. When the time comes when
you have decided to get rid of the loans, there are at least two ways to do it. Look to see which
one suits you best:
• There is the most efficient option, which consists of organizing your loans We based on
your interest rate, the most expensive first. When this one runs out, move on to the
second most expensive, and so on. Leaving the cheapest ones for last. This method
minimizes costs.
• On the other hand, there is the “avalanche” option. Sort your loans by amount, with the
smallest ones first and the largest ones last. Start paying the least, for example, for an
appliance titic. When you have paid it, you will have the monthly amount that you already
had available last month, plus what you save by not paying the credit for the appliance.
This way, you can pay a larger installment on the second loan, finishing it sooner. And
when the second loan is paid, you will have even more monthly income to pay the third
loan, that's where the "avalanche" thing comes from. And it can be argued that paying
credits Cough is not a problem of mathematics but of attitude, of feeling that you are
making progress and being constant. Seeing goals being achieved helps keep you on
track.
2.4. Saving, for what?

So we have decided that we want to save, we want to spend less. Therefore we have to see how
to manage our income. We also assume that we want to live for ourselves, not off the crumbs of the
state.
In principle, we can establish three levels of savings:
• At first, the individual or family financial effort focuses on solving short-term problems, of
making ends meet.
• Subsequently, the objective is to have a financial cushion that allows you to overcome any
setback, such as a car accident or a serious illness. Normally this is what is called an
“emergency fund” and requires accumulating the equivalent of several months' expenses, for
example 3–6 months.
• Lastly, wealth is accumulated. The objective is to do the opposite in the future, and be able to
convert that accumulated wealth into income.
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Sep 2021
It is the achievement of this last point that this book is about.

Please note that the objective is to obtain income from the accumulated assets. Not accumulating
without rhyme or reason, not in being able to buy a brand-name car or a bigger house, but in having
passive income that allows us not to depend on salaried work. In not being afraid of losing your job, in
being able to work in what you like even if you have a lower income, or even stop working and spend
time with your children. This book tries to show how to have the freedom to choose, because your
freedom depends on how much you earn and how much you spend. Or put another way, the more you
need salaried work, the more dependent you will be on third parties.
But notice, as Jake says on his podcast The Voluntary Life , it's not just the destination that
matters but the journey as well. Have a job and a way to save that makes you happy. Something that
helps you get up in the morning, that makes you feel useful and that contributes something to your
family and society. Something that if something happens to you like an accident or a serious illness,
you don't have the feeling of having gone through life without having enjoyed it. Somewhere is the
happy medium, and you have to find it.
2.5. Personal Economy Diagrams

This section classifies various types of people according to their personal finances. them. Your
income and expenses are shown graphically, to have an intuitive idea of what the objective of the book
is, Financial Freedom. We follow the motto here that a picture is worth a thousand words .XXXV
A typical employee is shown in Figure 2.1, a person who money in figure 2.2 , various people who
spend more than they should in figures 2.3 and 2.4 , a saver in figure 2.6, and finally our objective in
figure 2.8 , where instead of working for money, you will have money working for you. Two auxiliary
diagrams are also shown: the usefulness of an emergency fund in Figure 2.5 and diagram 2.7 that
shows the relationship between a saver and a person in debt (and why it is in their best interest to be
the saver).
Figure 2.1: Salaried worker.
Let's start with Figure 2.1, which shows the situation of an employee. An ordinary person like you,
who works for a salary, with which he buys the things he needs to live. A typical work and consumption
cycle. In this simple case, there is only one source of income and you cannot spend money that has
not yet been worked. The amount of income that a worker can have is proportional to the time and
effort he or she dedicates to his or her job. For example, if you get a second job, or work twice as
XXXVThis section is a reworking of section 7.1 of Fisker, Early Retirement Extreme .
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Sep 2021
many hours, then your gross salary will be double.
Figure 2.2: Wasteful.
On the other hand, Figure 2.2 shows the much-seen example of a person or family that spends
inefficiently. Who spends on unnecessary things like big televisions, luxurious cars, or big houses. This
expense does not even affect the person, since it involves the purchase of unnecessary things.
Purchasing other less expensive but more efficient products would have been wiser. It is not
necessary to have the latest model mobile phone, a generic one will probably provide you with the
same service for a much lower cost.
When a person goes into debt, we find ourselves in the case of the figure ra 2.3. In this case, the
person spends so much that they have had to take out loans to supplement their salary. He uses part
of his income to purchase
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Sep 2021
Figure 2.3: Person in debt.
Figure 2.4: Highly indebted person.
necessary things, and the other party to repay the debt he has contracted (elect household appliances
bought in installments, car, house; Does it sound familiar to you?). This debt has allowed the purchase
of products that could not possibly have been purchased without debt, okay, but in exchange it
requires the payment of interest. A penalty that can absorb a good part of our income. As an example,
make a simulation of the cost of purchasing a house and check Note that with a regular mortgage you
end up paying several times the capital initially requested.
In the extreme case of a person who uses their credit card for daily expenses, we will find figure
2.4. All income goes to the bank, and from there it is extracted by purchasing with the credit card. This
implies great inefficiency, because although the card has the advantage of allowing payments to be
delayed, it does so in exchange for high interest.
These cases of people in debt are very well described by Robert Kiyosak iXXXVI . He talks about
the rat race , the madness he embarked on There are many people who, despite having a high
income, make huge expenses, without a balanced budget, drowning in more and more debt. The
continuous increase in more consumer products increases your expenses without limit. This leads to
working as much as possible, in a search never completely satisfied with more income, because no
matter how many increases in income these will never be enough. It's a consumerist trap. This causes
stress, lack of time, the frustration of being trapped, and the worry that truly any unforeseen expense
XXXVISee his book Kiyosaki, Rich Dad Poor Dad .
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Sep 2021
would cause you to not be able to afford it. to make ends meet. An example of this is that everyone
has a credit card today, even very young people, and yet few are clear about how much it is costing
them in both interest and maintenance expenses.
It may be reasonable to incur a debt if there is a good reason for it, if it is exceptional and under
control. But a person who lives in debt is not a free person. She cannot choose to stop working, she is
obliged to continue until she repays the debt to the person who lent her. Living in debt is living in
slavery.
Changing the subject, an important idea for anyone who wants to achieve Financial Freedom is
the idea of the emergency fund, represent ted in figure 2.5. Here we find that during a savings phase
we accumulate in the emergency fund (left area of the diagram), so that if tomorrow there were a
problem (for example we If we were unemployed), we could extract capital from the fund and continue
living (see right area of the diagram). A kind of unemployment (and accident, and illness) insurance,
which would allow us to move forward without changing our way of life.
We now come to the example of the saver, presented in Figure 2.6 . A person who has used his
resources, but as an expense , but as an investment . These invested resources provide interest that
allows the purchase of more goods. It can be a house, if you live in it or rent it. They can also be
investments in the stock market. These assets provide profits in and of themselves.
The saver could invest his income in his own projects, however it would be much better if he
could do so in large, reliable and stable projects. How to achieve this? Investing in the stock market, in
the largest and best-known companies in the economy. Those are the best projects. In fact, these
companies will choose which projects they want to invest the money in. They are the best option, and
on top of that they provide a source of income (their dividends).
Also note something very important: income diversification. To the
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Sep 2021
Figure 2.5: Usefulness of an emergency fund.
Figure 2.6: Saving person.
receive income from several independent sources, your future is more protected. If you lost your job
you would still be receiving income from your assets. And if there was a crisis and your assets (if you
were, for example, invested in the stock market) were lost, you would still have your job. Whatever
happens, the saver is better protected.
We have previously shown the cases of the person in debt (fig. ra 2.3) and the saver (figure 2.6) ,
and we now combine them to show the power of saving in figure 2.7. When a person saves, that
capital does not have to remain static. With that money in the account, the bank grants loans to other
people or companies, providing a return to the saver. On the other hand, the saver could buy
government bonds or cor poratives, which are basically the same idea of the loan. Or you could also
buy shares, which in essence is buying a company with the hope of collecting dividends or through the
increase in the value of the share. In all these cases there is a flow of capital from the debtor to the
saver. dor. Please note that this is a completely voluntary relationship, yes.
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Sep 2021
Figure 2.7: Relationship between saver and debtor.
Figure 2.8: Financial freedom.
Someone wants to live in debt, it's their decision. The important thing is to realize that you live much
more peacefully as a saver.
Finally we show the case in which Freedom of Faith has been achieved. nancial, in figure 2.8. In a
similar case to the saver, but now it is no longer even necessary to have a job. There is no salary
income, only through investment returns.
The amount of income a worker can have is proportional to the time and effort they dedicate to it.
In the case of an investor, the income These are proportional to the accumulated capital and do not
require full dedication. They are passive income. And that is what interests us. We are not looking for
investments that require attention, but only supervision.
It could be thought that the person who has achieved Financial Freedom is less diversified than
the saver, since he or she receives income from a single source (capital returns) and not from several
like the saver. It is therefore the investor's responsibility to diversify appropriately to avoid risks by
investing in the stock market, renting an apartment, writing books, or doing occasional jobs. A
developed financial culture is required to be able to obtain income from various sources.
Save while working
Note that everything explained here revolves around saving the income generated by work. You
have your profession with which you earn a living, and what you have left over is what you are
going to invest. You may win the lottery or receive an inheritance, but that is another topic.
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Sep 2021
2.6. Have a plan

We have already decided that we want to change our consumer habits. We can reduce our
expenses, to invest what we save, and later receive capital income.
It is important to set a long-term plan and follow it step by step. Not so much to become an
obligation and force us to meet the dates at all costs, but to be able to know if we are on the right track
or not. By setting intermediate goals and celebrating when you meet them, you become emotionally
invested and have a greater chance of success.
A list of objectives can help us achieve the ultimate goal of Financial Freedom. The intermediate
objectives will be achieved little by little, and thanks to them we will know if we are going to arrive on
time.
Table 2.1 shows an example list. It assumes that Financial Freedom is achieved in 20 years. It is
important to leave it in writing (or in a spreadsheet), to be able to compare what was planned with what
was actually achieved as the years go by.
This is only an indicative table, similar to the one we have followed. The reader can modify it to
his liking, especially the dates. The intermediate objectives may be other, but it is advisable in any
case to go towards them. idols step by step, fulfilling, for example, one or two a year. Reaching them
will be a joy, an injection of energy to continue with more vigor!
In practice these objectives will be achieved in parallel, a bit all at the same time. What we want is
to establish criteria that allow us to detect if everything is going as planned. It is not necessary to be
strict, but at least be able to justify whether we are going in the right direction or whether we have
deviated from the plans.
These objectives do not indicate whether they must be achieved as a single person or as a
couple, although everything will certainly be easier as a couple.
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Sep 2021
Figure 2.9: Evolution of the plan in table 2.1 . Plani example shown fied in that same table along with a
case in which it is late, and another case in which the objective of Financial Freedom will be achieved
ahead of what was initially estimated.
Table 2.1 presents the date of achievement of the objectives with respect to the initial start date.
Figure 2.9 presents basically the same information, the diagonal solid line (showing when the actual
date is equal to the planned date) shows the case in which the planned is exactly the actual case. The
only difference with the table is that the graph considers 2016 as the start date of this project.
Figure 2.9 is nothing more than the so-called S curve in project management.
Start saving and investing little by little. If you feel confident, increase your monthly contributions.
But don't rush, don't follow the news, and always have a plan B prepared in case an unforeseen event
arises.
Within this planning, one of the important points is to have a clear ro how to make investments.
How much to invest, how often, from what way, with what objective. This is important in itself and we
will look at it later in more detail.
As you will see, we suggest that you take the reins of your investments yourself. sions. To do this
you just need a little financial culture. You may not feel comfortable and would prefer to leave it to an
expert. No problem, find one you trust. But be aware that the financial industry lives off of us, taking
advantage of our ignorance, and that by the time you know enough to discern a good financial advisor
from a bad one, you will also be able to manage your investments. And it is not difficult to do it
yourself.
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Sep 2021
About personal finances, economics, ETFs; see bibliography in appendix B.3.

11
For example through non-face-to-face universities such as the Open University , UNED, or online courses such as
12
Coursera.
Step Year Objective to achieve
1 2016 Account for annual income and expenses. One does not know what
He spends until he calculates it, and it is always more than expected. Once you
know this, you can start cutting unnecessary expenses.
2 2016 , 5 Adopt a frugal lifestyle: quit smoking, minimize
alcohol consumption and eating away from home.
3 2017 Use the bicycle more, for example to shop at the supermarket.
4 2017 , 5 Save a small emergency fund (for example income
net of a couple of months). In a bank account separate from your day-to-day
account, which will serve as a starting point for the future.
5 2018 Find out about ways to invest your savings (for example ETFs).
Read a couple of books on the topic XXXVII

. Periodically follow a related blog,
such as Mr. Money Mustache, Early Retirement Ex treme or Econowiser.
6 2018 , 5 Dedicate 20% of your monthly net income to savings.
7 2019 Pay outstanding debts (for example, car or appliance
cos), and undertake not to request consumer credit again. Minimize the use of
credit cards (for example, only use them for online purchases). If you have a
mortgage, paying it off will take a few more years, but at least you're on your
way.
8 2019 , 5 Go live near work, or in a place that allows you to get there
by bicycle or public transport.
9 2020 Sell the car.
10 2020 , 5 Dedicate 40% of monthly net income to savings.
11 2021 Save and invest it regularly, for example in ETFs. So I appro
Let's see the benefits of compound interest as soon as possible.
12 2022 Follow a personal finance course, introduction to economics,
introduction to investing in the stock market or similar XXXVIII

.
13 2023 Finish paying the mortgage on the house, the largest loan that
the average citizen has. This is a great success! One feels floating after paying
the last monthly payment.
14 2028 Finally, investments generate more than our style of
Frugal living requires. At that moment we have achieved Financial Freedom.
2.7. Issues
In this section we comment on some of the problems we have encountered along the way.
Perhaps the reader will have more luck, perhaps he will find others, these lines will serve as an
introduction.
XXXVIITable 2.1: Planning how to achieve Financial Freedom with trans

XXXVIIIcourse of the years. The first column indicates the goal number, the second column the year of
expected achievement, and the third describes the goal itself.
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2.7.1. Ourselves
We ourselves can become a problem by not having a sufficiently broad vision. And you don't
know what you're capable of until you try.
People extrapolate what we know in our immediate environment. The experiences we have had in
our past lead us to think in a certain way and plan the future in particular ways.
We could ask ourselves what achievements we are capable of as the years go by, as shown in
Figure 2.10 . But our estimates of what we are capable of doing, of learning, of traveling, of living,
always fall short. We achieve exponential goals, but we believe we improve linearly.
Look back, for example, at the times when you were a young student, and try to remember what
your mentality was, your vision of the world. Could you have imagined that you would get to where you
have? To start a family, with children, to have the job he has, his house, his car. I certainly couldn't
even imagine it, and any expectations have been greatly exceeded.
So, reader, don't go with the flow. Plan, make long-term plans, set objectives to achieve, think
about your future because you and yours will benefit the most.
And if life hasn't gone well for you, don't despair, there is always room for improvement.
Our Savings Capacity

As already mentioned in section 2.6, it is essential to reduce spending at all costs. This is the
most important parameter.
However, saving means saying no to many things. It may mean not having a television, not
having a car, not having vacations in the Caribbean, not buying jewelry, not having exotic pets, not
having expensive tastes in clothes or food, etc.
This is something very dependent on each person. From our point of view, and in some aspects,
we see no problem in living as our
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Sep 2021
Figure 2.10: People are capable of greater achievements than we think, and our estimates of the
future always fall short. If in three moments of our lives we had been asked where we saw ourselves in
the future, we would have extrapolated our immediate environment. But as time goes by, unforeseen
events always happen, we learn new things, we have conversations that open our eyes; and in the
end, looking back, one always reached beyond what one could imagine.
parents. They could not enjoy the amazing technological advances we have today (internet... in your
pocket, almost infinite television channels) nor the infinite variety of options there are to choose from
(food in the supermarket anywhere in the world). world, plane trips to paradisiacal beaches). The
average citizen enjoys these advances, and he is well done if that is what he likes. We maintain that a
little initial effort can provide big benefits down the road. Not spending at first to invest and enjoy the
benefits in the future can be a very wise decision.
In fact, it is this vision of how to manage income over time that largely determines the wealth of
nations. The Societies that live in the moment, carpe diem , that spend their income as they get it, are
societies that tend to be poor. Societies that withhold their spending today, to instead invest it in their
future (buying a house, saving for retirement, attending training courses), are societies that tend to be
richer.
Don't spend what you earn, but save today so you can spend tomorrow. This book is about this,
about saving and investing what is not spent so that tomorrow it will allow us to live off the income.
Our Own Fears
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Sep 2021
The ideas presented in this book are shocking. But can you really be self-sufficient without
needing a state pension? But is it possible to live without working? Well yes, that's right, and this book
strives to demonstrate these ideas.
A first problem is the desire to spend more and more, “spending inflation”. People tend to spend
as much as we earn. We are here stuck to it. We are told that we must live in the present, not be
boring, stingy. However, we have to be aware of what we spend, what we really need, and everything
that is expendable.
The first big change that occurs when you stop working out of obligation is the enormous amount
of free time. What to do? One of the reasons for going to work is to socialize, to be with other people.
People are happy when we interact with others. That is why it is important to have things to do.
Hobbies, collaborating in NGOs, etc. In fact, now is when you can spend your time doing the things
you really like to do. And it's not that you can't work for money, it's that you probably can. For example
writing a book (like this one!), managing a blog and having advertising income. Anything, but you like
it.
Be that as it may, you don't have to end up as retirees looking at the works or throwing crumbs to
the pigeons. Or maybe you do, but only if that's what you really want to do.
2.7.2. The society

One would like to think that in a free country like ours everyone thinks actions that do not disturb
others are possible. And desirable if you ask me, because in this way a diverse society is achieved
that is more prepared for new challenges. However, as the reader will know, ideas that deviate from
social conventions are not welcome. Society does not welcome new ideas.
And we say society, understood as school, friends, family. It is in personal treatment where you
notice that these ideas sound strange.
They will accuse him of being "a rentier who lives without working." Maybe even a DINK, a
Double Income No Kids , a childless couple where both work. Oh, bad, couples have to have children,
and the woman has to stop working to take care of them. Have you never heard that?
These criticisms also do not hold up. Not working does not mean not contributing to society.
Investments provide capital to companies that use it to prosper and provide more and better services.
So rentiers contribute a lot to society.
This also comes in line with the old motto: "To each according to his capacity." city, to each
according to his need.” From this it follows that if a person can work, then he should do so. Following
this motto, the reader will find himself in coffee conversations who propose that the state force those
who do not want to work. That it is unfair or immoral not to work when you can. It is for the common
good. Individual freedom is not welcome on this issue.
One could have a vision along the lines of: “from each as the person wants, to each as society
wants.” Let it be the person who gives Decide how much you want to work, and let society decide the
income that person should receive. But society as a group of individuals, of people who choose freely,
not as a state that makes decisions unilaterally and forces its subjects to comply with its orders.
Related to the effect of society, the family environment, on people people who have incomes
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Sep 2021
above average, there is a very interesting documentary tructive: Broke from director Billy
CorbenXXXIX . The video shows many people who quickly gained fortunes and then were unable to
properly manage their wealth, ending up bankrupt. For example, in the US, 60% of NBA players, and
78% of NFL (American football league) players, have lost everything they earned within 5 years of
stopping playing. These cases are plagued by waste and bad investments, but in what concerns us
now, also by profiteers who appear everywhere. And sometimes the immediate environment is part of
the problem, as it can encourage you to spend beyond your means, even when you are a millionaire.
Prevailing thinking tells us that we have to spend practical ment everything we enter. If something
goes wrong, we should not worry because the state will always be there to help. After all, that's what
it's for, right? He will give us a subsistence allowance, the famous 400 euros per month. This helps
almost no one save. "I just can't make ends meet, how am I going to save?" he says to himself.
Various colleagues, with incomes of the order of 3000 euros monthly net (and remember that the
minimum interprofessional salary in Spain in 2016, in 14 payments per year, is 655 euros/month), they
say they live from day to day, how is this possible? They simply do not deprive themselves of anything.
When I was little, my parents used to respond to my demands for spending (games, clothes,
candy, etc.) with the phrase "but what do you think, that we are the Bank of Spain?" At that time, for
those parents, saving was important and they could not spend beyond the family's capacity.
I get the feeling that nowadays parents no longer restrict their children's spending in the same
way, since the kids all have the latest generation mobile phones, which means not only paying for the
device, but also the monthly fee. Saving for the future is no longer a positive idea.
In fact, not spending everything you earn is now seen as something negative. Phrases like “You
are going to be the richest in the cemetery” or “enjoy it, don't be agony” are common. How funny! as if
accumulating wealth like Uncle Gilito did had any interest in itself. At some point the effort to save was
lost, and was exchanged for the joy of consuming.
All this is no coincidence. The current vision of the economy fo It discourages consumption and
penalizes savings. For example, John Maynard Keynes and Paul Krugman are very explicit about this.
It is not by chance that the average citizen does not save, it is that things are made so that they cannot
do so.
So today consumerism prevails, and going against majority thinking is difficult. It is difficult to
explain in words what it entails, and how it is not understood by family and friends. Saving is seen as
something negative, and saving is precisely what we want to do.
2.7.3. Financial Companies

The financial sector is a formidable business. Imagine that your neighbors give you their money
so that you can do whatever you see fit with it, in exchange for a percentage of what is given. A fixed
percentage, that whether the stock market goes up or down, you always charge. What do you think the
result would be?
Better yet, imagine you invent a thing called a “pension plan,” make sure the state sends you
citizens, and then enjoy keeping those clients captive for 40 years. Clients who do not know how much
XXXIXSee the video on Youtube, Corben, Broke .
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Sep 2021
their fees cost them, and if they find out and try to recover their money they will be sad lized strongly,
by law. Do you think these pension plans will give good or bad returns?
Unfortunately, these forces are enormous and we citizens end up bombarded with messages that
prevent us from thinking clearly.
The average citizen is imbued with consumerism fever, and of course he repeats to himself that "he
can't save anything." In fact, if you cannot pay for a product directly, you can always request a loan.
For the house, the car, the vacation, or the washing machine; great vein if there is one, please
calculate how much it is costing you.
Nobody considers that they can save. And it is not because of a secret conspiracy, which pulls
the strings in the shadows. It is nothing more than the result of companies guided by the search for
their own benefit.
In fact, look at a curious detail: How many listed companies exist, and how many investment
funds? In Spain, the number of listed companies is around one hundred, and the number of Spanish
variable income investment funds ñola is 132 (see the BME and Morningstar websites) . And the same
thing happens in the US, where there are about 3,700 listed companies and about 4,600 investment
funds. Don't you think that's suspicious? How is it that there are as many or more investment funds
than there are companies to invest in? They are necessarily all buying the same assets. It is the
practical demonstration that investment funds provide enormous benefits... for their managers.
2.7.4. Taxes
Taxes are probably the main burden that will make it difficult for us to achieve Financial Freedom,
and therefore deserve a special mention. They are resources that we deliver to the state.
They are one of the main expenses, so the mini mist them.
The state is a curious institution, a traveling companion that sometimes brings us benefits and
sometimes complicates our lives. To the extent that the state provides a safe environment in which to
live, work and invest, then it is a positive idea. Unfortunately, states live off the taxes of their citizens,
and since they do not have a counterpower to limit them, they tend to raise taxes as much as possible.
The first thing to do is view the taxes, because usual Mind you, the state takes them without
warning and before they reach our bank account. Therefore, the normal thing is that we do not realize
what we pay, and in any case we feel happy if at the end of the year the declaration has to be returned
(in any case we should be angry, after all the state has left during the year with extra money that did
not belong to him).
A very instructive example to show the amount of taxes paid is the so-called Tax Liberation Day
XL
. . This day is calculated all the years in Spain by the Civismo Foundation .
These reports are very revealing, we recommend the reader take a look at them. For example,
everything worked until mid-year (June or July) is delivered to the state upon compliance with tax
obligations. And even worse, it's virtually the same date for everyone, regardless of income level.
Most of the taxes go into the Social Security section. cial. This is a third of the gross salary, and
although it is paid by the employer, it is for the benefit of the worker (mainly his pension). Zion). This is
XLThink Tank Civics, Tax Freedom Day 2016
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Sep 2021
the biggest tax for normal citizens. A rather opaque tax, by the way, because it remains hidden from
most citizens. The good news is that, as long as we don't have a salaried job, we won't have to pay
Social Security. Being self-employed may be something to take into account.
The average Spaniard pays 550 euros per month for his pension (approximately a third ofXLI of a
typical gross salary of 1700 euros/ monthXLII . The net salary in 12 payments is about 1400 euros/
monthXLIII . If the citizen could save that money, from the ages of 25 to 65, at the time of retirement
he would have a total saved capital more than enough to live on (see section 3.1) .
On the other hand, one of the main sources of taxes is housing. States make great efforts to
“help” people buy a home, and of course, once it is owned by the citizen, there is no escape. Or it's
very difficult at least. And that is when the state recovers the “aid” previously given.
Every year you have to pay the IBI (the Real Estate Tax) and the garbage tax. Just for existing,
regardless of whether you live and use the service or not.
Additionally, when filing your tax return, you may have to pay additional taxes. There are three
possibilities.
• Main residence: you do not pay additional taxes.

• Rented housing: taxes are paid based on the income it provides. Ok, common sense.
• Non-habitual and non-rented housing. The state makes a presumption of income, estimating
the benefits it believes the home has reported (even when closed!) and charging a percentage
of those (non-existent) benefits. All very logical.
XLIV
All this can be read in the IRP F manual , page 124, “Estimated returns on real estate capital”
section.
So having a house is very expensive. Do your calculations and you will see that between im
positions and maintenance ends up paying like an expensive investment fund, on the order of 2% of
the value of the house annually. It is possible that it is not worth it to buy a house and you may be
better off renting. More on this in section 4.1.2 .
And there are many other things that we pay for that are fundamentally important positions, and
that you should minimize to save. Car fuel is a good example. It is often said that 2/3 of the price are
taxes, so if it costs 1.50 euros per liter, 1.00 euros are taxes and 0.50 euros ros the real price of fuel.
In other words, taxes are not a fraction of the price of the product, but double. As if a child had lice
when he came to class, but not just little blood-sucking bugs, but a 100kg monster on his head. And
the same can be said of tobacco and alcohol. If you don't do it for your health, do it to be efficient in
spending, and minimize the consumption of these products.
Among the things you can do to minimize your tax payment, the first thing is to get married,
because it implies a significant reduction in all developed countries. Being married, the couple who
does not work receives free healthcare. And by filing jointly, you can offset property gains and losses
XLISocial Security, Bases and types of contributions 2014 .

XLIIOECD, Average Annual Wages .
XLIIICinco Días, Net Salary Calculator .
XLIVTax Agency, 2015 Income Declaration Manual
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together. For better or worse, the world is made by and for married people, so take note.
Year Tax pressure

1980 14%
1990 23 %
2000 31 %
2010 40 %
2014 41 %
Table 2.2: Evolution of tax pressure in Spain, understood as a percentage of GDP that the state takes
via taxes from its citizens. Source: OECD Annual Taxing Wages Report, see OECD, Taxing Wages .
Finally, in the long term, the situation can only get worse, as Table 2.2 indicates. Fiscal pressure
has grown at an average rate of 8% per decade. It seems that it has slowed down in recent years, but
that is not exactly the case, it is simply that now we must include a percentage of the structural deficit
that the state spends but does not receive via taxes. Is government debt, which we do not pay today
with our taxes, but will be paid by the taxes of our children and grandchildren.
In short, citizens cannot be squeezed more. In comparison, the medieval tithe was nothing more
than pocket change.
2.8. The Distribution Pension System

But let's see, let's not complicate our lives with this book. Don't states provide pensions for our
elders? They are the pla pay-as-you-go pensions, by which states take taxes from workers who are
currently active to pay pensioners also current. It would be reasonable to assume that in the future,
future workers will pay future pensions. However, this book proposes another option, a type of funded
pension plan, in which it is the worker himself who saves today for his pension in the future.
But why don't pay-as-you-go pension plans work?
Let's do some history. Until 1985, in Spain benefits were calculated based on the average salary
base of the last 2 years of working life (which are usually those in which the highest salary is reached).
Starting in 1985, this base was higher than the average of the last 8 years. With the Toledo Pact, since
1997 the average rose to a range between 15 and 30 years. With the change from 2010–2012, the
average of the last 35 years and a minimum of 25 years of contributions.
The system has been modified for the worse 4 times in the last 30 years. By which are unilateral
changes (made by the government) that worsen the conditions of the "contracting" party (the citizen),
due to not being able to comply with the agreement. If a company did this it would be called
“bankruptcy”. Therefore, it is important to be clear: the pay-as-you-go pension system in Spain has
gone bankrupt 4 times in 30 years. How many times will it go bankrupt until you retire?
The worker spends more and more years contributing, to pay for increasingly fewer benefits.
Furthermore, governments play with language. Instead of saying that they take away benefits from
citizens, they say that they "delay the retirement age." Instead of saying that they reduce pensions,
they say that "they increase the years of the calculation period."
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The solution of encouraging immigration to increase contributors to the system has its positive
aspects, but it does not solve this particular problem, since immigrants will also retire and will have to
receive a pension. In fact, it only makes the situation worse, because it magnifies the problem and
postpones the solution. And we do not speak from hearsay, because we ourselves are part of those
emigrants.
In the long term things can only get worse, because life expectancy continues to improve. When
pay-as-you-go pensions began to be implemented, few people lived to be 67, so few people received a
pension. Today life expectancy has risen to 85 years, so statistically a person works 47 years to
receive a pension for about 18 years. But you reader who is reading this will probably live to be 100
years old. This will require delaying the retirement age to reduce those receiving the benefit. You will
have to work until you are 80. And the problem is not working longer, but under what conditions 80-
year-olds will be able to compete with 30-year-olds. They will not be able to keep their job, they will
suffer unemployment, and therefore additional reductions in the pension they will end up receiving
(due to having fewer years of contributions).
Official State Gazette, Legal Regime on Unfair Competition
Article 24. It is considered disloyal because it is deceptive, in any circumstances. tance, create,
direct or promote a pyramid sales plan in which the consumer or user makes a consideration in
exchange for the opportunity to receive compensation derived fundamentally te of the entry of
other consumers or users into the plan, and not of the sale or supply of goods or services.
Government of Spain, «Law 29/2009» .
Furthermore, public pensions are illegal. The Official State Gazette, in its legislation on unfair
competition (see attached text box), is very clear on this matter. The public, pay-as-you-go pension
plan is a pension plan in which a user pays month by month in exchange for receiving compensation
when they retire, which is paid in full by the contribution made by new users to the plan. Exactly a
pyramid scam. This is explicitly prohibited by Spanish legislation. Forbidden for everyone? No, not for
everyone, because the state does not comply. In fact, you don't even need to create the exception in
the legislation, you simply ignore it and that's it.
It is certainly paradoxical that in increasingly richer societies, with better Continuous increases in
people's living conditions, states worsen the pensions they provide.
Therefore, anyone who is thinking about the state providing them with a decent livelihood when
they retire is condemned to destitution.
However another option is possible. And it is not a theory, there is a real example from several
countries. In the US and the UK, citizens can save part of their monthly income in a retirement
account. What is deposited in this account, and the benefits it generates over time, are not They pay
taxes (they pay when redeeming it, taxes are deferred).
Let's focus on the case of Chile, as it is a Latin country where funded pensions have been
implemented with great success. In Chile, the pension that the Chilean worker receives is comparable
(in terms of the fraction of the salary that the worker obtains upon retirement) to that obtained by the
Spanish worker. But there are at least four differences between the capitalization system (for example
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Sep 2021
Chile) and the pay-as-you-go system (for example Spain):
• On the one hand, in Chile, 10% of the gross salary is paid to the pension fund. sions, and in
Spain 1/3 of the gross salary is contributed. So at first approximation we see that the Chilean
system, as it is implemented, is proportionally much lighter, 3 times cheaper, so it is to be
expected that today it provides 3 times less income to its pensioners. After all, wealth that has
not been generated cannot be distributed.
• On the other hand, in the Chilean system the worker has saved and is the owner of his assets.
When he retires he will do so with the fruit of his work, and this heritage will be inherited by his
partner and children. In this contributory system, however, the worker does not own anything,
only the promise that the state will take away a worker's income to pay his pension. Your
pension will be whatever the state unilaterally decides to give you, and your heirs will receive
nothing. If you die at age 66, you will have spent a lifetime paying 1/3 of your gross salary for
nothing. This is the best incentive, the freedom to work for yourself and your family, instead of
being dependent on others.
• The capitalization system has the advantage of favoring responsible people, giving more to
those who save the most. On the other hand, the pay-as-you-go system is indifferent to the
behavior of citizens, paying an equal pension to those who have been responsible and those
who have not. The capitalization system helps the little ants, the distribution system helps the
grasshoppers.
• Finally, in the capitalization system, savings are available wearable for companies. Chilean
citizens have saved an amount comparable to Chile's GDP. This increases the capital lization
of the economy, contributing to the growth of the country, to greater production and better
quality of goods and services. This is one of the reasons why Chilean citizens live better than
their neighbors. On the other hand, in the contributory system there is nothing saved.
Whatever workers have paid during their working lives already It has been spent, there is
nothing left of it. Money only changes from hand to hand.
The forecasts are undeniable, because the people who have to pay the pensions of those of us
who now work have already been born. There are not going to be major demographic changes. Today
there are 2 workers per retiree. Every tra The worker pays an average of 500 euros per month and the
retiree receives 1000 euros. But it is estimated that in 20 years, in 2036, there will be one worker per
retiree, so pensions can only go down. Therefore, if taxes do not increase, and it does not seem that
they can increase because they are already at the limit of the citizen's resistance, we can expect to
receive 500 euros per month. But this will depend on those who work in 20 years agree to pay
pensions, since they can vote no. Especially if society is not homogeneous and those who pay and
those who receive are different communities, so that social security is a transfer of income from one
community to another, and this is perceived as plunder by those who pay.
A very visual way to see the effect of pay-as-you-go pensions versus funded pensions is to see
what they provide for the same cost. 500 euros paid by a worker today means 500 euros for a retiree,
also today in the pay-as-you-go system. However, 500 euros invested for 40 years, assuming a
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Sep 2021
modest 4% annual increase in purchasing power, thanks to compound interest ends up accumulating
about 600,000 euros (with the same purchasing power as at the beginning, that is, having already
discounted the inflation). And this €600,000 fund, assuming a 4% return on investment above,
provides €2,000 of income (do the math yourself, or go to section 3 for more details on this). And this
accumulated wealth is inherited, but not the pay-as-you-go pension.
In summary, capitalization systems like the Chilean one are clearly a positive path. It is the
citizens themselves who have to solve the problem. And this is where this book comes in, not to
promote the existing private pension plans in Spain (which not only do not serve to accumulate capital,
but also lose money year after year).XLV ) , but for the citizen to do it himself.
What is shown in this section goes along the path of the so-called property society. tarians . In
this type of society, the majority of individuals are constituted having growing assets through savings
and capitalization of an adequate percentage of their income. This change implies greater productive
investment, from which it follows that society as a whole would be richer at the end. manufacture more
and higher quality products. And of course, with greater happiness for individuals, since income from
work would only be a fraction of the total income of citizens.
For more information in this regard, you can consult the reports of the Juan de Marian Institute as
of 2021
, which although they are celebrating their anniversary, are still excellent.
2.9. Create a Company by Achieving Freedom Fi

financial
We have already seen that taxes are the main brake on achieving Financial Freedom. How could
we minimize them?
A good idea for when you reach Financial Freedom is to declare yourself self-employed or create
a company based on your favorite hobby. Why? By that in this way the expenses related to that hobby
can be deducted andXLVIXLVIIXLVIII .

Let's assume that you have a large income, let's say 50,000 euros gross per year, which after the
tax declaration remains at 36,000 euros net annually, about 3,000 euros per month in 12
payments.XLIX . Let's say you spend 12,000 euros a year on your favorite hobby: cars, racing
cars, vintage cars, etc.
If you are a simple citizen, those 12,000 euros are taken from your net salary, after paying
personal income tax. In this way, you still have 24,000 euros net annually for other expenses
XLVFernández, Aguirreamalloa and Corres, “Profitability of Pension Funds in Spain, 2001–2011”

XLVIMerino, Blanco and Rallo, «A Society of Owners»
XLVII Rallo, Merino and Bagus, «Private pensions in Spain, an alternative»
XLVIIIWatch The Voluntary Life, Tax Strategies and Financial Freedom podcast.
XLIX To review these accounts, you can use any online salary calculator, for example Cinco Días, Net Pay
Calculator
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(equivalent to 2,000 euros per month).

However, if you can justify going to competitions, or showing your vintage cars at shows, then
those expenses are business expenses that are deducted from income before paying taxes. And the
VAT that would have been paid is returned by the state. In this way, it is as if you really had 38,000
euros of gross annual income (50,000 minus 12,000), which after paying personal income tax remains
at 28,000 euros net annually, about 2,300 euros per month.
What is the result of all this? Well, you would have 300 euros more per month (2,300 instead of
2,000 euros per month) than if you had done nothing.
All you have to do is behave like a business: keep invoices, have separate corporate and
personal bank accounts, don't deduct non-business expenses. As long as you follow the rules, there is
no problem. There is nothing strange here, it is that in this case you are a company that is providing a
service, competing, presenting results, etc.
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Chapter
Theory
If people don't think mathematics is simple, it's only because they don't
realize how complicated life is.
John von Neumann; mathematician, physicist and economist.
In this chapter we show several equations that will allow us to quantify when and how we will be
able to save and spend. Stephen Hawking said that when writing his book A Brief History of Time ,
the editor warned him that ca Any equation that included would reduce the number of readers by half.
We don't care, in this book we have decided to show equations. If the reader wants, he can ignore
them. We liked them because they demonstrate mathematics mind that, under certain conditions, the
goal is achievable. These conditions being a first approximation of common sense. We hope that the
reader does not worry about the mathematics, just look at the graphs if you want.L .
First of all, we want to say a few words about inflation, since the treatment we give to it
permeates all the formulas we show. Inflation is a crucial parameter to take into account. Because of
its effect, the same amount of money today buys fewer goods and services each passing year. It is a
silent tax, a tax that does not require approval of parliament ( inflation is taxation without legislation ,
as Milton Friedman said).
To take inflation into account, what we do is assume that interest rates already have inflation
discounted. If, for example, we expect the stock market to grow at a rate of 8%, but we expect an
inflation of 2%, the return that we have to substitute in the equations is 6%. This is what we have
done in general, unless exceptionally we indicate otherwise.
On the other hand, we do not take taxes into account. It is very dependent on your personal
situation. So these figures refer to gross income before taxes.
LThis chapter is based on section 7.3 of the book Fisker, Early Retirement Extreme .
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We are not calculating amounts of money but purchasing capacity. When the equations refer to,
for example, 10,000 euros in 10 years; It really refers to an amount of money equivalent to that which
today allows us to buy goods and services worth 10,000 euros.
We apply mathematics to obtain figures that serve as a guide. But all this is approximate and in
reality many more parameters must be taken into account. Just like going to the doctor and asking
about the recommended weight, there is a wide margin of possibilities, fatter or thinner, always being
far from the extremes and being acceptable from a medical point of view. Furthermore, with the
passage of time, unexpected events can happen, such as becoming unemployed or suffering from a
disabling illness, so the estimates we make are nothing more than reasonable approximations.
3.1. How much can we save?

This is the most important part. To be able to spend in the future, you must first accumulate a
sufficient amount of capital in the present.
This section presents the first phase of the plan to achieve Financial Freedom, the phase in
which you save and invest.
In a simple way, we could follow the recommendation of only spending a part of our net income
on day-to-day expenses, and saving the rest for the future. We could, for example, save 10% of
income and spend the remaining 90%. Thus, with a simple account, we see that we would have to
save for 9 years to have an amount of accumulated capital equivalent to one year's expenditure. In
other words, we could live one year on what we saved for 9 years.
In another example, if we saved half of what we earned and spent the other half, we could work
one year and live another year with what we saved.
Equation 3.1 (equation B.7 in the appendix) summarizes the paragraphs an interiors. Let 's call
the division of savings by total income r. les, and M the number of years. If a person saves 10% of
their income ( r = 0 , 10 = 10%), then they can live 9 years on what they save ( M = 9). Likewise, if we
save r = 0 , 50 = 50%, we obtain M = 1, that is: work for two years and live off the income the
following year.
Years that you have to work to live the next year on what you saved
M=1-r (3.1)
r
Please note that we are not interested in exact quantities. It doesn't matter if a family earns
2,000 euros a month and saves 1,000; or if they earn 4000 euros a month and save 2000; For these
formulas it is the same, what matters is that in both cases r = 0 , 50. The variable r allows us to
abstract and focus correctly on the problem. And it is not only a problem of savings, but also of
reducing spending.
It should be noted that this savings factor, r , has its difficulties when it comes to being put into
practice. It is not as easy to save with a high salary as with a low one. A person with a salary of 750
euros/month is difficult Mind you will be able to save, while a couple in which each person earns
1500 euros/month will have it easier. This is true, but also note the call called spending inflation ,
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according to which people spend more the more they earn. People who spend large amounts on
exotic trips, sports cars and fabulous houses. And how many times have we thought that if we had
their income, how easy our lives would be. But that remains to be seen, because most high-income
people live hand to mouth just like low-income people. They simply adjust their spending level to their
possibilities, minimizing their savings. And everyone, rich and poor, will say they can't save. That is
why we need an equal measure for everyone, and this indicator is the r factor.
These calculations that we have made do not include the reinvestment of possible benefits
obtained from saving. If what is saved is invested (in com buy a house and rent it, or in stocks or
state bonds), this investment generates a return, which if in turn reinvested generates exponential
growth. What is known as compound interest. Instead of keeping it now lost under the mattress , we
can invest it in some way that provides us with a certain return. Something that is neither complex
nor expensive, and whose risks can be minimized. We'll go into details of how to do this in section 4.
Equation B.20 shows us the capital we accumulate based on the
time, and we rewrite it here.
Capital accumulation
g Pn r (1+ i ) n - 1
P= = (3.2)
n
g 1-r Yo
Being:
• P n the capital saved after n years. For example 300,000 euros.
• n the number of years since you started saving.
• g the annual expense. For example 12,000 euros/year.
• P n
g
the capital saved, but measured in the amount of annual expenses. In this case P n
g
=P
n /g = 300,000 / 12,000 = 25. This amount is measured in years.
• r the relationship between savings and total net income. For example, r = 0.50 if 24,000
euros are earned net per year, of which 12,000 euros are saved (and g = 12,000 euros are
spent, as we explained a few lines above).
• i is the rate of return on investment. What investments produce nes, whether by dividends or
capital increase. A typical value is i = 0 , 04 = 4%, the Safe Withdrawal Rate ) as we will see
in Sec. tion 3.4. We could also consider a long-term average stock market value (6%) or
historical government bond yields (2%). For more examples see section 6.2.
Equation 3.2 allows us to know how much capital we have accumulated, considering the returns
on investment and the extraction of capital to live. Note that when the interest on investments is i = 0,
this equation reduces to 3.1.
Let's assume an example: we save r = 50% of our income and assume an interest of i = 4%,
after n = 20 years we will have managed to save money equivalent to 30 times what we saved in one
year.
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We save for n years, and at the end of that time we have an amount of capital equivalent to M
times our annual expenditure g . This allows you to stop working and live for M years without extra
income. However, note that it has not been taken into account (yet) that during those M years the
investment continues to generate dividends.
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Sep 2021
Fraction of savings with respect to total income (r) [%]
Figure 3.1: Number of years to save until P 0

g
= 26 is achieved. That is, the capital necessary to pay
expenses for 26 consecutive years.
It is the representation of equation 3.3.
From Appendix B.1 we now take equation B.25. We solve for the number of years in equation
3.2 . Let M be the number of years it takes to raise an amount of capital. This amount is P M /g ,
measured in annual expenses.
Number of Years Necessary to Save an Amount of Capital
1
ln ^ 1+ P n g i -
r
r ^
M= (3.3)
ln(1 + i )
Figure 3.1 shows the number of years you have to save to accumulate capital equivalent to 26
times annual expenses. This quantity, 26, is relatively arbitrary, coming from assuming i = 4% in
equation 3.5 (found later on page 65) .
Note that for large savings fractions, especially when r ≥ 80%, the effect of the return on
investments is small. It doesn't matter if the stock market provides 2%, 4% or 6%. The time required
is the same in all cases; It is approximately proportional to the number of years. This is mostly a
mathematical curiosity, because few people will consider this level of savings.
On the other hand, when the savings proportion is low, for example when r ≤ 10%, the
necessary savings are not achieved even in an entire working life (or at least not in 40 years). In
these cases there is nothing left but to work until the state decides to give us a pension.
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Fortunately, a saving of 20% of our net salary over about 40 years of working life would allow us
to live on our own with the same standard of living that we had during our time as workers. And when
we retired we would also receive a pension from the state, which during those 40 years would have
been collecting 30% of our gross salary in exchange for providing us with a tiny fraction of our current
salary (as we already mentioned in section 2.8) .
By the way, buying the house you live in can be a form of investment, if it means you stop
paying rent. But this is better discussed in section 4.1.2.
In this section we have presented the mathematical development of the savings phase, we now
have to show the spending phase, in which we live off what we previously saved.
3.2. How much can we spend?

Let us now move on to the second phase necessary to achieve Fierce Freedom. nancial. We
have already saved and invested for years as indicated in the previous section. Now it's time to live
off the income generated by these investments.
Suppose that initially the amount P 0 has been saved, and that at first year groupers a quantity g
is extracted. The rest ( P 0 - g ) grows with an interest rate i that will depend on the investments
made. At the end of the year, a quantity i · ( P 0 - g ) is obtained, which is the return on the
investment. This return is reinvested for the following year. The objective is to know how much
money we will start with the following year P 1 .
This problem is solved in detail in Appendix B.2 , from which we now take equation B.45, shown
here as equation 3.4 .
In the case in which the investment does not grow, i = 0, it follows that N = P 0 g and therefore the
saved fund would simply last as many years as what we have previously saved ( P 0
g
is the amount
of money saved, divided between the money we spend annually).
Now suppose that we select some investments that provide us nan i = 0 , 04 = 4% (being
pessimistic and having already subtracted inflation), if we have also already saved the equivalent
money that we spent in 10 years ( M = 10), then this fund will last 12 , 4 years ( N = 12 , 4) until
exhausted HE. That is, as investments provide certain benefits year after year, we can extract more
money from the fund than we enter. Wonders of compound interest.
It may happen that the denominator inside the upper logarithm is zero. This causes N to be
infinite. In other words, that the fund never runs out, that there are resources in perpetuity. This is
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achieved when the following equation is satisfied (equation B.47 in Appendix B.2) :
Condition so that the fund never runs out
M ≥ 1+ i (3.5)
Yo
Substituting a typical stock market return value ( i = 4%) into Equation 3.5 gives M = 26 years. In
other words, if we save the equivalent of 26 years of our expenses, then the fund will never be
depleted. In practice, of course, we will want this value to be higher ( M = 30 years for example), to
cover any unforeseen events.
Condition 3.5 basically tells us nothing more than, if we want the fund to never run out, what the
fund grows each year has to be equal to or greater than what we extract to live.
It could even happen that we extract from the fund an amount per year ( g ) less than the
generation of wealth from the investment. In this case, the fund would never stop growing.
Graph 3.2 visually shows these results. If the investment did not provide any profit ( i = 0%), then
we would be faced with a purely linear case and the fund would last as many as the equivalent in
years that
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Sep 2021
Capital saved measured in annual expenses [years]
Figure 3.2: Number of years that an initial capital P 0

g
lasts (measured in years of expenditure),
depending on various investment returns.
we have saved.
For any typical case where i > 0% (long-term average), the fund duration grows rapidly. So
quickly that there is an amount saved beyond which the duration of the fund tends to infinity, as for
example in the case where i = 4% and the equivalent of 26 years has been saved (these values are
given by equation 3.5 ) . There is no magic here, it is simply that the fund would provide a greater
return than we would spend, and that is why it would never run out.
This is a very interesting conclusion: it is not necessary to save indefinitely. Normally, after a
certain limit the fund will last forever.
In an optimistic case, assuming returns of 6%, we would only have to save the equivalent of 18
years. On the other hand, in a pessimistic case, he knew Giving returns of 2% would mean saving
the equivalent of 51 years. “You see, the problem is not whether you can achieve Financial Freedom,
but how long it takes to achieve Financial Freedom.”
Compare this to a public pension, where you pay throughout your working life in exchange for an
entitlement , not the capital itself. In this way, the right to receive the money from the fund back is
extinguished upon the death of the pensioner. Even though the capital saved could have been
equivalent to a perpetual fund. What is saved in a distributive pension is not inherited, but in a
capitalization pension it is, think about the difference this makes for the future of your children.
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3.3. Combined Effect of Savings and Spending

Perhaps the most interesting result of this chapter is the one shown in this section, as it shows
the combined effect of the saving and spending phases.
We now calculate how many years you have to work to be able to live off your income. We are
not interested in the fund lasting forever, but in enjoying it ourselves. If at the end of our life there is
still a remainder and it passes to our heirs, that is welcome, but we expect that in the very long term
the fund will be exhausted.
We assume that the person's life goes like this:
• He is training until he is 20 years old, and just at that moment he begins to work.
• Then he spends M years working and saving until he accumulates a sufficient amount of
capital.
• And finally he spends N years living off his savings, like a retiree.
We impose the condition of M + N = T , with T being the sum of years after down and retired. T
is a constant because we assume that the more years we work, the less we will be living off of
income. As an approximation, let's take T = 80 years, which implies that we will live to be 100 years
old (since as we said a few lines before, we start working at 20 years old). Saw living up to 100 years
seems a reasonable approximation taking into account that life expectancy does not stop growing.
And in any case, it is better to go overboard than to fall short. In any case, these round figures are
nothing more than an example and can be modified to the reader's liking.
The equation that governs this system is the following (B.61 in the appendix).
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Fraction of savings with respect to total income (r) [%]
Figure 3.3: Combined effect of the saving and spending phases. We assume that we save the r
fraction of our income for M number of years. We subsequently live off the income for N years ( N is
not shown directly in the graph, but we impose that N + M = 80 years).
Years to Work Depending on the Savings Fraction
^ 1+ 1- r r (1+ i ) ^
ln
1+ 1- r r (1+ i ) (1+ 1 i ) T
M=
ln(1 + i ) (3.6)
The equation is complicated, but a graph is worth a thousand words, see figure 3.3.
The first thing to say is that the calculations for a normal person, someone who wants to retire
around the age of 67, are unrealistic. And social security contributions, which are what pay pensions,
are around 30% of the gross salary. For a normal citizen this represents around 40% of the net
salary. If you look at the graph, you see that if a person saved 40% of their net salary they would only
have to work for about 23 years (assuming a 4% return on investments). However, today a person
who starts working at age 20 has to work twice as long ( ≈ 47 years) to reach the age of 67 and be
able to legally retire. And this is without taking into account that the legal retirement age will continue
to be delayed in the coming years. Therefore, what is stated in this section requires a quasi-heroic
effort on the part of the saver: saving some of the net salary, knowing that the state is taking much
more of our income (that 30% of the gross salary) to offer much less what one could do for oneself.
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In graph 3.3 you can see the effect of, for example, saving 10% for retirement. With a return on
investment of i = 4% we would have to work for 50 years to retire.
Savings Fraction r [ %] Time Saving M [Years]

0% Infinite
10% 51 years
20% 38 years
30 % 29 years
40 % 22 years
50% 17 years
60 % 13 years
70 % 8 years
Table 3.1: This table indicates the number of years working and saving until reaching Financial
Freedom, showing the same data as graph 3.3 for the case in which the increase in purchasing
power grows on average at 4% annually. If you don't save anything you will never achieve it, but
notice that if you managed to save 30% you would only have to work for 29 years, and if you
achieved a formidable savings of 50% you would only work for 17 years. Note that we are ignoring
the public pension and salary changes over all those years. It's a very crude approach, but it does
one important thing: show that it can be done.
The most striking thing about this graph is realizing the combined power of the savings capacity
and compound interest. If we manage to save 50% of income, and assume i = 4%, we would only
have to work for 17 years. Let's say for example that a couple has a joint salary of 2000 euros net per
month. From there they spend 1000 euros on day-to-day expenses, and they save the other 1000
euros. If the savings are invested with a typical return of 4%, it turns out that they will be able to live
off the income for most of their lives. They could start working at age 20, work for 17 years until age
37, and then live off the income until age 100. Enjoying life for 63 years without having to work. Can
you imagine a better dream?
We could even consider the case of a person with a low salary, say 1000 euros per month, but
who lives with his parents. Surely you know of a case like this. Since the house is the main expense
for any person, not having to spend resources there is a huge relief. This person could easily save
500 euros per month, also half of his net income, so that according to graph 3.3, in 17 years he
would have guaranteed income equivalent to his current expenditure, 500 euros per month. If this
person started working at 18 years old, at 35 they have already achieved Financial Freedom. Well,
when you reach this point we recommend that you continue working and repay your parents for
everything they have done for you.
Really the goal is to save the more the better. If you are a couple with a net income each of
1,500 euros per month, 3,000 euros per month jointly You could have expenses worth 1000 euros
per month (rent, food, etc.). The rest, 2000 euros per month, they save. That represents 66% of the
income. sos, and looking at graph 3.3 it is observed that they need 10 years. In 10 years they will
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have an income of 1000 euros per month for life. From there he will surely continue working, but with
a different vision of life.
An extreme case is that of Jacob Lund Fiske rLI who argues that while working he had a
savings rate of over 70%.
Be careful, the reader may say, that these are crude averages. The value of shares on the stock
market does not grow monotonically. Assuming average investment returns, no matter how
representative they may be, can be a risk. What would happen if there were a long succession of
years in which the stock market went down? The next section addresses this issue.
3.4. Simulations
In the previous sections we have calculated what fraction of our income we have to save in
order to reach a predetermined capital. This has been a valid theoretical analysis, but it lacks
practical data.
Putting these results into practice requires an entire life, and never better said. It would take
many people who had lived putting into practice these ideas, and see how they fared from birth to
death. Make statistics of how many people did well, and how many badly. This limits the possibility of
proving all this, because we do not have this data.
In order to independently confirm the analysis we can use simulations. These simulations take
historical data and reproduce the si tuation that would have occurred if we had applied the method at
that time. Nobody knows what will happen in the future (remember that "past returns do not justify
future returns"), but in the absence of anything better, we have no choice but to look at the past and
put in place all the necessary safety margins. We therefore proceed to comment here on several
simulations available on the internet.
In these simulations it is concluded that, in general, given a fund already available mulated,
extracting capital from it at a rate of 4% is safe in the long term. In fact it is the so-called SWR ( Safe
Withdrawal Rate ).
The SWR refers exactly to “constant purchasing power”, the situation tion in which you have an
asset invested and begin to extract capital from it at a rate of 4% per year. Each year, this withdrawn
amount will increase according to inflation. But note that if the stock market crashed the year after
you started, you would continue to withdraw the initial 4%, and you could exhaust your capital. The
SWR of 4% refers to the fact that it is statistically most likely that under these conditions the capital
will not be exhausted in a reasonable time (for example, 75% chance that it will not be exhausted in
40 years). On the other hand, note that if you were able to adjust this 4% to the capital you have left
at any given time (spending less in periods of crisis, and more in times of prosperity), then your
capital would never be exhausted (but it is already it is not the definition of the SWR).
In section 6.9 we show that investing 50% in the MSCI World index and 50% in an aggregate of
European bonds would have provided tioned an equivalent annual return of 5.7 % between 1998 and
2016. You would still have to take into account taxes and inflation, but it is not bad considering that it
LIAuthor of Fisker, Early Retirement Extreme .
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has gone through the dotcom crisis, the 2008 crisis and the Greek debt crisis.
There is a very simple simulator onlineLII . With just a few general parameters it gives a very
visual estimate of the income we can have during our retirement. Although be careful because the
author proposes some certainly risky investments.
On the other hand we have an online calculator called FireCal cLIII , which is an even better
simulation. In this case it is directly a website where we can enter our parameters and obtain
personalized results.
This simulation attempts to answer the question of whether we can live the rest of our lives given an
accumulated capital and a spending rate. It uses historical data from the United States stock market,
but countless parameters can be adjusted. In principle it also assumes a form of passive investment,
75% in shares and 25% in bonds, with a TER of 0.18 %, although this is also modifiable (TER refers
to the annual cost of investment funds, see surrounding text box).
TER and Investment Fund Expenses
The acronym TER refers to Total Expense Ratio , and is a measure of the cost of investment funds.
A TER of 1% means that each year the fund manager subtracts 1% of the invested capital for
his expenses, leaving the other 99% for the investor.
The TER is fundamentally composed of the AMC ( Annual Ma nagement Charge ), and to a
lesser extent for registration, audit and deposit expenses. Lately there is a tendency to call these
costs OGC ( On-Going Charges ) instead of TER.
In addition to the TER, investment funds may have other costs that the investor pays and the
manager receives, such as entry costs (for buying the fund), exit costs (for selling the fund) and
performance costs (for exceeding them). These other costs are not common in ETFs.
And finally, there may be hidden costs for the investor, which cause the fund to have a lower
real return than expected. That is, a fund that tracks an index can be expected to obtain a
return annual increase equal to that of the index minus the TER. However, the usual thing is that
the performance is even lower due to, for example, ex taxes. after ( stamp duty in the United
Kingdom), costs of operating in the market, impact of modifying the market, and others.
to
Bryant and Taylor, “Investment Management Association Fund Management Charges, Investment Costs
and Performance”
This would be the first thing to do, to be more austere, so that by adjusting expenses to income
(common sense!), the fund would last even longer.
LII Segura, Financial Strategist, Vital Calculator

LIIIFireCalc, How long will your money last?
Each person enters their own figures, and given the capital saved, they choose the amount they
want to extract each year. As you can see, given a capital withdrawal rate of 4%, it is very difficult for
the securities portfolio to be exhausted in a reasonable amount of time (for example, 60 years).
The good thing about this simulation is that it takes real stock market values, not statistical
averages.
It must be taken into account in these simulations that very rigid conditions are assumed, that
the person is not going to reduce their expenses if things go wrong.
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The Importance of Low Commissions
When buying a mutual fund, it is important that you buy a cheap one. Safe, with a good name,
well-known, simple... and low cost. A good way to visualize why is through the 4% rule. We have
seen in the text that 4% of their annual value can be extracted from our investments, assuming
the ideal case that they are cost-free indices. But in reality you have to take into account the
expenses (TER of the fund, custodian, intermediary). Even if expenses add up to 1% per year,
that is already a quarter of the 4% per year that we expect. That's a lot! Worse yet, imagine if the
cost of your investment was 3% per year, you would only have 1% left for yourself. And deduct
another 20% in taxes at the end of everything. No, investments, the cheaper the better. This is
the reason why we prefer international ETFs over domestic investment funds, because the cost
is 10 times lower. The investor's profit is what the manager does not take.
The Rule of 300
In the text it has been argued that in the long term 4% of the fund value can be extracted per
year. There is another clearer way to express this: we have to save 300 times our monthly
expenses. For every euro we spend per month, there must be 300 euros saved generating
profits. And how is this deducted? Because if we have 300 euros saved, we can expect a 4%
return on investment per year, that is 12 euros per year, which is equivalent to 1 euro per month.
We really like this rule because it allows us to visualize what we are saving for. If we have 6000
euros in the bank, that means that the mobile phone bill is paid forever (20 euros per month).
The next 15,000 euros that we save will pa They will cover the gym (50 euros per month). When
buying a car we could choose an expensive one for 30,000 euros, but it is better to buy it for
15,000 euros and invest the rest so that we can pay for the gasoline.
The Rule of 25
Another way of looking at the “rule of 300” is the so-called “rule of 25”. With It is that Financial
Freedom is achieved when you save the equivalent of 25 years of expenses, because 4% of
passive income from that saved capital equivalent to 25 years of expenses... is exactly 1 year of
expenses.
LIVLVLVI
The so-called Trinity Stud is well known and which simulated the evolution mul ture of
portfolios between 1929 and 2009. Obtains similar conclusions: reco invest at least 50% in stocks,
withdraw 7% annually from the value of the portfolio (4% or 5% taking inflation into account), and
have the flexibility to adjust expenses if a crisis were to come.
LIV Cooley, Hubbard, and Walz, “Portfolio Success Rates: Where to Draw the Line.”
LVMaria A. Bruno, Jaconetti and Zilbering, “Revisiting the 4% spending rule.”
LVIMaria Bruno, The 4% spending rule, 20 years later .
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The Trinity Study is very well described in Spanish by Homo Investor on their website. There he
explains various variants applied to investment in the IBEX 35 and the importance of flexibility when
rescuing the investment.
29 30
Similar studies are found on the Internet, prepared for example by Vanguar d , where the
viability of a portfolio composed of 50% stocks and 50% long-term bonds is studied. In conclusion, it
is also obtained that withdrawing funds at a rate of 4% of the total is stable in the long term, in the
case of having very low management costs ( 0.25 % TER). If we assume higher expenses (the article
assumes in this case 1.25 % TER), the annual amount that can be withdrawn is more like 3%. We
argue that this situation is more realistic, since not only 0.25 % TER would have to be accounted for
in the expenses, but also the taxes are borne by income tax rates ( 0.20 %–30% of profits), possible
withholding tax from one country to another ( withholding tax ) and the fact that ETFs follow net return
LVII
indices rather than gross return. .
And if everything goes wrong, if the stock markets collapse and you lose some of your capital,
hold on. See section 6 on how to conveniently organize your portfolio, and section 7 to get an idea of
how many crises you will experience.
Ok, we have already seen that in the past it has generated a return on investments of 4% per
year in the long term, after taking into account inflation, but how to implement it? How to invest to
achieve this goal? Let's see it in the next chapter.
What does it mean to withdraw 4% of the investment annually?
We have said that if investments provide 6% per year in profit medium to long term, and we
suffer 2% inflation, in the end our purchasing power grows at 4% annually, which is the rate that
we should not exceed to have income assured in the long term.
But how is that done in practice? Suppose you have had in poured 300,000 euros over a whole
year.
Normally you will have investments that provide you with divi In short, let's assume 2% per year,
6,000 euros gross (let's ignore taxes).
Plus the revaluation of the investment, let's assume an additional 4% per year tional (because
2% plus 4% add up to 6%). So the investment has been revalued by 12,000 euros, so it is
valued at 312,000 euros. ros. Note that this is a long-term average revaluation; it can vary
greatly from one year to the next.
But we must take into account inflation, which causes us to lose typi 2% of purchasing power
per year. That is, our nominal 312,000 euros have the same purchasing power as 306,000 eu
ros the previous year.
To stay with the same invested purchasing capacity, you can We must withdraw 6,000 euros of
the 312,000 we have, to remain at 306,000 nominal euros (300,000 euros of purchasing power
after taking inflation into account). With this we are left as we were at the beginning.
In short: We invested 300,000 euros. We received 6,000 euros in divi We give them and sell
6,000 euros of the investment, in total we have 12,000 euros gross in our pocket (the blessed
LVII Amery, Dividend Tax Leakage in Popular Equity Indices .
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4% of the initial investment). And in the end we have 306,000 euros invested, which represent
the same ca purchasing power that we had a year before.
At this point, we have passed the first year. You have to decide how much to withdraw from the
accumulated in the second and subsequent years.
• Withdraw 4% of the initial investment. This is the case with considered in the SWR (
Safe Withdrawal Rate ) and the Trinity Study . It consists of maintaining the initial
purchasing power forever. Problem, if a crisis comes it can run out.
• Withdraw 4% of what remains invested each year. This method ensures that if a crisis
comes and the value of the investment falls, it also Well, let's extract less and avoid it
running out. Problem: You may not be able to reduce expenses as much.
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Chapter
Investments
The stock market serves as a placement agency, where money moves

from active investors to patients.
Warren Buffett, perhaps the most successful investor in the world.
We have already explained in the previous chapters what our objective is, we want to be self-
sufficient. We want to obtain a source of income for sive, that do not depend on our daily work, but
flow independently. Ultimately, we want to achieve Financial Freedom.
Without a doubt, this is a long-term objective, which cannot be achieved from one year to the
next, and which is only accessible to ordinary citizens today thanks to the expansion of the middle
class and the generalization of investment. low cost.
There are several ways to achieve Financial Freedom. We could buy houses and then rent
them. This rental is what would provide us with passive income. This may be a solution, but it has
many flaws, as will be seen in section 4.1.2 .
On the other hand, we could manage a business that requires relatively little attention, little daily
effort, and certainly much less than the 8 hours a day of a conventional job. For example managing a
blog, writing books, or programming applications for mobile phones. This is certainly difficult because
we all have the same intentions, and you have to be very good in what is done to be able to make a
living from it.
The most feasible thing for a person on the street is to take advantage of democracy. zation of
investments. The fact that you can safely invest in funds, which will manage your capital
automatically and with minimal intervention tion of the investor. Take advantage of the fact that these
funds are already choosing the best investments present in society, giving the money to those
companies that can best benefit from it.
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Risk and Return
This is a basic rule of investing: the return is greater the greater the risk you are willing to accept.
For this reason, stocks have historically provided greater profitability than corporate bonds,
because if the company goes bankrupt, we will have to see if the bondholder gets the money
back, but the one who surely won't get anything is the shareholder. And that is why having the
money in the bank account does not provide any return, because it does not carry any risk
either. In short, be aware that profitability is not given away for nothing.
Rule of 72
Calculating the effect of compound interest on an investment requires relative effort, but there is
this small formula that allows us to give quick and fairly accurate estimates. It is the so-called
“rule of 72” .
It consists of the number of years necessary to double an investment is equal to 72 divided by
the percentage of the return on the investment. Example: If we assume that the investments will
provide 6% per year, then the initial investment will double in 12 years (for example that 72 / 6 =
12). And vice versa, if we want the investment to double in 9 years, we would have to obtain a
return of 8% per year (because 72 / 9 = 8).
Note that this is nothing more than a first approximation that assumes constant interest
throughout all those years. Reality is always more complicated.
Invest What You Have Leftover
Invest only those income that you will not need in the short term. If you think you will need it,
keep it. Don't forget that the bag is im predictable and you can lose money when you need it
most. And even less invest on credit, never, because if you have losses they can be greater than
the amount invested.
4.1. What Form of Investment to Choose?

At the time we were thinking about how we could invest, how we could We save for the future.
After much thought, we have analyzed the different possibilities and reached our conclusions.
In our case we have chosen ETFs as instruments because they seem to us to be the best
option. We present these ideas in the following pages, but please, reader, educate yourself and make
your own decisions. ETFs have excellent properties, but they may not be best for you.
Invest But Don't Speculate
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Note that everything consists of working, saving patiently, and investing what is left over. There
is no room for speculation here. Chasing high returns is the surest way to lose money.
4.1.1. Types of Passive Income

From a tax point of view, there are three ways to obtain income financial income:
Capital gains
It is the usual “buy low and sell high”. If we pay 800 euros for an asset and later sell it for
1,000 euros, we will have a profit of 200 euros.
Dividends
By purchasing shares we have the right to receive dividends that could to distribute the
company. Dividends are part of profits of the company, that is, after having paid corporate
tax facts. Note that they are not safe, the company has the freedom to choose whether or not
to pay dividends.
Interest
Interest has a similarity to dividends, in the sense that the company delivers a given amount
of money to anyone who owns a security, a bond or a share. However, the company pays this
interest (the bond coupon) before having paid corporate tax. Furthermore, the company has
no choice about whether or not to pay the coupon, it has to do so, it has committed to it.
4.1.2. Buy house

Buying a house is something that we all have in our minds, it is one of the objectives common to
all people. This is normal, because we all want to have a roof over our property, the stability that this
provides, to put down roots, to feel attached to a place.
Furthermore, Western states have made great efforts to achieve guide the population to own a
house. To achieve the so-called society of owners , which makes countries more stable, since people
who accumulate wealth (houses in this case) are less likely to join revolutions that turn society upside
down.
Interest rates for purchasing homes are very low, so the cost of interest becomes acceptable. On
the other hand, the duration of mortgages has been lengthened, reaching up to 100 years in Japan
and Switzerland, so monthly payments are lower (if a mortgage that our grandchildren will end up
paying can be considered positive).
In a first approximation we could ask ourselves if it is worth buying the house in which we live.
For this, some calculations would have to be made about the cost of buying, renting, and accessory
LVIII
expenses. . And going further, already, we could consider buying houses to rent them and thus
obtain relatively passive income (we say "relatively", because we have to maintain the houses and be
aware of the needs of the tenants).
LVIIINew York Times, Is It Better to Rent or Buy?
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In any case, there are those who seek Financial Freedom by buying houses and renting them
(such as What Life Could Be and Afford Anything . It is a possible option, but we will explain below
why it does not seem like the best option.
What is the worst investment imaginable?

The purchase of the home in which you live may have its reason for being. However, before
embarking on what would surely be the biggest purchase of your life, it is important to consider
several aspects. In fact, one can start by considering, just as JL has done Collins on his blog, what is
33
the worst investment imaginable .
By modifying the reasoning, and looking for the worst investment instead of the best, one will
find surprises. Let's define that terrible investment point by point.
• It should require a continued investment over time, which forces the investor to make periodic
payments.
• It should be illiquid, understood as the difficulty of buying or selling the investment to other
investors.
• The purchase or sale would have to take a long time, weeks or months, to be carried
out.
• It should have high transaction costs, either through daily or taxes. These transaction
costs would be a relevant fraction of the investment cost and would apply to each
purchase and sale.
• It should be complex to buy and sell. Not just expensive or illiquid do, but it should also
require exhausting bureaucracy, visits to managers, notaries, and documentation to
present.
• It should generate lower profits, the better. For example, similar to inflation, but after
considering all the hidden expenses it would be even lower.
• It should be a credit investment.
• The investor normally focuses on the leverage (cre dito) increases profits when
everything is going well. Naturally, it increases losses by the same amount. In this way,
when When the real value of the investment falls, payments must continue to be made
at the initial price.
• It should be an investment with a mortgage. So that the investment itself serves as
collateral. This way, if something goes wrong and payments cannot be made, the
investment guarantee is completely lost.
33
Collins, Why Your House Is A Terrible Investment .
• Continuing with the previous point, that the delivery of the investment (pro piedad)
mortgaged is not enough to pay off the debt in case the investment goes wrong (in
other words, dation in payment does not apply). It is necessary for the investor to
continue paying the difference between the initial value and the current value of the
mortgage.
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• It should be a basically unproductive investment. Perhaps with a lot of effort it could be

possible to obtain some benefit (for example by renting), but then the risk of losing the
investment and the transaction costs would have to exceed the expected benefit (if a tenant,
for example, destroys the house).
• It should be an immobile investment, tied to a specific geographic location. cific.

• In this way, the investor could never go too far from that place, lest something happen
to his investment in his absence.
• If you wanted to sell it, you would find few buyers because potentials who were
interested in that very specific place.
• It should be subject to geographical risks, so that the The direction of the investment is
associated with that of the country, region, city, even the neighborhood where it is
located. In this way, risks become unpredictable: countries can suffer economic crises,
regions can suffer natural disasters, emblematic companies tics of certain cities can go
bankrupt.
• It should be an investment whose risks are directly correlated ned with other possible income
of the investor. For example, if the investor or his tenant are employed, and due to an
economic crisis or natural disaster they are left without work, it is at this moment that the
investment that interests us would also fail (if the tenant is unemployed, it will not will be able
to pay the rent).
• It should be a very expensive investment.

• Ideally it would have to account for a good part of the investor's income. In this way, the
investor would not be able to diversify his savings with other investments and would
find himself practically depending on a single investment.
• It would not only have to be expensive to buy but also expensive to maintain. have. This
investment should require effort and money to prevent it from being in a ruinous state
after a while.
• It should be a fragile investment. Easily damaged by inclement weather, fire, vandalism.

This would require paying insurance to cover these risks.
• You should pay more taxes than other similar investments.
• You should pay VAT, even though investments (stocks, bonds, funds, gold, etc.) do not.
• If an investment increases in value over time and is then sold da, will require paying a
fraction of the benefits, as is normal. However, in the event that its value plummets,
this loss could not be offset with gains from other investments to reduce the tax impact.
• You should be required to pay taxes every year, not just when you collect profits. A tax
that would be proportional to the total value of the investor's properties (IBI), and not
just the income they earn cias. A tax also for a value decided by the state, and not for
the real value of the investment.
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• You should pay taxes even if you have not generated profits (the house has not been
rented), since in this case the state would assume that those profits have existed ( The
benefits of goods or rights capable of generating returns on real estate capital are
LIX
presumed to be paid . .
• It should still pay taxes even though it has not been used, without anyone living there.
For example, pay garbage tax without having junk nerate, TV tax without having
watched TV (UK, Germany); electricity, water, gas, which is always paid for something
even though it has not been consumed, most of which are taxes (Greek method of
collection).
• It should be an investment that is an indivisible unit, difficult settling things for example in the
case of divorce or inheritance.
• That it is an investment whose legislation changes frequently due to to the discretion of

electoral policies. To ensure this, it would be convenient to have a specific ministry for these
investments.
For all these arguments stated above, buying a house does not have to be a recommended
investment. At least not if what you want is invest , that is, rent it. Another issue is whether it is the
house in which you live, which could perhaps be reasonable as long as it is long-term, because in the
short term the purchase/sale expenses devour the benefits.
It might also be reasonable if you wanted to save on something tangible, something you could
touch and be fully aware that it remains intact, to save on something that you can't lose overnight. In
that case buying a house is reasonable. But this is a decision that each person must make, because
what for one may be a blessing (ease of buying and selling with a few clicks online, intangibility,
absence of ties to the land) for another may be negative.
Some Calculations
Suppose we buy a house for 200,000 euros. Paying a loan interest rate of 2% (typical in 2014),
and assuming a 30-year loan, you would have to pay 750 euros/month. This is 9,000 euros/year, in
other words, you pay the bank for the house (principal and interest) 4.5 % of the value of the house
per year (see any online mortgage simulator).
To this cost we must add fixed expenses such as the Real Estate Tax (IBI), garbage rates,
insurance (life for the mortgage, housing), community expenses. These expenses together can be
around 1000 euros per year. Let's assume that on average in the long term we need another 1000
euros/year for unforeseen expenses and general maintenance (for example, repairing leaks). In total
2000 euros/year, 1% of the initial value of the house.
Therefore, the cost of owning the home is 11,000 euros per year ( 5.5 % of the value of the
house). At the end of 30 years, you own a 200,000 euro house (ignoring inflation for simplicity).
On the other hand, the cost of renting a similar house can be around 600 euros/month, to 7,200
euros per year (search for information, for example, on the Idealista portal) .
LIXSee page 122 of the Tax Agency, 2015 Income Tax Return Manual .
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Let's imagine that the person who rents pays 7,200 euros/year for rent. ler, and invests another
3,800 euros/year in the stock market (that is, he spends a total of 11,000 euros/year, just like the
person who buys the house).
Suppose we invest these 3,800 euros/year in the stock market, for 30 years and with a return on
investment of 4% in the long term (after having discounted inflation, see table 6.1) . This would mean
213,000 euros.
The final result is shown in table 4.1. As can be seen, both investments give similar results. At
the end of 30 years, the person has either a paid-for house or savings that, when invested, provide a
return equivalent to renting a house.
In this example it is slightly more beneficial to rent than to buy. But what is truly advantageous
about investing in the stock market instead of buying a house is not being tied to the land. Having
freedom of movement and being able to look for work in another city if necessary.
Annual expenditure Result After 30 Years

Buy 9,000 euros in the purchase House worth 200,000 euros
2,000 euros in extra expenses
Rent 3,800 euros in investments Investments worth 213,000

7,200 euros for rent euros
Table 4.1: Comparison of results buying or renting a house. See the text for an explanation of the
conditions of this simulation.
Inflation has not been taken into account, but this affects both cases equally. The value of the
house would increase over time at the rate of inflation; But it is possible that the rental price would not
change year to year, and what is certain is that the investments would revalue more than the
assumed 4%.
To make matters worse, when buying a house you have to have approx. 10% more budget for
taxes, notary fees, and similar. Which makes the option of renting even more advantageous.
On the other hand, if the house loan was paid off in a very short time, say 5 years, then both
cases would be stalemate. The person who buys pays much less interest, but has to pay a very high
monthly payment. The person who rents can invest the difference, which will be a lot, in something
that will produce profits.
Here we have assumed that the person who buys the home lives in it. Or the similar case could
also apply in which you rent it. On the contrary, buying to keep the house closed is an economic
disaster. Buying a house outright is never an investment, because houses only revalue in the long
term with inflation (theoretically). And that is why buying a house cannot compete with a true
investment, because the effect of compound interest is relentless.
If you still decide to buy a house, please buy the cheapest house that meets your needs, and not
the most expensive one you can afford. And remember that the larger and more expensive the
house, the higher the associated expenses will be, such as the interest part of the monthly payments,
maintenance costs, heating, furniture...
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In short, in general buying a house is not the best investment. It is better to rent a house that is
relatively cheap and invest the difference.
4.1.3. Pension plans

The natural solution to saving for old age should be pension plans. You would have to deposit
some money every month into one of these plans.
The existence of pension funds is common to all countries, there is always specific legislation for
citizens to save for retirement in this way, and Spain is no less.
Therefore, the first reaction that people have when considering saving for retirement is to use
pension plans. That's what they are for, right?
When in this section we refer to pension plans, we are referring to the set of products designed
to save for old age. Although we focus on Spanish legislation on pension plans, this can be
generalized, for example, to Individual Systematic Savings Plans (PIAS).
Studies on the Sector
When we consider saving to complete the public pension, the first thing we think about is
pension plans.
In the process of searching for information, two reports from the IESE Business School–
35 36
University of Navarre fell into our hands on pension funds in Spain during the last 20 years.
These studies have mythical phrases, which we repeat here as is.
• During those periods of 10 and 17 years, the average profitability of pension plans was lower
than the investment in government bonds.
• None of the 170 plans with 17 years of history [...] had a higher return than the Madrid Stock
Exchange Index.
• In the last ten years, 66% of the individual system funds obtained a return lower than inflation,
and 95% obtained a return lower than 5.76% (that of 10-year government bonds)
• Of the 532 pension funds with ten years of history, only

2 exceeded the yield of ten-year government bonds [...] and 191 had a negative average
yield! [exclamation in original]
35
Fernández and Bermejo, «Profitability of Pension Funds in Spain, 1991- 200 7 ».
36
Fernández, Aguirreamalloa and Corres, “Profitability of Pension Funds in Spain, 2001–2011”.
• The disappointing overall performance of the funds is due to high fees, portfolio composition
and active management.
As the articles explain, if we select the funds that invest mostly in fixed income, we would expect
their returns to be similar to those of state bonds. However, the average profitability of pension funds
was below that of government bonds. This is surprising, because buying bonds does not require any
special skills, any citizen can do it.
It is surprising that pension plans provide such low returns. Those who invest in the stock market
should achieve better results than those of the Madrid Stock Exchange, since they charge the client
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for their active management, from which it follows that they are actively choosing the best stocks that
will provide better returns. However, its returns are always lower than those of the general stock
market index.
And what no longer has a name is that pension funds, whose managers earn a salary at the
expense of the client, provide negative returns in the long term. As the articles say, it is because they
mainly buy state bonds (which only makes sense with clients who are going to retire soon and want
stability), since they keep almost 20% of the value of the funds in treasury (cash money and sound
without inverting!).
As the articles indicate, similar problems occur in pension funds in other countries.
The 1991–2007 article ends by advising investors to invest in funds with small commissions and
expenses that replicate the indices, and avoid funds with “active management” [...] .
Finally, the authors comment that savers lose sales tax benefits provided by the state in just 5
years. Pension funds are a creation of the state to help citizens save, and curio They also achieve
exactly the opposite.
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Tax Advantages Are Lost in 5 Years
The great advantage of state-sponsored pension plans is that the money invested in this way
does not pay personal income tax (be careful, it does not pay at the time of investment, but it
does pay when you redeem the money in retirement). On the other hand, any other investment
is made with money that has already been paid by personal income tax. However, this immense
advantage is lost both due to the poor management carried out by the managers and due to its
high cost.
Let's calculate the evolution of the investment in each case:
• Suppose we invest in a pension fund a amount of money (100%). Being optimistic, let's
assume that the return on investment is equal to inflation (therefore, in this
approximation, purchasing power does not change). When we retire we rescue the
investment little by little and pay the corresponding personal income tax. current, which
we can assume will be a low rate, around 25% of the total. Therefore, in the end only
75% of what was invested is recovered.
• Suppose we invest in stocks or investment funds (for example ETFs). We have earned
the money we invest by working, and we can assume that it pays a marginal 35% of
personal income tax. This way, we only invest 65% in ETFs (in other words, the other
35% is taxes). By investing in the stock market we can expect a 4% annual return on
investment (assuming do zero inflation). Let's assume an additional 20% tax on profits
when redeeming the ETFs (so 4% we take its corresponding 20% and we are left with
3.2 %). Therefore, the purchasing power is 65%(1 + 3 , 2%) n , with n being the number
of years.
When do the two investments give the same result? When 75% = 65%(1 + 3 , 2%) n is met, from
which it follows that n = 5 years. From there the ETFs win thanks to their exponential growth.
Pension plans are also absurd because by law we are obliged to maintain the pension fund in
the long term, just when it is worst for the citizen, becoming a catastrophic investment.
Comparison
At a certain point we asked ourselves: what would happen if we did it ourselves? themselves? If
you yourself made exactly the same investments that investment funds make, then you would be able
to save on fund fees and have the freedom to manage your savings. These are great advantages, but
in exchange you would find that you have to pay more taxes because unfortunately this is penalized
by the state.
Take as an example a typical pension plan from one of the major banks in Spain. Go to your
product catalog and look for any pension plan. You can also search for it through specialized
websites (such as Morningstar) . In our case we have chosen one on European fixed income, to be
able to compare. Look for the pdf file with the monthly sheet, or similar document that explains the
product in a couple of pages.
Once you have the prospectus in front of you, look in it:
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• Investment objectives: Investment in medium and long-term fixed income domestic and euro
zone.
• Commission of the managing entity. In this case it is 0.95 % per year of the amount invested.
• Commission of the depository entity. In this case it is 0.10 % per year of the amount invested.
To these expenses we must add account maintenance and other possible hidden expenses.
Let's not take them into account, let's assume that the total expenses are 0.95 + 0.10 = 1.05 % of the
capital invested per year.
Let's now look for an ETF that provides a similar service. We can use the Morningstar search
engine.
A typical European public fixed income ETF costs 0.20 % (the so-called TER, Total Expense
Ratio ), and already includes the cost of the depository entity. Its returns are comparable to those of
the previous pension fund.
Let's now take into account the broker's expense. Suppose that the man Account maintenance is
free and you pay 0.25 % of each purchase and sale. As an approximation, suppose we buy the ETF
(pay 0.25 % of the initial investment), hold it for 25 years, and then watch it demos (we pay 0.25 % of
the final investment). We can approximate this by the equivalent of ( 0.25 % + 0.25 %) / 25 = 0.02 %
per year.
Let us now compare the equivalent annual cost of the pension fund (which is 1.05 %) with that of
the equivalent ETF ( 0.22 %). Practically 5 times more expensive to provide the same service.
You have to at least be glad that thanks to the emergence of ETFs and do-it-yourself , the typical
cost of pension funds has fallen in recent years by half, more or less from 2% to 1% (but there are
have to include the costs of entering and exiting the fund and maintaining the account, which depend
a lot on the bank and cost the same).
One might ask, how is it possible to charge 5 times more for a service than it is really worth?
There are several explanations. One of them is that the client is paying for the brand, because the
well-known bank provides security (although in truth it is much more likely that the well-known bank
will fail than the ETF manager, because the ETF manager is not leveraged).
Another explanation is along the lines that we clients do not have basic knowledge about
finances, so we do not supervise what these entities do with our money, so they literally do what they
want, which is irremediably bad for the client.
A third explanation is that as citizens we are faced with perverse incentives. The state promotes
that we give the money to the pension funds with tax breaks and various propaganda. As people, we
have the vision of short-term savings (reduction in personal income tax) versus the difficult to
estimate long-term benefit. And we choose short-term savings, we choose state-sponsored pension
funds. Because we are reasonable people, and the arguments presented to us They feel they are
going in that direction. If we did not act like this we would be monkeys who act randomly, but we are
people who react to incentives, and that is why we fall.
And who benefits? Not only the banks, which charge 5 times the real price of the service, 1.05 %
annually in this case. The remaining 98 , 95% goes directly mind in the hands of the state. The state
obtains a large benefit from pension funds, because the money is mainly used to buy state bonds.
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The legislator, the state, is judge and party in this matter and that is why we citizens only lose.
In summary
Pension funds are very expensive. They are clearly harmful to citizens, and would not be there if
it were not for the collusion between banks and states.
At most, pension plans offer a certain security in exchange for selling your soul to the devil.
Because in order to accumulate mono capital rapidly increasing, based on volatile products on the
stock market, investment funds have to use complex products (for example purchase or sale options
in the future), which introduces new additional risks, and On top of that they have a cost for the client.
In the end, in exchange for the peace of mind of protecting the bulk of the invested capital, it is
accepted to have no profits or even small losses year after year.
4.1.4. Investment Funds

In Spain there are so-called Collective Investment Institutions (IIC) and these encompass the
investment funds themselves, the SICAVs, and the SOCIMIs (Listed Public Investment Company in
the Real Estate Market). To simplify the language, we say investment fund here, but we are
generalizing to all IICs.
A definition of investment funds would be that they are entities that operate They serve as
instruments for capturing and channeling investment resources. investors, through the issuance of
LX
shares, with the mission of managing and administering the corresponding securities portfolios.
So everything seems to indicate that a reasonable way to invest would be to use investment
funds, since they have been created for this. Will these be the best instruments to save in the long
term?
The first thing one can read is the article written by Pablo Fernández and collaboratorsLXI ,
very similar to those already mentioned about pension plans in section 4.1.3 . Their conclusions are
horrifying, here are some pills:
• The average annual profitability of investment funds in Spain between 1999 and 2014 ( 1.60
%) was lower than the investment in 15-year Spanish state bonds ( 5.83 %) and what would
have been obtained if it had been invested directly on the IBEX 35 ( 3.28 % gross annual,
including dividends).
• Of the 629 investment funds with 15 years or more of history, only 9 of them exceeded the
profitability of the 15-year Spanish bond, only 74 had They had a return higher than the IBEX
35, and 99 funds provided negative returns!
• Very few funds have been profitable for their participants and have justified the commissions
they charge.
LXFor more information see AFI, Collective Investment Institutions and CNMV, Los Fon d Investment and
Collective Investment .
LXIFernández, Ortiz et al., «Profitability of Investment Funds in Spain, 1999- 2014»
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• The overall result of the funds does not justify tax discrimination in their favor. Given the
results, the State should not “encourage” investing in investment funds. It is unfair that an
investor who directly carries out the same operations with his money as the manager of his
investment fund pays more taxes than the fund and, furthermore, before.
We can also add that, since the average return has been 1.60 % per year and nominal inflation
in that period was 3% per year, the average investor has lost purchasing power at a rate of 1.4 % per
year.
LXII
There are many similar articles, both at the national level as
internationalLXIIILXIVLXVLXVILXVIILXVIIILXIX and there are also books that go on at length on the

subject.LXX . The conclusion is always the same, regardless of the country: the only one who
systematically wins is the manager, but never the investor.
Furthermore, the investment method used does not change things either. This Distinctively, no
method has consistently provided long-term profits for the investor. This will be seen in more depth in
section 4.2 .
We can do a thought experiment, but instead of thinking about fund managers and whether the
stock market goes up or down, suppose we flip a coin and see if it comes up “heads” or “tails.”
Suppose we take a population of 24,015 people (which is the number of investment funds in Spain).
(according to the Morningstar website) who toss coins in the air and try to predict the outcome. If they
predict “heads” and the coin actually comes up “heads”, then We consider that they have got it right.
But if they have said "heads" and it comes up "tails", then We consider that they have failed. And vice
versa. This experiment is nothing more than pure chance, and there is no way that the person flipping
the coin can influence it to come up heads or tails. However, if we have everyone flip the coin and
predict the outcome, we can expect half to get it right and half to miss. About 12,000 will have been
LXII The performance of actively managed funds in Spain has been significantly lower than that of their market
indices Iturriaga et al., "Performance of Indexed and Active Management Funds in Spain"
LXIII The higher the expenses for the investor, and the more active the management style, the worse re Results
for the Investor Cuthbertson, Nitzsche and O'Sullivan, “Mutual Fund Performance: Measurement and
Evidence”
LXIVMalkiel, “Returns form Investing in Equity Mutual Funds 1971 to 1991”
LXVPhilips et al., “The Case for Index-fund Investing”
LXVIOnly 0.6 % of managers improve their index, and this number is not even this Distically significant Barras,
Scaillet and Wermers, «False Discoveries in Mutual Fund Perf either rmance: Measuring Luck in Estimated
Alphas»
LXVII The more active the investment style, the worse the results for the investor Barber and Odea, «Trading
Is Hazardous to Your Wealth: The Common Stock Investment Perfor mance of Individual Investors»
LXVIII Statistically, the higher the investment fund fees, the lower the profitability for the investor Kinnel,
Predictive Power of Fees: Why Mutual Fund Fees Are So Important
LXIXSee tables ( reports ) 1 and 11 of McGraw Hill Financial, Spiva US Year End 2015 , following a simple
index would have provided better results than most investment funds that invested in that sector.
LXXMalkiel's excellent book, A Random Walk Down Wall Street .
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correct, and we could repeat the experiment with them, having them toss the coin again and make
their prediction. Whatever it is, again more or less half will be right, so we would have about 6,000
people who have been right twice in a row. Those who were unlucky will walk away thinking this was
a scam, but those who were lucky will move on. And we could continue like this, for example 10
times, and it would be the case that about 23 people would have correctly guessed the result of the
coin 10 times in a row! They must be geniuses! And that's not the case, those 23 people have no
merit, and a group of 24,015 trained monkeys would have achieved the same result. And the same
thing happens with fund managers, given a sufficiently large population there will always be someone
who has done well in the long term.
Active managers often criticize the above reasoning, implying understand that this chance is not
such. It would be very suspicious if those 23 people who got it right 10 times by tossing the coin all
lived on the same street in the same city in the same country. They should be living randomly all over
the world, and yet those 23 people are grouped together. This is what happens, that many of the
most successful investors (starting with Benjamin Graham and Warren Buffett) define themselves as
followers of a certain investment style (the so-called Value Investing ). Does this mean that you can
really be rich and famous by following an investment style? We don't think so. And flipping the coin is
not similar to the decision that a manager makes to buy a certain share and have its price rise or fall.
Flipping the coin is more like the manager choosing his investment style. And a certain investment
style works well for a while, until other investors realize the competitive advantage, switch to Value
Investing , and buy those types of shares of companies, which due to demand now have higher
prices than before, losing all the effect. So any advantage ends up diluting over time, which is what
happens to great investors, who were very good in the past and today obtain returns similar to the
market average.
And the important thing is to compare each investment fund with its benchmark index. Because
it's easy to win when everyone wins. What there is to have to compare with something, and this is the
crux of the problem, that statistics are disastrous for investment funds.
Statistically, mutual funds earn less than the index they follow after deducting management fees.
This, on the other hand, is nothing that should surprise us: half of the investment funds will have
made purchase and sale decisions that will have become good investments (compared to their
benchmark index), and the other half will have done worse. On average, all aggregated, they will do
so as the index. However, you have to discount their management expenses (TER), which are
around 1 - 2% per year, and after doing so, the average investment fund does worse than its
benchmark index. The objective would be, in any case, to minimize the TER in order to receive the
average performance.
It is true that there are some managers who obtain better results than their benchmarks. But it is
not clear that this is persistent over time, nor that a small investor can find them within an ocean of
mediocrity.
This account must also be done carefully, because we run the risk of suffering from Survivor
Bias . The fact that, when searching for fund information for a given period of time (for example 15
years), we only find information for funds that have survived. But we did not find information about
those that have been closed due to poor performance. Therefore, direct averaging only provides the
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average performance of the best investment funds. And that is not realistic, because we could have
invested in funds that have been closed, which would have represented a very bad investment, and
we would have lost money.
What can we do as small investors? Is there any chance that an ordinary person would not be
systematically defrauded by his bank and his investment fund?
But wait a moment. We have shown that mutual funds achieve results that are statistically worse
than their benchmark indices. What if we hire a fund that strictly follows an index? A passive fund,
where you don't have to think. That has to be very cheap, because an index fund minimizes
expenses, since the manager has nothing to think: he only has to buy and sell what the index says.
Let's see it.
Let's look at a particular case to see what one can achieve. For example, look on a specialized
website, or go to your bank and ask.
Let's take the example of a large, international, well-known, orange bank. If you search their
website, you will find that they offer several investment funds. Take for example the ING Direct FN
Euro STOXX 50 FI fund (ISIN code: ES0152771038, you can find it using an internet search engine).
• It is expensive. Its cost is 0.99 % of the annual investment in management expenses, plus
0.10 % annual custody fee. In total 1.09 % annually. This investment fund is actually managed by
Amundi, which offers ce ETFs that track the same underlying (for example FR0010654913) What is
the price of these ETFs? 0.15 % annually (purchased from Xetra or Euronext). The same manager
charges 7 times less for its ETF product (note that ETFs have other expenses, but at least they can
minimize HE). And we must keep in mind that there are managers that offer this index for 0.09 %
annually, 12 times less. How is this possible? Why are investment funds so expensive? On the one
hand, due to "retrocessions", because fund managers pay intermediaries so that the investor can buy
"for free" (the intermediary charges a part of the manager's TER). And on the other hand the lack of
competitiveness. In Spain, investors have been very limited. An oligopoly of a handful of large banks
are the only ones authorized by the CNMV to offer investment funds. Without foreign competition and
without formal investors Two, the managers could charge whatever they wanted. Compare the reader
the cost of investment funds in the US, which is up to an order of magnitude lower. In fact, in the US it
is indifferent whether to buy the fund or the ETF, both cost more or less the same; but in Spain it
does matter, ETFs are much cheaper.
• It is inefficient. And if you compare the evolution of this investment fund with its benchmark
index (go to the Morningstar website and search for its ISIN), you will see that it is a disaster.
Over the past 5 years this passive index-tracking fund has delivered returns that are 2%
worse per year than its benchmark index. The TER ( 1.09 % annually) only explains half, the
other half is due to the fact that the fund is obliged to have around 5% of its capital available
in case there are investors who want to sell their participation. Between the beginning of 2012
and the end of 2016 (5 years) the index rose 77%, but since the fund was only 95% invested,
it could only capture a 73% increase (down 4%, 0.8 % annually) .
• It is not transparent. The fund has some leeway to buy things other than the stocks in the
index. For example, in 2015 this stock investment fund bought state bonds (why do you want
long-term state debt?), derivatives (isn't it obvious that it has to buy shares?). This is not
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illegal, by any means. In any case, you may have your reasons when managing it, they
explain it in your brochure, but it is up to the reader to decide if they are going to give their
money to managers who say they are going to buy the shares of the 50 companies. most
significant in Europe, and then, when you look at the fine print, it turns out that they have also
bought other different things that have nothing to do with it. Adds complexity and risks to the
investment.
In Spain, investment funds have privileges compared to other similar forms of investment (for
example in shares or ETFs). For example, because they do not pay taxes when moving capital from
one fund to another. But this is something exceptional in Spain, which is not the case in other
surrounding countries. If you buy investment funds in Spain and move abroad, know that the tax
advantages disappear and can become a nightmare (if the fund is not UCITS, for example).
Perhaps the most astonishing argument why we don't like mutual funds is because some don't
even do their job, they simply buy other funds. They charge around 2% per year to do the same thing
you could do. And those funds that buy have added expenses, probably 2% per year as well, making
it impossible for you to make any profit in the long term. At least some funds with dignity have been
They are called “funds of funds”, so you already know what to expect. But they often hide this fact,
and we can only realize it by looking at the list of assets under management. By the way, if you look
at it, you will find many ETFs. We will avoid giving names, but we recommend that you You should
definitely look at it yourself. Check it out, and if you don't find the information quickly, be suspicious.
So if you are thinking about investing, do like the professionals and buy ETFs.
In short, active investment funds are not worth it. In the long term, the investor always loses. And
not even conventional indexed funds are interesting, because their expenses are enormous. An ETF
that complies with UCITS regulations is much cheaper and more transparent.
The usefulness of the UCITS label is explained in the text box on page 97 . UCITS is a good
example of good legislation, which forces the product to be standardized, safe, simple and
transparent. The funds can grow more than they would if they were limited to a single country, so
they take advantage of economies of scale and are also cheaper. The success is such that even non-
European investors invest in UCITS products.
In any case, although we believe that passive investing is clearly better than active investing for
us small investors, we do not want to eliminate undermine active investment funds. They are
necessary, yes, because they set prices and provide liquidity. What we want to highlight is that small
investors like us have everything to lose with them.
Let's now look at several particular types of investment funds. Does the reader believe that
perhaps there is some flower hidden in the mud?
UCITS
UCITS ( Undertakings for Collective Investment in Transferable Secu rities ) is a series of

European Union directives that allows collective investment funds to operate freely throughout
the European Union, as long as they have been authorized in one of the member countries . It is
a kind of passport for investment funds. Additionally, countries may decide to include additional
regulation.
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The first UCITS directive dates back to 1985. Subsequently, a UCITS II was prepared but was
never implemented. UCITS III was implemented in 2001 and has been in use until recently,
when it was updated with UCITS IV. And a UCITS V is already being prepared.
This regulation obliges investment fund managers to do several things, these among others:
•
It should be clearly specified whether the background is sophisticated or not. Traditional
investment funds are not sophisticated. Fon Two alternatives, which invest in derivatives,
inverses, or ETFs, are considered sophisticated.
•
Frequent and detailed information on the status of the fund must be provided. And a
simplified prospectus (KIID) explaining the risks that the investor runs.
•
The “5/10/40” rule, to avoid the concentration of investment sion: no asset can exceed
10% of the total investment. And for those assets that exceed 5%, their sum cannot
exceed 40% of the investment.
•
A fund cannot be exposed to “counterparty risk” greater than 10% of the value of the
assets, in the usual case where the counterparty is a bank. If the counterparty is not a
bank, the limit is lowered to 5%. This applies, for example, to synthetic ETFs, where the
manager must have at least 90 or 95% of the value of what is invested in assets (ideally
100%, of course). In other words, the risk that the manager goes bankrupt and does not
return the investment cannot be greater than 5 or 10%.
•
European Commission, «UCITS - Undertakings for the collective investment in transferable securities»
•
Groves, Exchange Traded Funds, A Concise Guide to ETFs
See also the website of the ALFI, Association of the Luxembourg Fund Industry .
Guaranteed Funds
These types of funds deserve a special mention because of how successful they are (for banks).
After analyzing them, the reader will see that they are not worth it either, but for more reasons than
those of the most general investment funds .LXXI .
What does a guaranteed fund offer? A guaranteed fund offers the It has two promises: to return a
certain percentage of the initial investment (typically 100%), and also a return related to the market
(for example, 50% of the rise in the IBEX 35).
This should certainly seem curious to the reader: investing in the stock market with the peace of
mind of not losing. Is this a dream come true? As we will see, guaranteeing what is intrinsically
variable creates even bigger monsters.
How is a guaranteed fund constructed? In a guarantee fund ized, the manager invests in two
types of assets: most of the capital in fixed income, and a small part in a derivative. The derivative
used is a purchase option on the market variable being pursued.
If it is an IBEX 35 call option, the manager will receive a basket of shares equivalent to the IBEX
35 (or, normally, its value). The interesting thing about options is that, as their name suggests, they
are a right to purchase, but not an obligation. If the IBEX 35 has done poorly and has fallen, the
LXXIMore information in Knop's book, Manual of Derivative Instruments
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investor will not exercise his right to purchase (because he would lose money), and only lost the cost
of buying the option.
In summary, at the maturity of the guaranteed fund there are two possibilities:
• The market variable (the IBEX 35 in this case) has fallen. The fund manager does not
exercise the right to purchase the option. The investor simply receives the guaranteed part,
obtained from the bond.
• The market variable has risen and the fund manager exercises the option. Normally it is paid
by differences , and the seller of the option gives the fund manager the money equivalent to
the value of the index. The investor receives the guaranteed part (as in the previous case)
plus the profit obtained through the option.
An example Let's take this example from a well-known bank in Spain. ña, one of whose funds is
called Ibex 2017 Guaranteed FI . There is nothing special about this example, the reader will be able
to find many other similar ones
Composition of the fund's portfolio Nov 30 , 2015
Asset distribution % cart
Foreword 12
Introduction 11
1.1. What is this book about? 11
1.2. What is Financial Freedom? 12
1.3. Why Write this Book? 13
1.4. Who has Written this Book? 14
1.5. Who should read this book? 14
1.6. Are there other people doing the same thing? 15
1.7. Why is what this book discusses so unusual? 15
1.8. But Is This Morally Acceptable? 16
1.9. Our history 18
Planning 22
2.2. Importance of Savings 25
2.3. Some Ideas to Save 26
2.4. Saving, for what? 28
2.5. Personal Economy Diagrams 29
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2.6. Have a plan 35

2.7.3. Financial Companies 41
2.8. The Distribution Pension System 44
2.9. Create a Company by Achieving Freedom Fi financial 47
Theory 59
3.1. How much can we save? 60
3.2. How much can we spend? 64
3.3. Combined Effect of Savings and Spending 67
3.4. Simulations 70
Investments 77
4.1. What Form of Investment to Choose? 78
4.1.1. Types of Passive Income 79
4.1.3. Pension plans 83
4.1.4. Investment Funds 88
4.1.6. Types of Public Debt in Spain 104
4.1.7. Types of Fixed Income in the US 105
4.1.9. Investment in Index Funds 107
4.2. Investments that don't work 113
4.2.4. Companies That Provide Dividends Grow you 120
4.2.5. Act According to Dates or Events 121
4.2.6. Economic Cycles 121
Invest in ETFs 126
5.1. A little history 128
5.2. What are the Main ETF Managers? 134
5.3. How does an ETF work? 135
5.4. How to Measure the Efficiency of an ETF? 148
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5.5. Are ETFs Made for Kids Investors? 150

5.6. Have ETFs Grown Too Much? 151
5.7. What Are the Risks of ETFs? 154
5.8. ETF Indices 155
5.8.1. Index Calculation Methods 155
5.8.2. Classification according to Dividend Treatment 160
5.8.3. Classification by Themes 161
5.9. Some Specific Types of ETFs 163
5.9.2. Asset Selection 163
5.9.3. Inverses and Leveraged 164
5.9.4. Real-estate market 165
5.9.5. Emerging Market Stocks 165
5.9.6. Global Indices of the World 166
5.10. Losses from Taxes Paid by the Fund 168
5.11. Typical ETF Expenses and Commissions 171
5.11.2. Trading Expenses Like Shares 172
5.11.3. Expenses for Being Listed Securities 172
5.12. How to Follow the Evolution of an ETF? 173
5.12.3. ETF Managers 174
5.12.5. Economic news managers 174
5.12.7. Specific web pages 175
How to Build a Portfolio 195
ETFs 195
6.1.
Core/Satellite Investment System 196
6.2.
The long-term 197
6.3.
How Long-Lasting is an Investment in Investment? you say?
200
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6.4.
Examples of Portfolios 201
6.5.
The Age in Bonds 210
6.6.
How many ETFs in Portfolio? 212
6.7.
Dividends: Accumulation or Distribution? 213
6.8.
The Benefits of Diversification 214
6.8.1. A Practical Approach to Diversification 214
6.8.2. Diversify by Number of Assets 215
6.8.3. Diversify by Asset Types 216
6.9. The Benefits of Rebalancing 218
6.10. Which Fixed Income ETF to Choose? 223
6.11. Emotional Errors and Investment Contract Zionist 224
Achieved 226
left” 226
6.12.2. Extract at ”constant purchasing capacity” 227
6.12.3. Extract a ”constant percentage of the portfolio” 227
6.12.5. Variable Percentage Withdrawal 228
Crisis 235
7.1. When Will the Next Crisis Come? 236
7.2. Ideas to Protect Us from Crises 237
Epilogue 239
Thanks 240
Recipe book 241
A.1. Steps to follow 241
A.2. How to Choose an Online Broker? 243
A.3. Example of Investor Contract 244
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A.4. How to Choose which Stock Market to Trade? 246

TO 5. How to Choose an Index to Follow? 250
A.6. How to Choose an ETF that Tracks an Index 251
Certain? 251
A.7. How to Decrypt an ETF Token? 254
A.8. How to Purchase an ETF? 258
Deduction of the equations 262
8.1. Savings equations 262
8.2. Expenditure equation 269
8.3. Combined savings and spending 273
Resources 285
Books 285
Articles 285
Websites 286
Contact the Authors 293
•
10 mayóte s pos sic en s Sector % cart

Galicia. Xunta de... - 57,19
Inst Created Official... - 20,32
Option/bk Ibex 2017|1 |2D17-01 -30 - 0,18
Total number of shares 0

Total number of bonuses 2
% of assets in the 1 0 largest positions 77.69
Figure 4.1: Composition of this Ibex 2017 Guaranteed FI investment fund.
searching on the banks' own website, or on Morningstar 's website (selecting the menus “Funds”,
“Quick Fund Search”, “Guaranteed” category, and searching for “IBEX”, for example).
For this fund that we have taken as a case study, and according to what the manager tells us,
the investment objective is:
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[The bank] guarantees to the fund at maturity (01.02.17) 100% of the net asset value of
11.29.12 increased, if positive, by 80% of the point-to-point variation of the Ibex 35, taking as
the initial value its closing price on 11/29/12 and as a final value its average daily price on
01/23/17.
Figure 4.1 indicates what this fund has invested in. As can be seen, despite referring to the IBEX
35, he has not purchased any shares. Alone two bonds: one from the Xunta de Galicia, and another
from the Official Credit Institute. That, and a purchase option on the IBEX 35. And surprisingly 22 ,
31% of the portfolio is made up of cash, that is, it is not invested.
The commissions section is also amazing (see figure 4.2) . Co They charge 5% of the initial
capital up front, and penalize 3% if the client wants to exit before maturity.
commissions
Inv. min. nest € 500 Entrance fee 5,00%
lv. min. additional Exit commission 3,00%

Deposit fee 0,10%
Management commission 1,55%
Distribution commission 0,00%
Figure 4.2: Commissions of this Ibex 2017 Guaranteed FI investment fund.
It may be acceptable to penalize the client who does not wait until the end, because it is complex
for the manager to return the investment to that client, because he would have to sell positions (if this
manager were to sell the Xunta de Galicia bond, the investors who remain deep down they would no
longer be invested two).
As if these commissions were not enough, on top of that there are expenses of 1.65 % of the
annual investment. Curious, because after the initial purchases, the manager has nothing to do until
maturity.
Some considerations Guaranteed funds are more complex than a small investor can imagine, and
they add new risks that were impossible to imagine a priori .
• Despite what its name says, capital is not completely guaranteed . The bond could go
bankrupt and not return the investment. It could be the case, for example, that a guaranteed
fund related to the IBEX 35 does not return what is guaranteed if the Xunta de Galicia goes
bankrupt. And this is a risk that an investor could not even imagine when looking at the name
of the fund.
• You invest in derivatives, which are not dangerous or strange in themselves, but which can
bewilder a small investor. It is more complex than one would like. Furthermore, derivatives
introduce a new risk: that when the time comes the counterparty will not be able to pay what
was promised by the option.
• A poorly trained investor might think that if the fund pro provides a performance related to the
IBEX 35, then the manager will have purchased IBEX shares. Nothing could be further from
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the truth, only bonds and a derivative are purchased. Nothing to do with actions.
• The fund claims to follow a market index, but does not however It provides the advantages of
being truly invested in it. And if we invested in IBEX 35 shares, we would receive dividends,
which in this case are of the order of 4% gross annually. So we are missing out on earning
those dividends.
• It is not diversified, because almost all the capital is invested in only two assets. If either of
them went bankrupt, the investor would lose that part of the investment. If you were really
invested in the IBEX 35, and one of the companies went bankrupt, you would expect to lose
that company's proportional share in the index (to a rough first approximation, 1/35).
• The commissions are brutal. 5% down payment, plus 1.65 % annually, plus the expenses
charged by the bank for having the account open (not in indicated here) is a lot. A small
investor acting on his own pays typical purchase commissions (stocks, derivatives) of about
0.20 %, and account maintenance fees also of about 0.20 % per year (ten times less!).
• The manager has perverse incentives, which lead him to take excessive risks. If you. The
manager wants a bond that has a very high coupon, but if there is more yield it is because
there is more risk (the Xunta gives 5,763 % annual yield, its rating today -Baa2 according to
Moody's- is at the limit investment grade , almost at the level of a junk bond ). And if the bond
fails, the investor loses, but the manager always wins (as we have already mentioned, 5% at
the beginning and 1.65 % annually).
The reader thinks if it is worth investing in something like this. There are simpler and cheaper
possibilities, which we will see later.
But what do the rich invest in?
From time to time the media releases news about rich people getting richer, who are getting
richer at the expense of the poverty of the rest of the population, much to the taste of those who tell
us what we want to hear.
In general, we might suspect that there is something strange about this argument. mention for its
lack of symmetry: when the stock market goes up, that news abounds, but when the stock market
goes down and investors lose money in spades, that news disappears.
Be that as it may, a question that we asked ourselves is whether it is real Mind you, the rich have
an advantage because they are rich. If they can access ways to invest that are prohibited for small
investors. Are there great of investors playing with marked cards? Playing with an advantage
because they have access to better products?
Certainly the rich , the large investors, have access to products that are not available to ordinary
citizens. But it is one thing for the rich to have access to specific products, and another thing is for
these products to be better .
In any case, an investor with knowledge and a large budget ends up paying lower commissions.
That is the important difference. And the good thing about it is that small investors can manage to pay
the same commissions as the rich, as we will see later.
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The first thing that comes to mind are hedge funds , investment funds only available for large
capitals and private banking services. But the return on investment from these investments has been
historic. significantly worse than the return of a general market index. If anything, these options
introduce more risk and higher costs.
Martín Huete's blog has an entry comparing, for example, the different index investment funds
that are available in Spain. It is true that an investor with a large capital has more and cheaper funds
available (with a TER of 0.10 % instead of 1%, for example), but it is also true that the same products
are already available at lower prices. res as ETFs, with TERs as low as 0.10 % previously seenLXXII
.
But today a small investor can buy funds that invest anywhere in the world, if they want. In fact,
part of the impetus with which ETFs grow is due to large investors, who buy them with the idea of
doing technical analysis and profiting from the market trend. Useless, as we will see in section 4.2.1 ,
but thanks to them, ETFs have great liquidity and low commissions.
In short, a small investor is better off buying a general, cheap and transparent index than
aspiring to buy complex and opaque products only reserved for large capitals.
We are going to analyze two cases in particular: SICAVs and Hedge Funds .
SICAVs It is often commented in the press and on television that SICAVs are a trick of the rich to
avoid paying taxes. Phrases like this and similar Can this be possible? A flagrant injustice for all to
see? The state helping the rich so that only the middle and lower classes pay taxes?
Let the reader get these ideas out of your head, because it is not like that. The rich have no
better instruments for their investments than those we mere mortals have.
SICAVs (Variable Capital Investment Company) are IICs, practically ethically equal to
investment funds. Equal, for example, in taxation, both are governed by the same regulations and are
50 51
taxed in corporate tax. des according to 1% of the profits obtained s .
Directly comparing investment funds and SICAVs:
• An investment fund is an asset that exists without legal personality, which results from the
capital contributions of the savers who participate in it. The small investor buys or sells it
directly with his intermediary, without going to the stock market.
• A SICAV is an investment fund but takes the structure of a company. It is a product that is
available to all investors and that is purchased like a share, on the stock market (in Spain,
usually on the MAB , the Alternative Stock Market).
In Spain, both have the privilege that transfers can be made from one fund (or SICAV) to another
without the obligation to pay taxes (taxes will be paid, but the payment is deferred to the future).
Curiously, ETFs are also investment funds that are purchased like shares, but they do not enjoy the
privilege of deferring the payment of taxes.
SICAVs are public limited investment companies with variable capital, and in them the saver
becomes a shareholder of the company. This allows the saver to exercise control over the manager.
LXXIIHuete, The Blushing Offer of Index Funds
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This control over the manager is unthinkable in an investment fund, where the saver owns shares in
the fund and is at the expense of what the manager wants to do.
This makes SICAVs go in a very interesting direction, that of giving power to the citizen. Now an
investor can act to invest as he wishes, according to his interests, and not according to the interests
of the manager. Much better to invest through a SICAV than oneself, because a normal citizen is
comparatively punished when investing in the stock market (example: dividends deduct taxes at the
time, management expenses are not tax deductible).
However, it could not be so perfect, and in the same way that it is an advance in the appropriate
direction, the legislation also imposes limitations that mean that an ordinary citizen cannot take
advantage (minimum number
50
Daniel's Blog, SICAVs pay taxes at 1%
51
Squeeze The Market, A SICAV does not mean paying less taxes of participants: 100; minimum legal
capital: 2.4 million euros). These limits are, however, similar to those of an investment fund (minimum
number of participants: also 100; minimum legal capital: 0.3 million euros).
In short, SICAVs are not fundamentally different from investment funds, and we are not
interested in them. No matter how much the spokespersons say that they are a bargain.
Hedge Funds Another way in which one could perhaps “get rich” is with Hedge Funds.
Hedge Funds are alternative investment funds (that's what they are called in Spain ).LXXIII ) ,
with more lax regulation, which allows them to invest with greater leverage and less liquidity. The idea
arose as a hedge against market fluctuations. So that profits can be obtained when the value of the
stock market remains neutral or even if it falls.
These managers have a lot of freedom to operate, but let's look at an example of a strategy. If
the manager focuses on a homogeneous group of stocks (an economic sector for example), he can
estimate that some stocks will do better than the average, and other stocks worse than the average.
If you go long (buy) in the stocks that you think are going to do well (let's put half of the investment),
and go short (sell) in the stocks that you think are going to do poorly (the other half invested), you will
be protected from what happens to the market as a whole. Because we can estimate that the market
will affect all stocks equally, but since half of the investment was long and the other half was short,
the market effect is canceled. All that remains is the manager's effect, which should be relatively
constant in the long term, or at least with less volatility than the market itself. This is how Hedge
Funds began, although over time their techniques have become much more elaborate.
Alternative investment funds have many limitations, see Let's see some of them.
Normally their minimum investment is very high, like 100,000 euros, which acts as a filter that
eliminates small investors. In this way, only institutional or very wealthy investors make use of this
form of investment.
On the other hand, the way in which managers obtain their remuneration is very interesting. In
addition to a fixed amount, around 1% per year of the amount invested, they also have a performance
fee that is usually 20% of the profits. This rewards the good manager, who receives a higher
remuneration the better the fund does. Contrast with a manager from a conventional investment fund,
which receives its salary independently worry about whether your investment decisions were correct
LXXIIISee the CNMV monograph, Alternative Investment Institutions .
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or not. Be that as it may, these commissions are the largest in investment funds.
Since the investments are usually illiquid, the investor cannot enter and exit the fund as he
pleases (the sale of illiquid assets in large quantities). entities could sink the bottom). You have to
give advance notice of when you want to divest, and the dates to do so are very limited, and you may
have to wait months.
In addition, alternative investment funds have the privilege of the dark rantism, of not having to
provide detailed information about their activities you. It is a question of trust in the manager and the
investor has to accept the lack of transparency. It is argued that these funds depend heavily on the
manager's particular techniques, or market niches that remain hidden from other managers. In this
way, publishing the manager's modus operandi would be equivalent to taking away his reason for
existing. But of course, would you trust someone who promises to outperform the market, but without
proving it to you, just trust their word?
See if you wish some Hedge Fund benchmark indices (for example on the Barclay Hedge
website) , compare them with simple and transparent indices, and choose accordingly.
And these funds do not have long lives. According to the CNMV monograph indicated above, the
current funds were created on average only 5 or 6 years ago. Not because these funds want to have
short lives, but because they go bankrupt! There is even a website dedicated to listing their
bankruptcies ( The Hedge Fund Implode–O–Meter ) .
Whether all this is advantageous for any investor remains to be seen. In any case, it seems
positive that small investors cannot enter there. The only certain thing is the high commissions, the
limitations (entry and exit), and that the average life of these funds is so short that the investor will
have to change every few years. Would you trust a fund that statistically is going to go bankrupt? in
just a few years?
Perhaps an example to take into account is that of Calpers, the pension fund for Californian
LXXIV
public employees. . At the time they invested part of their funds in Hedge Funds , but after a few
years they have abandoned it, literally because it is complex and expensive. The returns on the
investment were not as expected either.
In short, alternative investment funds are a product for the rich and are said to provide huge
profits. In practice there is a lack of transparency, limitations, enormous costs and broken promises.
4.1.5. State bonus
If pension funds invest primarily in government bonds, couldn't we do the same?
Public debt, along with corporate bonds, is also called fixed income. This refers to an investment
in which the issuer (for example the state) is obliged to pay the investor a fixed amount on
predetermined dates (in addition to the initial capital at maturity). It is this double requirement,
quantity and schedule, that explains the adjective “fixed”.
This is what makes it different from shares, since these do not imply any obligation to pay
dividends. If a fixed income issuer defaults on a payment, then it is in default . Depending on the
severity, it can lead to bankruptcy. However, if a company decides not to distribute dividends one
quarter, there is no breach of contract.
In fact, as ordinary citizens, we have a certain predisposition towards bonds (which represent
LXXIVWall Street Journal, CalPERS to Exit Hedge Funds .
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debt, for example from a company that agrees to return what we invested plus interest) instead of
stocks (which represent property of the company, and that the investment can be lost if the company
goes bankrupt).
Furthermore, state bonds have in principle a very positive particularity. And they are anti-
correlated with actions. When stock prices go down, bond prices go up. And vice versa.
However, investing in bonds has several problems.
On the one hand, the lack of profitability. The Central Banks have taken The systematic
purchase of state bonds ( Quantitative Easing ) is the norm, creating a fictitious demand, causing an
unstoppable rise in the price of the bonds, and therefore bringing yields to basically zero. Buying
bonds does not give any worthwhile return. And if it gives 1%, so to speak, that is below inflation, so
no investor will feel sato may want to invest in something knowing a priori that it is losing purchasing
power over the years.
On the other hand, state bonds are not products for retail clients. tas. Like Hedge Funds , the
minimum unit that can be purchased is between 50,000 and 100,000 euros, which prevents retailers
from buying.
Furthermore, they are not purchased with the same ease as stocks and funds. two. At least this
has been the case in the past, when bonds were OTC ( Over The Counter ) products, bought and
sold directly among interested parties. two, without a clearing house (without the stock exchange as
an intermediary ensuring the operation).
Nor are bonds as stable as before, when a bond was purchased with the intention of holding it
until maturity and collecting the payments. coupons. Nowadays bonds are bought and sold as if they
were stocks, trying to obtain a return in the short term. To this we must add that states have no
qualms about acting in the market by modifying prices ( Quantitative Easing indicated above). On top
of that, short-term public income is no longer as safe as it was believed, when the 2011 crisis almost
broke up the European Union and some countries were close to default. And not even the anti-
correlation between bonds and stocks is true today, because the price of bonds represents the blind
purchasing interest of central banks, not the critical vision of investors.
So buying bonds does not seem very advisable. In any case, they could be purchased if they
were more accessible, in smaller quantities (like the price of a share). If it were through an investment
fund, it would have to be a very cheap manager, because the management fee of most funds is
higher than the yield of the bonds. Is there an investment fund with these characteristics? Then we
will see if it does.
Given its importance, let's look at the classification of government fixed income such in Spain
and in the USA.
4.1.6. Types of Public Debt in Spain

There are three types of public debt: treasury bills, state bonds and state obligations. The
biggest difference between these assets for the small investor is the difference between the amounts
LXXV
and terms in which they invest. .
LXXVThe information in this section comes largely from Navarro's website, ActiBva .
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All these types of investments are made through book entries. ta, so our rights are registered in
a file, we do not receive a certificate of them on paper as was done in the past.
• Treasury Bills are an asset issued by the Public Treasury and with a maturity of less than 18
months. They were created in 1987 when the Book-Entry Public Debt Market was launched.
They are an ac tive very suitable for safe investments in the short and medium term. They are
issued monthly and in discount mode. Discount mode means that the assets give us the right
to collect a predetermined amount on a certain day and we buy that right for a lower amount.
For example, we buy the right to collect 1,000 euros on a certain date for 990 euros. These
assets are issued with a value of 1,000 euros, so we have to invest that amount or multiples
of 1,000.
• State Bonds are issued for three and five years and are a form of medium and long-term
investment. In addition, the method of payment of interest ses is explicit, so they are issued
specifying the profitability that will be given. They are usually issued monthly and can also be
purchased on secondary markets. The minimum investment is one thousand euros. The
remuneration of this type of debt is made through the payment of quota nes , whose interest
generation is usually annual. The name coupons comes because in the past the debt was
issued on paper and there were coupons that indicated the maturity date. These coupons
were separated from the debt security and collected, in fact they were even used as currency.
Nowadays that system of printed coupons has been obsolete, but the name is preserved. The
advantage of this system is that we do not have to wait for the maturity date, but rather we
receive the periodic payment in our checking account.
• State Obligations are very similar to state bonds, with the term being the biggest difference.
They are issued for 10, 15 and 30 years, so they are very long-term investments.
4.1.7. Types of Fixed Income in the US

The United States is the most dynamic fixed income market in the world, and is frequently in the
55
news. It serves as a reference for other countries, so we briefly discuss it here .
•
Municipal Bonds ( Municipal bonds , also called Munis ). They are issued by states and some
local authorities. Normally it is They are associated with large infrastructure works (roads,
schools). Municipal bonds are exempt from paying taxes at the faith level deral, although in
exchange they usually provide a lower coupon than other bonds. Normally these municipal
bonds are acquired by person people with high incomes.
•
Treasury Bonds ( US Treasury Securities ). They are issued by the go federal government
and are used to provide funds to operations ness of the government. They are considered
risk-free because both the principal and interest are guaranteed by the US Treasury
Department . Maturity periods vary between 3 months and 30 years.
•
Treasury Inflation Protected Securities (TIPS). They are special treasury bonds, which are
indexed to inflation. In this way, the value
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•
The information presented here comes from Bond Desk Group, Fixed Income Asset Types . of the
5
principal and the coupon increase over time. For example, if we buy a TIPS for $1,000 with a maturity
of one year, and assuming inflation of 5%, at the end of the year the federal government will return
$1,050 based on principal. That is, 1,000 of the initial capital plus 5% inflation. To this we must add
the coupon. If it had been a normal bonus, we would have only gotten our initial $1,000, regardless of
inflation. In exchange for this security, TIPS pay a lower coupon than a conventional bond.
4.1.8. Actions
We could go simple. If we are going to invest in the stock market, we could buy the shares
directly. This has great advantages, starting with its transparency, knowing exactly what has been
invested in, and being sure that there are no strange things (high-risk bonds, derivatives, etc.). Also,
by purchasing the shares directly, we fully enter into the do-it-yourself philosophy.
There are also many people who are achieving Financial Freedom specifically by buying shares
and living off their dividends. Both internationally (25 000 Dividends , Dividend Growth Investor, Di
vidend Mantra , No More Waffles) as in Spain (Investing in Dividends , Independence Via Dividends,
Living on the Dividend, Activating the Future, Ca za Dividends, Don Dividend) .
However, purchasing shares entails several difficulties. We present here some arguments
against buying shares.
• The complexity of studying companies. We would have to select em interesting preys, check
which ones are solvent and buy those assets tions. That requires a lot of time and being an
expert performing fundamental analysis of companies (accounting, expansion plans, etc.). It
is not what we want, since we assume that the reader, just as not Like us, he has his own job
that provides him with income. If we were experts in business accounting, we would probably
do it full time. No, what we want is to find a simple way to save, not to dedicate ourselves
professionally to investing. If what we want is to select stocks correctly, it would be best to
hire a professional manager.
• The imperfect diversification. Ideally we would want to invest in a large number of companies,
the more the better, but in practice the number number of different companies that an
individual investor can reasonably buy is not very large. Imagine tracking, say, 30 companies.
We will encounter countless problems more Which companies have paid dividends in recent
months? What has been the total calculation of profits to pay to the treasury? Do they differ
do you hold back? Different currencies? Has the board of directors changed? Has something
happened that affects that company? Am I well diversified by economic sectors, by countries,
by capitalization? Should I rebalance? Different costs of trading in different stock markets? All
is This is a lot of work and one would want to outsource these tasks to professionals, who
could buy hundreds or thousands of companies for what is ideally a small amount.
• In Spain, legislation also punishes the purchase of shares with respect to the purchase of
other investment instruments such as investment funds (which can be transferred from one
product to another without paying taxes) or pension plans (which have extensive tax
deductions). and whose managers are exempt from corporate tax).
• If you buy a company that is doing poorly and goes bankrupt, your shares will be worth
nothing. You will have lost your entire investment. This can happen suddenly without you
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being able to do anything, or on the contrary, little by little so that you always have the doubt
"should I sell now or should I continue?" We don't know what's worse. As small investors that
we are, we will never have a portfolio with many shares, so a bankruptcy implies a notable
loss.
For all this, although we like it, buying shares is not what we have chosen. Or better, we could
say that some of the characteristics of shares are very good (simplicity, transparent buying and
selling), and that other characteristics of investment funds are also very good (professional
management, simplification of procedures). a mixed product that unites the best of both worlds?
4.1.9. Investment in Index Funds

We now come to index funds, and within them a very particular group, ETFs ( Exchange-Traded
Funds , funds that are listed on a stock exchange). This chapter applies to both equally.
In the previous sections we have reviewed the different possibilities. ities, and each way of
investing has its pros and cons.
Direct real estate investment is very interesting, since the purchase of a home is embedded in
the minds and lives of people. For one reason or another, there is always a certain demand to buy or
rent. But buying a house has many complications, as we already saw in section 4.1.2. Isn't there a
way to "buy a house" with the benefits but without the complications? It would have to be something
that can be bought and sold without difficulty and in small quantities.
We also saw that pension funds exist (section 4.1.3) , but they also have countless problems. Is
it not possible to invest just as pension funds invest, but without their high costs or the impossibility of
rescuing the investment? It would have to be something cheap and that can be recovered at any
time.
They could be investment funds, understood as actively managed funds (see section 4.1.4) . In
that case we would have to choose the best funds, those that systematically obtain better returns on
the investment. sion, is there a group of funds with these characteristics? We have already seen that
it is not. In fact, on the contrary, investment funds systematically obtain significantly worse results
than their benchmarks. Therefore, why buy an investment fund when you can buy its benchmark
index?
Or better than state bonds (section 4.1.5) , which require large sums, can't the stability of state
bonds be bought in small amounts?
Or better than stocks (section 4.1.8) , which are cheap and transparent tes, but they have great
volatility. And the listed company can go bankrupt, making us lose our entire investment. Couldn't we
diversify to average the market and prevent a bankruptcy from making us lose a good part of our
investment?
What we are looking for is exactly an index fund, a passive fund that is dedicated to buying
assets indicated by an index. Where the fund manager does not have to think, does not have to make
decisions. Simply buy the index assets as cheaply as possible. See figure 4.3 for a graphical view of
5,657 .
the effect of commissions, and compare with real results of investment funds
These funds combine the best qualities of stocks (liquidity, sensitivity cilez), with the best
qualities of investment funds (diversification, professional management).
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And within index funds, the most transparent and cheapest are ETFs. So it seems like they are
the best for our needs.
They are especially cheap, because the fund manager does not have to think, he does not have
to take any initiative. Just buy and let time pass.
56
McGraw Hill Financial, Spiva US Year End 2015
57
F. Luque, 2014, a bad year for RV Spain's actively managed funds
Figure 4.3: Graphic demonstration that the best thing a small investor can do is follow the market
average. Empirically, the distribution of returns for different investors and investment funds is similar
to a Gaussian bell. Note that after paying commissions, most investors (light gray area) end up worse
than the market average. Very few investors earn returns better than the market average (dark gray
area). Note that these are pre -tax returns.
Although you have to be careful, because there are also active ETFs that can follow a particular
strategy, and they can be as expensive as a conventional fund. But we are not interested in active
ETFs, since they lose the advantages of passive investment (especially simplicity, liquidity, and low
cost).
ETFs are widely used by investment and pension funds, as they serve as basic elements in the
construction of their strategies. And it is precisely this ability to serve as a basis for investment, which
gives rise to "do it yourself", which is precisely the reason why they are so useful to the small
investor.
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ETFs vs. Conventional Funds
We prefer ETFs over conventional funds for 4 reasons.
• On the one hand, because they are on average cheaper: conventional index funds have
TER of the order of 1–2% per year, while equivalent ETFs can cost 0.10 - 0.20 % per
year, ten times less.
• On the other hand, in addition to this higher annual cost, funds with conventional ones
have hidden costs. They can only be 95% invested, the other 5% has to be ready to be
delivered to the participants if they wanted to exit the fund. So if the index rises 10%
annually (allow us a touch of optimism for the sake of simplicity), the fund would have
only made 9.5 %, missing out on the remaining 0.5 %.
• For transparency. Because whether the manager acts correctly is not a matter of trust, it
is that the fund ticker is selected and the price of the ETF can be observed on the stock
exchange, the web, or an app.
• Conventional funds punish long-term investors. Imagine a crisis like 2008, where the
value of assets you fall in half. When an investor wants to leave the fund, the manager
has to return his money according to the NAV value. Pe But in crisis situations it may be
impossible to calculate that value (if an exchange is closed or if there is no liquidity for
that asset). If there are many investors who want to exit, the fund may be forced to sell its
best assets at a discount due to the lack of liquidity in the market. Underselling assets at
a low price to pay according to a high NAV that is not real. So that in the fund there will
only be assets that no one wants, and for a lower value than what the participants who
have not left the fund paid. So the participants who remain have subsidized those who
have left. ETFs, however, support long-term investors. If an investor wants to sell the
ETF, they will offer it to the market. In times of lack of liquidity, if no one wants to buy buy
it, you will have to sell it at a discount. But whatever happens, the transaction is the
decision of the investor who wants to exit, and does not affect the remaining participants
of the ETF. Discounts due to lack of liquidity are only paid by those who leave, not those
who stay.
You can buy ETFs that track very diverse indices, e.g. of emerging countries. It would be difficult
to buy shares of companies in Turkey, but with ETFs you can (it's another matter if it's worth it...).
The idea is that following an index is cheap, and that in itself gives enough performance. The
S&P 500 for example has returned 12% annually on average over the last 25 years (between 1991
and 2016, including dividends). And if we compare the index value of any given day with another day
a few years earlier, if the interval is long enough, the index has always improved.
In a theoretical way, the justification that indices are a good choice comes through the so-called
Efficient Market Hypothesis (see text box on page 4.2.3) . This hypothesis has given rise to a lot of
talk about whether it is correct or incorrect, and it is true that if we go into detail there would be a lot to
discuss, since it is possible that there are bubbles and prices do not adjust to the value of the assets.
But we don't go into detail, we go to the broad outline, and there is no problem there. In the long term,
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the Efficient Market Hypothesis works, in the long term information flows, imbalances are adjusted
and the prices of things reflect their value. That's why index funds work.
And what is the point of buying an index fund? Buy the whole market fallen, period. If we can't
discern which companies are better than others (and active managers can't), why complicate our
lives? Simple mind buy it all. With an index fund you are buying listed companies, basically an
approximation of the country's economy. What does it matter to you if the stock market goes up or
down? You don't care if the price of chickens goes up or down, what interests you is that those
chickens lay golden eggs. What you want is for what you have purchased to generate income,
automatic, inexhaustible, simple. You become the owner of a part of the country's productive sector.
In fact, you have not bought one hen that lays golden eggs, but hundreds, perhaps thousands.
The probability that a company goes bankrupt is a lesser evil, because its effect is minimized among
many others. And surely others will have risen. Because if you buy a share and tomorrow the
company you Well, you will have lost 100% of your investment. But if that company doubles in value,
you will have gained 100%. And if the day after tomorrow it continues to grow up to 10 times the initial
value, you would have gained 900%. They are relative figures tively absurd, but they make one thing
clear: the losses are limited, the gains on the contrary are unlimited.
Is investing in index funds safe? It is true that there is always risk in the stock market. In this
case, security comes from dividing the responsibilities of the companies involved, so that they are
independent of each other. By For example, one company calculates the value of the index (Spanish
Stock Exchanges and Markets for the IBEX 35), another company manages the purchases to follow
that index, another company is in charge of providing liquidity on the stock market, another company
custody of the fund shares, and another company audits the system.
It should be noted that the risk of the fund manager going bankrupt is negligible. nifying, since
the fund only manages the purchase of assets, it has no debts or obligations. But even if the manager
goes bankrupt, the investor is protected because the assets are always in the hands of a depository
entity, like any other. I want another investment fund. The assets are in the name of the investors, not
the manager, and the depositary entity also serves as the manager's auditor.
We will see more information about ETFs in chapter 5, where given their importance they have a
chapter to themselves.
4.1.10. Comparison
We now compare the different forms of investment that we have presented in the previous
sections.
Table 4.2 presents this information. It is largely a personal opinion. The intensity of the gray color
of the background of each cell gives an indication of whether it is good or bad. The darker, the worse.
• Management and maintenance costs refer, for example, to the maintenance house
maintenance (taxes, repairs) or recurring investment expenses (TER, account maintenance).
• The historical return on investment refers to the income that can be expected. In the case of
the house, it is assumed that it revalues with inflation (reasonable in the long term) and that
you obtain rent from it (or at least you do not pay rent to live there). This section will depend
on what the investor is looking for; Yes, more risk and more benefit, or more stability and less
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benefit.
• Transparency is the ease of obtaining information about the investment, how the manager is
managing the capital that we have given him. In the case of housing, ETFs, stocks,
government bonds, there is no problem. However, sometimes it is difficult to know that they
are creating a pension plan or an investment fund with the money.
• Liquidity is the ease of buying and selling the investment asset, especially in times of crisis.
Pension plans are special cially disastrous in this, because the law prohibits recovering the
investment
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1
Cost Management Historical Return on Transpa Liquidity Say versifi Attention
I Maintenance Investment rence cation Required
Home hig ) inflation and rent high low none half
Pension Plan h hig ) worse than inflation depends none low low
Investment Fund h low 0 worse than market depends high high low
116
Actions low 0 market high high low high

State Bonds low 0 better than inflation high high low half
ETFs low 0 market high high high low
Table 4.2: Comparison of the different types of investments. This table is a summary of the sections present discussed in this chapter.
Sep 2021
(although in recent years the legislation has been modified and now ex exceptionally allows
the money to be recovered in certain cases, such as serious illness or long-term
unemployment). A home is also very illiquid, because a long time passes between the
decision to buy/sell and until it is finally obtained. And it requires a lot of bureaucracy and
agents external to the exchange (for example notaries). Shares on the other hand can be
bought or sold with the push of a button. We could also count the purchase and sale costs
here, re ferred to the expenses incurred when the asset is bought or sold. Taxes and notary
fees in the case of purchasing a home; brokerage cost in the case of the stock market. As
our Our intention is to maintain the investment in the long term, this is in principle a minor
expense.
• Diversification is the capacity of an investment, which, even having been purchased as a

single asset, is equivalent to several smaller investments. Is This is implicit in investment
funds (and ETFs), for example, because buying a share of an ETF is equivalent to buying the
shares of the index it follows. Stocks are not diversified (and the same applies to bonds), and
you would have to buy many different stocks to to achieve diversification (which increases
costs and requires a lot of attention from the investor). A house is the epitome of lack of
diversification, because it forces the investor to use most of his savings in a single
investment. We want the greatest possible diversification, so that the behavior of the different
investments is independent of each other (absence of correlation).
• Attention required refers to the degree of supervision that must be had. A house, for example,
requires attention to pay bills and taxes, especially if it is rented. Individual stocks can drop
sharply, for example if a company goes bankrupt, which requires being careful not to lose
what you invested.
There are other investments that could be reviewed. An example would be buying gold, but in
any case it serves as a capital reserve, not as an investment (because in the long term its value only
grows at the rate of inflation). And it has high transaction costs.
Table 4.2 shows that the purchase of a house and pension plans nes are the worst investments.
ETFs are the best option and that is why we focus on them.
4.2. Investments that don't work

When you first approach the world of stock market investments, you have an unreal vision of
how things work. A vision given by cinema, the mass media and popular knowledge. Therefore, it is
important to realize from the beginning which investments are not working.
In this section we certainly give a very personal vision. Warren Buffett's maxim of not investing in
something if you don't understand it has worked for us, so we always try to keep things simple and
transparent.
These statements are partly exaggerated, because it is possible that one of finished strategy will
be effective for a time. However, as soon as the effectiveness of the strategy is discovered, other
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investors will begin to apply the, losing its efficiency. So in the long term, which is what interests us,
there is no better strategy than "buying the entire market" and letting yourself be carried away by the
averages. Maybe the title should be “Investments That Don't Work in the Long Term for Investors
Seeking Simplicity.”
For a much more detailed description of the different ways to lose money in the stock market, we
recommend the excellent book by Burton G. malkie lLXXVI .
4.2.1. Technical analysis

Possibly the view that most of the general public has about stock market professionals is the
image of someone dedicating themselves to technical analysis.
They are those who are dedicated to predicting the future based on how the value of an asset
has behaved in the past. That's even though everyone knows We know that “past returns do not
justify future returns”, a magnificent phrase that is mandatory in investment fund prospectuses.
Technical analysis, also known as chartism , is dedicated to analyzing To use graphs, try to find
trends, whether upward or downward, that allow you to obtain a profit by buying and selling at
different prices. And if the trend is going to change, find the right moment ( market timing ) to ride the
new wave.
Based on the idea that "a picture is worth a thousand words", a true technical analyst is only
interested in the graph, but not in whether the graph is of the price of a company, a bond, oil,
derivatives or any other
LXXVIMalkiel, A Random Walk Down Wall Street
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It's in free fall! I will never again let myself be carried away by
trends.
I'm getting rich. I'm On this support Ummm... the upward trend is
Investment a crack! it will bounce clear, if I buy now I will be able to
price and I will not recover my losses
lose money
Excellent, it Damn, keep

bounces, the trend going up
is consolidating What a way to
go up, who
would have
What's going on? As caught it?
soon as it goes up My neighbor told me that
again, I'll sell the stock market is doing
well. Heh heh, you'll see
This is how I take when he comes down.
advantage of this The newspapers say
fall that we may be facing
a recovery
I am going to take
advantage of this A shoulder-head-shoulder,
fall to increase my it's going to keep collapsing
Ummm... the price position
is rising, we have
to watch the This is already too Saved! I am outside already.
market much, I'm going to Thank goodness, which I got rid
sell as soon as of...
possible Time
Figure 4.4: The choreography of market timing . If you haven't caught yourself thinking like this yet,
don't worry, it will happen.
another thing. The asset is indifferent, it is just the abstract representation of a price.
Dev Ashish does a good analysis on his blogLXXVII . Their conclusions indicate that market
timing is not worth it. He compares three investors who buy once a month, at the most expensive
time, the cheapest time, or simply at closing price. Even if we contributed all the personal effort
required to know and evaluate a multitude of listed companies, buying shares when they are cheap,
the result we would obtain in the long term (final, non-annualized returns) would be similar to what we
would obtain If we simply bought at the closing price. Better yet, buying at the closing price of the
month would avoid making mistakes and ending up with I buy when prices are maximum. Either way,
the difference is not overwhelming and not worth the effort.
Technical analysts think that market movements are 10% logical and 90% psychological, and
therefore they want to find patterns of behavior reflected in the charts.
They are very creative in their analysis and see figures in graphs like someone who sees shapes
in clouds. And it's basically the same idea. Hasn't it ever happened to you that someone told you
"look at that cloud, it looks like a face", and you didn't see anything? Well, that's right, technical
analysis is very personal, and consists of seeing patterns in everyday charts.
LXXVIIAshish, Stable Investor
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His vocabulary is very colorful. They have read and heard it, surely. With its jargon about
“resistances” (a price that an asset has failed to overcome on several occasions, giving the
impression of going up to it and going down again, which makes it possible to predict that the next
time it will bounce again as well), “supports” (against rio to the ”resistances”, a low price, which the
asset has not crossed downwards on several occasions, giving the impression of bouncing and rising
again, which allows us to predict that the next time the price falls to that point, it will bounce back. tare
and will rise again), ”shoulder-head-shoulder” (a figure that indicates that the price is going to fall, it is
easy to imagine), and many more. They also use the very characteristic “Japanese candlestick
charts”, which give an additional indication. tional on whether the value goes up or down. And in
modern times they also use moving averages (for example, the average value of the price during the
last 200 days - so to speak - if the current value is above or below the average, we will have to sell or
buy respectively).
Perhaps the main argument in favor of technical analysis is that it attempts to get ahead of
events. Try to detect trend changes before others, arrive before others.
It rather seems to us that their predictions are hardly credible, and at best self-fulfilling (if all
technical analysts see at the same time a figure that predicts that the price is going to fall, all of them
will sell their assets to protect themselves, causing the fall they were waiting for).
Investment banks love technical analysts because they encourage investors to buy and sell
frequently, which is where the banks make money from commissions.
They have a certain space in the economic media, where there is usually a section for them.
Normal, because it does not require any cone specialized foundation, anyone can see and
understand the prediction. Who is going to want to suffer the cost of learning, studying a company or
economic sector, its regulations, news in the press, etc., if they have the impression that the graph
encapsulates everything and Is that enough? It's the easy way.
However, technical analysts do not have a good press in the financial world. They are
considered shamans, unscientific, who provide esteem tions without support.
If we review the list of the most famous investors of all time pos, like Benjamin Graham, Warren
Buffett, Peter Lynch, John Templeton, George Soros; none of them are for doing technical analysis.
In any case fundamental and macroeconomic analysis.
And following trends is good. . . while the trend is fulfilled. But imagine that you had invested all
your savings betting that the upward trend would continue, just before a crisis (because that is how it
happens, the trend is very clear when it has been showing for a long time, until the crises of 2000 or
2008 arrive and it collapses. ).
In short, technical analysis is a good example of how to lose money in the stock market. Chasing
hypothetical short-term profits will only lead you to paying certain trading commissions.
4.2.2. Intraday Investment

Intraday trading is really a part of technical analysis. It focuses on operating in the very short
term, so that it is bought and sold on the day, according to criteria obtained from the graphs.
For example, you buy in the morning, and sell the position a little later. In this way all positions
are opened and closed during the day. What is achieved with this? A very particular effect: that the
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investor can sleep peacefully at night.

Usually a very liquid asset is chosen, especially in an exchange rate like the euro/dollar.
In fact, today thanks to new technologies, auto programs Technical analysis experts have a lot of
pull. Programs that calculate multiple mathematical parameters and buy or sell as certain conditions
are met. nothing conditions. Which have a speed unattainable by any person, at the pace of Internet
LXXVIII
communications (the so-called High-Frequency Trading , HFT, it is said that today half of the
operations on the stock market are decided by these automatons. The reader should be careful, as
there are already websites that are offered so that investors can define their own algorithm and
implement it with them.
The criticism would be the same as that of the technical analysis, and that is that the broker will
be delighted with the enormous number of operations that the investor carries out. You would have to
trade each day with most of your available capital, a purchase and a sale. Calculate what your broker
charges you in commissions (typically 0.10 % –0.25 % per purchase or sale). Any operation would
have You have to make a profit greater than double the commission to make a profit. And that's
difficult.
Furthermore, although economics is not a zero-sum game, day trading is. Because no matter
how much you buy or sell, you are not generating value, you are not generating more capital. There
is only money that is transferred from one hand to another, mainly from the investor to the broker
through commissions.
4.2.3. Fundamental Analysis

Fundamental analysis (also called Value Investing ) has a vi sion completely different from
technical analysis. Now the graph of the past is of no interest at all, only the intrinsic value of the
company that you want to buy or sell is of interest. Unlike technical analysts, analysts
Fundamentalists think that market movements are 90% logical and 10% psychological.
You have to estimate the future income flows that the company will have. By bringing them to
present value, we can thus assign a value to the company. If we then compare our estimated value
with the current market price, we can assess whether the stock is cheap or expensive relative to our
estimated value.
This sounds very good in principle. It is pure logic, irrefutable mathematics. But the problem
arises when the fundamental analyst has to estimate an infinite number of financial parameters of the
company, such as operating costs. tion, taxes, depreciation of equipment, growth expectations, other
competing companies, unforeseen events, etc. All these factors are difficult to predict and make the
analysis close to a fortune teller's prediction. Different analysts can have opposite predictions from
the same data, due to making different assumptions about behavior. internal management of the
company And how is the problem of conflicting predictions resolved? Through the ”market
consensus”, the average (or mean, or median) of the predictions. That is: averaging values that we
know have a lot of error, because we want to believe that the errors are independent of each other,
and that is why the average has some value. Everything collapses if analysts all make the same
LXXVIII Mamudi, Trading on Speed
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failed assumptions.
Go ahead and choose a vision of the philosophy of the stock market, this is the one we like the
most. Our criticism would rather be that by the time a small investor finds out about things, the
professionals have already taken it into account, therefore the price of the share is already that of the
value of the company (due to the hypothesis of efficient markets , see in this regard the surrounding
text box). So fundamental analysis may come in handy for a professional investor, but there is no
chance for a small investor to make a profit greater than the market average.
For example, if someone inside a company obtained privileged information (an insider ), they
would act accordingly by buying or selling the company's shares. Then he will tell his friends and
family, then the stock market professionals will find out, then it will appear in the press and on
television, and in the end the people on the street will find out. What is the possibility that a small
investor can make use of the analysis? fundamental? None.
Efficient Market Hypothesis
The efficient market hypothesis states that a stock market is “informationally efficient” when
competition between different The participants involved in it lead to an equilibrium situation in
which the market price of a security constitutes a good estimate of its theoretical or intrinsic
price.
This can also be expressed in another way: that the prices of credit securities (such as shares)
that are traded in an efficient financial market reflect all existing information and adjust fully and
quickly to new data that may arise.
For example, if the value of a stock was worth 20 euros yesterday, but today it is discovered that
there is a reason that will make it worth 40 euros tomorrow (a newly obtained administrative
license or a new patent), then there will be no doubt that there will be a rush buyer and its price
will reach 40 euros today.
Fundamental analysis presents several problems. On the one hand, obtaining reliable
information about a company can be complicated, because the figures may be doctored or contain
accounting tricks. On the other hand, given the same input data, different analysts can come to
different conclusions. different conclusions. And finally because, even if there is an estimate that a
company is cheap or expensive, the market does not have to correct itself. The share price of that
company may remain in that situation over the long term, being persistently cheap or expensive,
regardless of the results of fundamental analysis.
But what happens in practice? Do you get better results by investing? do in Value companies?
Table 4.3 shows some historical results. From there we can draw several conclusions:
• Value companies have done better than growth companies by 0.9 % annually (the
Annual return Annual volatility
Reference index [%] [%]
Large Cap Value Companies 8,5 15,2

Large cap companies 8,2 15,3
Small cap companies 8,0 19,9
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Large Caps Growth 7,6 17,5

Diversified portfolio 7,4 10,0
US long-term fixed income 5,3 3,5
International companies (non-US) 4,4 16,7
US Treasury Bills 2,5 0,7
Table 4.3: Comparison of investment returns (gross returns include dividends) from 1995 to 2015.
General indices are shown, from the US point of view (all are references to companies and bo
(United States, except international companies). Data taken from Blackrock, Asset Class Returns .
More results of this work are shown tran in the figure in section 4.2.6 .
Growth companies are companies with great growth potential, which are expected to increase
in value in the future, to a certain extent opposed to value companies, which are cheap for
what they offer today). However, this is because of the starting point of this data series,
because during the 2000 crisis, growth companies rose to higher prices than value
companies. And after the crisis, the price of growth stocks fell more than value stocks. If we
had started this series at the beginning of 2002, value and growth would be the same today.
• The differences between the annual return of value companies ( 8.5 %) and growth
companies ( 7.6 %) are 0.9 %. However, the variability has been 15.2 % and 17.5 %
respectively, much greater than the 0.9 % difference. Inc. Therefore this difference is not
significant.
• The value companies shown here are a subgroup of all the companies large capitalization
dams. This makes the investor less versified if it only focuses on value companies and this is
important, for example, in the case of company bankruptcies.
• The indices have different complexity when it comes to implementation. A simple, generic
large-cap index is very easy. These companies have great liquidity, both individually and
jointly. There are also products derived from general indices (options, futures), which allow
financial companies to carry out operations with these derivatives (for example, hedging their
positions). The existence of these derivatives implies additional liquidity for the companies
that are part of that index, which will not be available in the case of less general indices (for
example a value index).
• The differences between the returns provided by large caps, value and growth companies are
not significant. Much to me Better to stick with the simple index (large cap) and avoid
complications.
In any case, the long-term results are no different from the promise. gave from the market. For
some time, companies with good foundations Such people may do better than the rest, but then the
opposite may happen to them. Statistically the difference is not significant. Or even worse, when We
look at the results of investment funds with their benchmark indices, their results are
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disastrousLXXIX .
In fact, the two most famous and successful Value Investing investors, Warren Buffett and
Benjamin Graham, have over time come to affirm that the best thing small investors can do is buy
index funds and get out of trouble.
4.2.4. Companies That Provide Dividends Grow you

This style of investment is very widespread. In English it is known as Dividend Growth Investing
(DGI). It is assumed that focusing on companies that consistently provide dividends over the long
term are good investments. They are calm companies, that take care of the investor, that do not have
as a priority growing as much as possible.
In the United States, if they have provided dividends that have remained constant or even
increased for 25 consecutive years, then they are called Dividend Aristocrats . There are about 50
companies that meet this requirement. In the rest of the world this criterion is usually relaxed to 10
years, because otherwise there would be very few.
These tend to be large, stable, predictable companies, with clear income statements, which
provide dividends higher than the market average. fallen Looking back, these companies have
performed better than the broad market indices over the past few years, which would make one think
they are a better investment than a passive index.
However, we have several drawbacks:
• The fact that dividend companies have performed better than broad indices in the recent past
is relevant. valid but not decisive, because as the CNMV rightly says, “past performance does
not justify future performance.”
• The fact that companies that provide high dividends have performed done well in the past is
nothing more than a rule of thumb. There is nothing forcing these companies to provide that
dividend. It is not like interest on a bond, which is provided by contract. The company can
decide to eliminate the dividend and does not have to give any justification.
• Distributing dividends is very tax inefficient because they are distributed after paying
corporate tax (around 30% of the company's profits). If the company does not distribute
dividends, and sim It simply reinvests its profits in itself, it does not pay that tax. There is a
30% difference. It happens that the payment of taxes is being delayed until the sale of the
shares, which ideally will never be. So in principle, companies with higher dividends have
lower growth potential, and are therefore less attractive.
• From a financial point of view, if a company pays a dividend do, the value of its share is
devalued by the same amount. The company simply distributes its value to the shareholder
instead of saving it for the future.
LXXIX We already discussed this in section 4.1.4, and the same can be applied here. According to McGraw Hill
Financial report 1 , Spiva US Year End 2015 , for example, if we had bought the S&P 500 index and held it for 10
years, we would have obtained better results than that achieved by 82% of professional managers.
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• If a crisis comes and the company goes through difficulties, the board of directors will have to
decide what to do with its meager income. Paying off debts and cleaning up accounts will
keep the company afloat. But continuing to pay dividends even despite having an empty cash
box is the best way to accelerate bankruptcy.
For all these reasons we are not in favor of buying this type of company. Furthermore, the
managers of this type of investment funds have already been taken into account in section 4.1.4, and
as seen there, it is most likely that these managers do worse than the market average. And we are
much less interested in buying individual shares, due to the little diversification that this implies and
the risk that one of the companies goes bankrupt. However, being positive, we recognize that it is a
positive incentive for the company's managers to maintain enough stability to provide dividends for
many years.
4.2.5. Act According to Dates or Events

It is very common to assume that on certain dates the price of stocks tions is going to behave in
a certain way. For example, at the end of the year the share price could drop if many investors
wanted to sell their positions at that time to obtain profits and close the accounting year.
However, once this effect is known (if it is real), many investors will be attentive to that moment,
buying the shares as they begin to fall. And since there are a multitude of buyers, due to the law of
supply and demand, the price cannot fall. With which the effect of the date is deactivated.
4.2.6. Economic Cycles

The economy has cycles, and every investor's dream is to take advantage of them. Buying
assets when they are cheap and selling them when they become expensive is the most repeated
maxim.
By applying common sense we can estimate which asset classes are going to perform better or
worse at certain times, depending on the economic environment.LXXX .

Let us also keep in mind that the value of companies on the stock market is an indication of long-
term expectations. The stock market does not rise when the real economy is doing well, but when
investors believe it will do well.
On the other hand, stocks and bonds have historically been old. related. When one went up and
the other went down, and vice versa. This has been the case until now, but the economic measures
of the central banks no longer seem to have any effect, so it is not at all clear that anticorrelation will
continue in the future. Note also that the yield of bonds is inversely proportional to their price.
Early recovery
The economy is beginning to recover after a crisis. The value of em dams listed on the stock
market are at maximum levels. The value of the bonds does not change. In this phase,
producers of raw materials and energy are doing well (as the industry is getting back on track)
and consumer staples companies, as citizens see that they are emerging from the recession
and can spend more than before).
LXXX There is a lot of information on the internet, search for economic cycle or investment clock .
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economic boom
The economy is at its peak, companies are operating at full capacity, but clouds are already
seen on the horizon and the value of stocks tions in the stock market begins to fall. Bond
yields rise. In this phase, large energy companies are doing well (because factories are
producing at maximum levels), and basic consumer companies (because salaries are
relatively high and citizens can spend).
Economic slowdown
The economy is getting worse and the forecasts are that it will get worse, so the stock market
is at a minimum. Bond yields are at highs. In this phase, companies that provide their
services regardless of economic cycles do well, such as companies in the health sector,
public services (water, electricity, gas, so-called utilities ) and banking.
Economic crisis
The economy is going through the worst, but the stock market is already recovering in
anticipation that the situation will improve. Bond yields are at a minimum. Technology
companies and large industrial companies do well in this phase.
What is described here is a classic in finance. A recipe book that tells us in which part of the
economy we have to invest, whether it is stocks or bonds, whether it is a particular economic sector.
The reader will perhaps be enthusiastic. We already have the "Tables of the Law", the
commandments that we have to follow to succeed in finances. This is very easy, we just have to buy
and sell at the rhythm of the cycle. Could it be that easy? Well, let's see that it is not like that.
A well-known table is that of the performance of different types of assets over the last 20 years
(see next page). Fundamentally bonds (short and long term) and stocks (depending on size,
depending on style, depending on whether they are US or international). In this case, the different
economic sectors are not included, but the result would have been similar.
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Assets on this side have obtained a HIGHER return
199 199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 201 201 201 201
6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5
BIG BIG BIG RENT RENT RENT BIG BIG BIG BIG BIG
GROWT SMALL INTERN INTERN INTERN SMALL SMALL
GROWT GROWT GROWT GROWT GROWT
H AL. AL. AL.
H H H H H
BIG BIG
INTERN
BIG
TREAS INTERN SMALL
BIG GH I INTERN
OKA G HA
INTERN
URAND G KA BIG
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GROWT NUE
GROWT E
GROWT NUE
AL. URE AL AN ESURU
S
AL.
H H
AL.
H
UH
BIG BIG PORTA BIG BIG PORTA PORTA BIG BIG BIG BIG RENT
INTERN SMALL TREAS SMALL SMALL SMALL SMALL
GROWT DIVFRSI
H AL. URE
E
DI
E
F
E
OIV GROWT
H
FRS
SMALL SMALL
PORTA BIG PORTA PORTA VE
BIG BIG BIG BIG BIG IF
SMALL BIG BIG PORTA BIG BIG PORTA PORTA
E E E E E.
RS
DIVERSI DIVERSI E
DIVERSI GROWT GROWT DIVERSI DIVERSI DIVERSI DIVERSI
F F F H H F F F F
PORTA PORTA BIG PORTA BIG

IF BIG PORTA BIG PORTA 3RAND PORTA PORTA BIG BIG RENT
SMALL INTERN INTERN TREAS
E
DIVERSI E
DIVERSI E
DIVERSI E
DIVERSI E
DIVFRSI E E
DIVFRSI E
DIVFRSI GROWT
AL. AL. URE
F F F F F F F H
INI
SR BIG BIG
SMALL
PORTA BIG BIG JRA URAND
INTERN
PORTA PORTA
INTERN
E
DIVERSI GROWT GROWT E E
DIVERSI E
DIVFRSI
ERNA. AN F H H ND AL
F F
AL.
UE E
T- N HKNA
SR BIG RENT
TREAS TREAS
BIG BIG RENT
TREAS TREAS
BIG
GROWT GROWT
STIRTI AN
H
URE URE
H
URE URE
UE
NI
BIG
GROWT
INTERN
BIG
GROWT
Nl INI NTFRN
ERNA AL. COLD A
H H ER
Assets on this side have obtained a LOWER return NA.
BIG CORE GREAT VALUE BIG GROWTH LITTLE INTERNATIONAL FIXED INCOME TREASURE LETTERS DIVERSIFIED WALLET
Figure 4.5: Returns over the last 20 years of different types of assets. Chart modified and translated from Blackrock.
Sep 2021
Each box in the figure on the previous page refers to an index dis red, or a combination of
indices, always referring to the US. Since we are not Americans, we do not have to choose the same
our indexes. We can choose other similar indices that are available locally, and that give more weight
to companies in the country or region. In any case, what we indicate here is quite general.
big core
Refers to large capitalization companies. In this case, it is the S&P 500 index.
Great value
They are large companies according to the Value Investing philosophy. It is the Russel l 1000
Value index, which includes companies with the lowest price-to-book multiples and with the
lowest growth forecasts.
Great growth
It is the Russel l 1000 Growth index, which includes the companies with the highest price-to-
book multiples and the best growth forecasts.
Small
Refers to small capitalization companies. It is the Rus index sell 2000 , which contains the
2,000 companies with the smallest capitalization, after the first 1,000 that are considered
large and medium capitalization.
International
They are international companies. It is the MSCI EAFE index, which contains companies from
Europe, Asia and the Far East ( Europe, Asia, Far East ).
Fixed rent
It is the Barclays US Aggregate Bond index, which contains investment quality bonds, with
more than one year to maturity, which are corporate, mortgages, US treasury or US
government agencies.
Treasure
It is a 3-month US Treasury bill index: ML US Treasury Bill 3 Month . When they expire,
similar ones are bought.
Diversified portfolio
It is a combination of the above, a typical portfolio. 35% of the Bar clays US Aggregate Bond ,
10% of MSCI EAFE , 10% of Russel l 2000 , 22.5 % of the Russel l 1000 Growth and 22.5 %
of the Russel l 1000 Value (basic (approximately 35% in bonds and 65% in stocks).
What can we conclude from this graph? Several things.

On the one hand, it is true that if it were possible to know what the Better investments next year,
we would obtain enormous benefits, of the order of 20% annually. This supports the theory that if a
good manager were able to find those good investments, his results would be fantastic. The problem
is that, as we have already mentioned, the few cases that achieve similar performance can be
explained simply by chance.
Stocks are great in good times, and bonds and treasury bills are good during downturns. In line
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with investing according to economic cycles, you could try to rotate investments from fixed income to
stocks depending on the state of the economy. Grow with stocks in good times, and protect yourself
from stock market declines by buying bonds. That's what mixed funds are all about. However, as we
have already mentioned, the results of fund managers trying to take advantage of cycles are no
better than those that would be obtained by an investor who simply bought the entire market .
And that is what the “diversified portfolio” box is about: an investor who had purchased funds
representative of the economy would have obtained average results. Final performances neither very
good nor very bad the. But yes, with a great advantage: having tempered the variations. Investing in
a diversified manner would have allowed for income, with less risk (understood as variability in the
price of investments), and with unsurpassed simplicity.
Returns for U.S. companies have averaged 8% annually, with a standard deviation of 15%. The
bonds have provided swam 5% annually, with a variability of 3.5 %. However, the diversified portfolio
has provided around 7% annually with a deviation 10% pica. Just a little less yield than stocks, but
2/3 the volatility. Wonders of the efficient frontier and the Markowitz efficient portfolio.
Note also that since the 2008 crisis we have faced a paradigm shift, because treasury bills, the
safest investment, have not provided any returns. It has basically stayed at 0% for 6 years in a row,
below inflation. Think about whether it is better for you to invest in something knowing that you will
surely lose purchasing power.
In short, using the theory of economic cycles does not even enrich professionals. You, who are a
small investor, do you think you have some any chance? If you don't have any, you will end up
chasing pipe dreams, entering and exiting market positions at the most inappropriate times and
paying high commissions. No, we have already seen it, buying the market is the simplest and safest
(due to its lower volatility). In the next chapter ex We explain how to “buy the entire market”, which we
repeat so much, can be done.
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Chapter
Invest in ETFs
The most efficient way to diversify an asset portfolio tions is with a low-cost
index fund. Statistics Typically, a broad index fund will outperform most
actively managed funds.
Paul Samuelson, Nobel Prize winner in Economics.
In the previous chapters we have seen that we have a long-term plan to save and earn passive
income. For this we have seen different for more than investing, and we have seen that funds that
follow indexes are the best option.
Among the funds that follow indexes we can choose two modalities.
exchange-traded funds
Even though they are investment funds, they are bought and sold like shares, directly on the
stock market. Simple, transparent, valid throughout the European Union (if they are UCITS);
They are the perfect option.
Conventional funds
They are bought and sold through the bank. They are the funds of a lifetime. These could be
an option, and in fact in many countries they are, but unfortunately in Spain the fund market
is an oligopoly where only 3 banks control 50% of the invested volume. For this reason, the
prices (their TER) are almost an order of magnitude more expensive than a
ETF, which is absurd for funds where the manager does not have to do practically anything.
For this reason, we rule out conventional funds in Spain (despite their very favorable tax
treatment). See Martín Huete's blog for more informationLXXXI .

LXXXIHuete, The Blushing Offer of Index Funds
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ETFs are more transparent, cheaper, and general than funds with ventional. Thanks to the
European UCITS directive, they can be registered in one country and become valid throughout the
European Union. These ETFs can be bought and sold in any other country without complications,
paying taxes transparently according to different national legislations.
Some Introductory Videos
A good way to learn about the world of passive investing, index funds and ETFs is through
educational videos. There are many on YouTube, take a look there because as it is very visual
material, it helps to fix ideas. Take the key ideas from here, why and how passive investing
works, and delve into them on your own.
• ”Martín Huete – The lies of the System. “Uses and practices that harm the investor.”
Martín is a national institution, with multiple videos on YouTube and his own blog .
• ”Ten Rules for Financing Life” . A series of videos created by Rick van Ness, where the
central ideas are visually shown those we describe in this book. Excellent content,
common sense, humility and well explained; better impossible. More information mation
on its Financing Life website
• ”Victor Haghani – Where are all the Billionaires? ”. Excellent video, although we do not
share your interest in active ETFs.
• “ Sensible Investing – Passive Investing Theory ”. Very good in Theoretical introduction

to passive investment. This author has many other recommended videos.
• “ Index Fund Advisors Inc. – Index Funds: The Documentary Film .” Devastating, very
well documented, very educational. But be aware that this is marketing material and we
are do-it-yourself advocates. Note that paying taxes in the US is different from Europe.
ETFs are not perfect, you have to know them and they can bring bankruptcy headshots. But we
do have a clear idea, and that is that of all the possibilities available to a small investor, ETFs are the
best.
In the following sections we will describe what exactly ETFs are, their history, and how to use
them.
ETP: ETN, ETC, ETF
To simplify the language, in this text we continually write ETF ( Exchange Traded Fund ).
However, this may not be an appropriate expression in certain cases. The following are
acronyms commonly used in the US market.
• There are ETCs ( Exchange Traded Commodities ), which as their name indicates refer
to ETFs that follow commodities such as precious metals or raw materials.
• ETN ( Exchange Traded Notes ), which were first created by Barclays Bank PLC. The
ETN provider commits to provide you with the return of a specific index, the novelty being
the absolute freedom you have to do so. Not even the invested capital is insured, it is a
simple contract, there are no guaranteed assets. In this way, the value of the ETN
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depends not only on the index, but also on the credit quality of the provider. dor. And if
the supplier goes bankrupt, the holder of the ETN becomes part of the creditors who
claim the debt from the supplier.
• And finally the ETP ( Exchange Traded Product ), which are the generalization that
encompasses all of the above.
5.1. A little history

The history of ETFs is very recent, and this is noticeable by the speed of changes and the
amount of information available. We report here the most relevant events that have happened, both
, which is where 6,465 began at 6,667
in the US , and in Europe .
64
Ferri, The ETF Book
65
Simpson, A Brief History Of Exchange-Traded Funds
66
Groves, Exchange Traded Funds, A Concise Guide to ETFs 6 7 Morningstar, A Guided Tour of the European
ETF Marketplace
The first conventional investment funds (not yet ETFs) that tracked indices appeared in the US
in 1973, managed by Wells Fargo and American National Bank.
Academic studies were already beginning to show that passive investing gives you no
advantages. An economics student, John C. Bogle conducted a study on the profitability of
investment funds with respect to their benchmark indices. And their conclusions were that most
managers do worse than the indices, largely due to their high fees. When he started working, he tried
to convince his bosses to offer indexed funds, but without success. Apparently it was feared that no
one would want to buy the mediocrity of an index, and could try to beat it. So John C. Bogle ended up
founding his own company in 1976, Vanguard, which has since been a symbol for all long-term
investors for its buy and hold philosophy. This company started with conventional index funds, and
over time it also offers ETFs.
The appearance of ETFs is relatively modern. In general it is with believes that the first
investment instrument with the characteristics of current ETFs was the Toronto Index Participation
Units (TIP SLXXXII ) . This fund was launched on March 9, 1990, but was later closed in 2001 due to
the existence of a better Canadian stock market index.
The first ETF that continues to function as it was created is the so-called SPDR S&P 500 (ticker
SPY), managed by State Street Global Advisors (due to the manager's acronym, SPDR, this ETF is
also known as a spider ), which appeared in USA in 1993 (a little over 20 years ago!). This ETF is
also the largest in the world by assets managed, in 2017, a whopping 224 billion dollars (almost 20%
LXXXIII
of Spanish GDP). , although this is comparing pears with apples). Until the end of 1997, TIPS
LXXXIINote that this TIPS has nothing to do with Treasury Inflation Protected Securities .
LXXXIIICompare State Street Global Advisors ETF Summary, SPDR S&P 500 ETF with National
Institute of Statistics, National Accounting of Spain
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and SPY were the only ETFs in the world.

Then the ETF industry began to grow exponentially. By 2002 there were 102 ETFs in the world,
and by 2009 there were already a thousand.
The first ETFs domiciled in Europe were the Dow Jones Euro STOXX 50 and the Dow Jones
STOXX 50 LDRS (“LDRS” refers to leaders ), which appeared in the year 200 0LXXXIV .
The Name of the ETFs
The name of ETFs provides a lot of information that helps the investor know their basic
characteristics. They are relatively long names. They normally include: the fund manager, the
index it follows, “UCITS ETF” (mandatory according to regulation) and other variable details.
Among the variable details, it is possible to find references to: NR, TR or TRN ( Net Return ,
Total Return , Total Return Net , see sec. tion 5.8.2) , “Acc” or “Dist” (accumulates or distributes
dividends), DR ( Direct Replication , referring to “physical” and not “synthetic” replication),
hedged (hedged against changes in currency value) , short (which in the context of stocks refers
to "going short", synonymous with downward or inverse; although if it is a bond ETF it then
refers to short-term bonds).
Let's look at some examples:
ManagerXYZ UCITS ETF EURO STOXX 50

The managing entity is ”GestoraXYZ”.
“UCITS” means that the ETF complies with European regulations on investment funds (see text
box on page 97) .
The ETF tracks the “EURO STOXX 50” index.
This ETF is neither leveraged nor inverse, because its name does not indicate it.
Manager
ManagerABC IBEX 35 HARMONIZED LISTED FI ETF

The managing entity is ”GestoraABC”.
“HARMONIZED LISTED FI” means that this Spanish ETF cum complies with the European
regulations on investment funds, equivalent to UCITS. This ETF replicates the “IBEX 35” index.
This ETF is neither leveraged nor inverse, because its name does not indicate it.
For more details, see the CNMV information guide, Los Fondos Co tized (ETF) .
The first ETF domiciled in Europe but tracking a global index was the EasyETF Global Titans 50,
which tracked the value of 50 global multinationals. It emerged in 2001, but unfortunately this ETF
was closed in 2010.
The first European ETF to track a corporate bond index was the iBOXX Liquid Corporates ETF,
by iShares in 2003.
LXXXIVThese ETFs were renamed to iShares, STOXX Europe 50 UCITS ETF (the 50 largest European
companies, 9 countries) and iShares, EURO STOXX 50 UCITS ETF (Dist) (the 50 largest companies in the
Eurozone, 7 countries)
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2003 was the first year in which the net flow of new capital was greater to ETFs than to
conventional funds. Since then, in the good years of the stock market, when everything goes up,
conventional funds have greater capital inflows. But when the stock market does poorly, then ETFs
have higher net capital flows.
The second largest ETF today, SPDR Gold Shares, began co marketed in 2004. This fund has
LXXXV
40 billion dollars in gold (about 950 tons) , and is believed to be the sixth largest owner of gold
in the world, on par with the central banks of major countries.
The first European ETFs to track an index of companies selected by their dividends were the DJ
Euro STOXX Select Dividend 30 and the DJ STOXX Select Dividend 30 ETF, created in 2005 and
today operated by iShares.
Also in 2005, the first commodities ETF emerged in Europe, managed swim by EasyETF.
In 2006, the first ETF was created to select companies according to their functions.
fundamentals, the XACT FTSE RAFI Fundamental Euro ETF, which was subsequently closed in
2009.
In Spain the first ETF was the BBVA Ibex 35 ETF Share , which co It began operating in July
2006. In September of the same year, Banco Santander launched the second ETF, but ended up
closing it (along with others) in 2008.LXXXVI . BBVA also created several ETFs that followed
Latibex indices (em Latin American dams listed in Spain) in 2007, but they also ended up closing
(these in 201 1LXXXVII ) . In Spain it is difficult for ETF managers to emerge, because the legislation
rewards conventional funds (since investment capital tide can be moved from one fund to another
without paying the Treasury at the time, delaying payment), and makes ETFs lose interest for
investors by comparison.
There are currently 3 management companies operating on the Spanish stock market: BBVA,
Lyxor, and db x–tracker sLXXXVIII .

In any case, we do not have to worry because there is little variety in the Spanish stock market.
Thanks to the UCITS legislation, we can buy in any exchange in the European Union (for example
Xetra or Euronext). This allows us to have a huge number of options available, in exchange for
(normally) a somewhat higher broker cost, because broker commissions are usually lower on the
stock market of the country in which the broker resides (if the broker is Spanish , it will be somewhat
cheaper to buy on the Spanish stock market).
As a curiosity, currently the contracting of ETFs in Bolsas and Mer Spanish contracts is on the
order of 1% of all hiring in any given month (in March 2016, 90 million euros compared to 8 billion
LXXXV State Street Global Advisors, SPDR Gold Trust
LXXXVIEl Economista, Santander Demonstrates its Lack of Faith in ETFs
LXXXVII Cinco Días, BBVA reviews its ETF strategy and closes two funds in fifteen days
LXXXVIIISee the list on the Madrid Stock Exchange website, in the menu: ETFs > Quotes on Spanish Stock
Exchanges and Markets, ETF market session prices
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eurosLXXXIX ) .
A modern development is also the figure of synthetic ETFs (see section 5.3.2) , where the fund
replicates the index not by purchasing the assets that compose it, but through financial engineering.
This allows the fund to multiply market changes (if it is a 2x ETF, that means that if the value of the
index changes by 1.5 %, the fund changes in the same period by 3%. And there are even inverse
ETFs, which go up when the index goes down, and vice versa.
It has reached a point where even the most prosperous active investor in the world, Warren
Buffett, declared in 1997 that most investors should invest in index funds, which is their best option,
and which is what he will leave behind. family in the will.
In fact, ETFs are so modern that many of them have only been in operation for a short time,
which represents a risk for the investor. Would you invest in a newly created investment fund? In a
fund that does not have a track record of years, that demonstrates its long-term stability? And also
follow an obscure, complex index, but one that promises great benefits? No, ETFs can also be a
problem. There are many to choose from, and you have to do your research to avoid inappropriate
investments. Don't invest in anything you don't understand or that doesn't have a long-term trajectory
like we want for our Financial Freedom.
ETFs are growing enormously in recent years, representing (as of September 2014) 5.5 % of all
euro fund investments. peos. This contrasts with the US market, where ETFs are 12% of
investments; and with the Spanish market, where we have already commented that they represent
approximately 1 %.XC .
Regarding assets managed in Europe, they have doubled between 2009 and 2014, now being
around 362 billion euros.XCI .

ETFs are growing in three main ways: by providing a security that can be bought and sold for
technical investors who follow trends, instruments for fund managers (look at what mutual funds
invest in, they often buy them themselves ETFs, making their lives easier), and finally small investors
who save for the long term (this is becoming very common in recent years, especially in the US due
to its particular retirement savings system).
So we have that ETFs are a very young investment product, barely 26 years old worldwide, 10
years in Spain. This helps explain why ETF managers provide so little historical information. toric
about the behavior of their ETFs, and the fact is that they did not exist very recently. Despite this,
thanks to being simple and transparent, they are growing exponentially in recent years. Let us now
look in more detail Learn how an ETF is implemented in real life.
What is a “European” ETF
When referring to European ETFs there is a certain uncertainty about what exactly we are
referring to. And it is confusing, given that we investors can live in a country, which may be
LXXXIXSee the Bolsas y Mercados website, in the “The Market Today” section and select “Variable Income”
XCSpanish Stock Exchanges and Markets, Variable Income
XCIMorningstar, A Guided Tour of the European ETF Marketplace
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different from the domicile of the investment fund, different from the country where the stock
exchange is located, and different from the country or countries of the assets in the index. . For
a citizen of the European Union, a “European” ETF refers to a fund domiciled in the European
Union and purchased on an EU exchange, so it is easy for an EU citizen to buy it, without
complications due to taxes.
However, for a non-EU, “European ETF” will mean an ETF that tracks an index representative of
the continental economy. European Union, regardless of its currency or whether or not it
belongs to the European Union.
With respect to the names of ETFs, “euro” usually refers to the currency in which the ETF is
purchased, and “Europe” refers to the ETF tracking an index of European companies, including
European countries outside the Union. European (for example the United Kingdom).
When you want to explicitly indicate the countries that make up the “euro zone” of the European
Union, you usually write “EMU”, European Monetary Union (which excludes the United Kingdom,
for example).
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2
Fig
ure
5.1
:
Ev
olu
tio
n
of
the
ET
F
ind
ust
ry.
So
urc
es
ind
ica
ted
in
the
tex
t.
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
2016
Sep 2021
5.2. What are the Main ETF Managers?

The world of finance, like so many other sectors of the economy, is usually very local, specific to
each country. And that's how it started in Europe. However, thanks to bold European Union legislation
that unified the criteria for being able to register in one country and be offered in others, we enjoy great
diversity. We can also transparently buy funds registered in one country, offered on the stock exchange
of another country, and while we are residents in another country.
In this way, the main European ETF managers are accessible to all member countries of the
European Union.
Table 5.1 shows a list of the main European managers. The world of index funds requires
efficiency, simplicity, transparency and low cost. The cost of a fund that manages 100 million euros is
very similar to the cost of another fund of 1 billion, largely fixed costs. Economy of scale is the
fundamental thing here, and this is the reason why the market is very concentrated. This quasi-
monopoly situation is not necessarily negative, because two managers implementing a fund that tracks
the same index have to provide very similar results. The only way to differentiate is through price, which
improves as the fund grows, so in this case concentration is acceptable.
In the United States the main managers are SPDR (its S&P 500 ETF is the largest ETF in the
world).XCII ) , Vanguard, iShares, PowerShares and Schwab.
XCIIState Street Global Advisors, SPDR S&P 500 ETF
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ETF Manager
Fraction of
Managed Assets [EUR billion] Total [ %]
iShares 166,4 46,0
db x–trackers 42,6 11,8
Lyxor 38,0 10,5
UBS 16,8 4,6
Source 15,1 4,2
Amundi 14,3 3,9
ETF Securities 11,5 3,2
Vanguard 8,8 2,4
SPDR 8,2 2,3
Deka 6,5 1,8
ZKB 6,2 1,7
Comstage 5,7 1,6
HSBC 4,7 1,3
EasyETF 3,3 0,9
XACT 2,5 0,7
Swiss and Global 2,1 0,6
DB ETCs 2,1 0,6
Ossiam 1,4 0,4
PowerShares 1,4 0,4
RBS 0,8 0,2
Think ETF 0,7 0,2
Others 3,1 0,9
Total 362,1 100,0
Table 5.1: Main ETF managers in Europe. Note that it is a very concentrated market, half is controlled
by a single manager, and 90% is concentrated in the 10 largest managers. This is normal, because it is
a market where managing large volumes allows costs to be reduced, which is what fundamentally
matters. Source: Morningstar, A Guided Tour of the European ETF Marketplace .
5.3. How does an ETF work?

ETFs are investment funds that track an index. This index can be simple, or follow rules so
complicated that in practice it can almost be considered active management.
Be that as it may, how do you get the ETF to follow its benchmark index?
An ETF is a complex system in which several agents buy and sell give actions seeking their own
benefit, through the “creation and redemption mechanism” of actions. As a result of the measures taken
by these agents, the value of the ETF share is very close to that of the index. The value of the ETF
share is close to that corresponding to the index, but not by law, but because if this were not the case
there would be an arbitrage opportunity and agents could obtain a risk-free profit.
The ETF's share price does not follow its index rigidly, but rather by forces that bring it to
equilibrium again and again. Like a pendulum that swings. Every time the price moves away from
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equilibrium, a force pushes it in the opposite direction, so the system is stable and always returns to its
equilibrium position. And although it is never exactly still vertically, it is always hovering nearby.
The end result is a product that tracks an index and is sold like a stock; where a series of
independent agents keep the system efficient and secure, for their own interest, thanks to the fact that
their incentives are correctly aligned with those of the fund.XCIII .

However, the net asset value of the ETF (see text box) may be different from the value of its
benchmark index, due to fund management fees and dividends that the ETF may pay.
The general objectives of an ETF could be defined as: following an index, operating at low cost,
and being able to execute buy/sell orders during stock market opening hours. In this section we are
going to explain how these objectives are achieved.
In general, we talk about ETFs whose assets are shares, although the idea is basically the same if
we were talking about fixed income or commodities.
The explanation for the functioning of ETFs could be that they are not co ly on the information
available about ETFs, in part because this gives an idea of complexity that goes against the view that
ETFs are a simple and safe way to invest. However, its description is relevant because it is not really
very complex, and because knowing the incentives that the different actors have allows us to discover
their weaknesses.
There are two main ways to implement an ETF: physical (or direct) and synthetic (or indirect). Both
are very similar, but the fact that synthetics have an added source of uncertainty makes them talk a lot.
We have a preference for physical ETFs because they are more transparent, but perhaps the reader
has other ideas.
In Europe, half of the ETFs are physical and the other half are synthetic. Of course, most of the
XCIV
capital (75%) is in physical ETFs, with synthetic ETFs being a minority (25%) .
Net Asset Value of an Investment Fund
The net asset value is very similar to the price of a share. The net asset value represents the value
of a small part of the investment fund, and the share price indicates the value of a small part of the
publicly traded company.
The net asset value is the ratio between the fund's net assets and its number of units. It is
calculated by adding the value of all the fund's assets, including liquid capital (cash), subtracting
expenses and dividing the result by the total number of units in the fund.
The meaning of the net asset value is to be able to compare the price of the par participation of the
fund with the assets in the possession of the manager, and to be able to verify that they are
basically equal and that no irregularity is being committed.
In the case of traditional investment funds, the net asset value is calculated at the end of the
trading session, once a day. In the case of ETFs, the value is calculated in real time, and is
indicated as ”Indicative Net Asset Value”.
XCIIISee Groves, Exchange Traded Funds, A Concise Guide to ETFs .

XCIVSee figures 39 and 41 from Deutsche Bank, European Monthly ETF Market Review .
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1. 3.1. Physical ETFs

This type of ETF was the first to be marketed. In addition, it is the simplest and the one that is most
widespread.
This (physical) system of replicating the index is the most direct. The sponsor of You decide to
create the ETF that follows a particular index (for example the IBEX 35). To do this, you join forces with
(at least) one authorized participant . This self-sharer rido provides the sponsor with the shares of the
35 companies that are part of the IBEX 35, each one in the appropriate amount that corresponds to it
according to the index (its market capitalization, so that companies predominate large prey). In
exchange, the sponsor delivers to the authorized participant a block of shares of the equivalent ETF.
This occurs in the primary market mario, see text box on page 148.
The authorized unitholder breaks that block into shares (typically 25,000 or 50,000 ETF shares)
and sells them on the stock market to private investors in the secondary market.
Why blocks of 25,000 or 50,000 ETF shares? Because the participant An authorized person must
be able to buy the shares that make up the index, and also do so in an economically efficient manner.
In the case of the IBEX 35, in February 2016, the company with the highest weight in the index is
Inditex with 18%, and the lowest weight Sacyr with 0.15 %. 0.15 % of 25,000 ETF shares at 9 euros
each are 340 euros. So each time the authorized participant acts, he has to make 35 purchases more
or less simultaneously, in amounts ranging from 340 euros in Sacyr shares to 40,500 euros in Inditex. If
the block of actions were very small queño, would have to make more frequent purchases and smaller
quantities, incurring higher operating costs.
The term physical ETF emphasizes that the trades that occur are exactly the underlying stocks
that the index is tracking. This system can also be called in kind .
Note that investors buy and sell ETF shares that have been created by an authorized unitholder.
The investor never makes any interest change with the sponsor, who paradoxically is the true manager
of the fund.
ETF shares are bought and sold on the stock exchange, in an organized market, exactly as is
done with shares of listed companies.
Table 5.2 shows the agents that take part in a physical ETFXCV . The Authorized Participant and
the Market Maker are separated in the table, but in reality they may be the same.
Physical ETFs are the most common in the US. In historical Europe Synthetics have
predominated, largely because governments charge specific taxes on stocks (the British Stamp Duty for
example), while they do not on derivatives, and that is why physical ETFs were more expensive than
synthetic ones. However, in recent years and due to modifi cations in European legislation that make
synthetic ETFs difficult, they are becoming less frequent.
XCVSee Spanish Stock Exchanges and Markets, Functioning of the ETF Market .
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Role Definition
Fund Manager ( This is the company that creates, sells and manages the ETF. It is also well known
Sponsor ) as the ETF manager or the provider. But the sponsor is not responsible for creating
the ETF shares, this function is wants the contribution of an Authorized Shareholder
(see below).
Index Provider
It is the company that calculates the benchmark index for the ETF. The Sponsor
requires a license from the Index Provider on which it is based. Thus, the Lyxor ETF
FTSE 250 requires a FTSE license to use the FTSE 250 index. Examples of index
providers are the Financial Times Stock Exchange (FTSE), Morgan Stanley Capital
International (MSCI) or STOXX.
Market of By definition, all ETFs can be bought and sold for in versors. And therefore, ETFs
Values have to meet the requirements of the Stock Market in which they are traded. The
bag also pro provides relevant information (e.g. real-time prices and volumes, real-
time indicative net asset value of the fund, daily basket composition and daily net
asset value). Furthermore, in Europe it is common for ETFs to be traded on several
stock markets at the same time.
Authorized Authorized Unitholders are what make or break ETF shares. The relationship
Participant between a Sponsor and an Authorized Unitholder in an ETF is similar to that in a
franchise (for example, fast food). The franchisor (Sponsor) has control over It
opens the concept of the product (about the hamburgers), but it is the franchisee
(Authorized Participant) who sells the product to the end customer (he is the one
who actually cooks the hamburgers). They operate in the primary market.
Market Maker
This is a common stock figure. They are companies that agree with the Sponsor
and the Stock Market to maintain a sufficiently liquid market in the shares of the
ETF (or the corresponding generic share). By doing so, they submit to rules about
spreads and minimum quantities for which they will provide a price. They operate in
the secondary market, and obtain profit through the difference between bid and
ask .
Custodian Financial institution that stores shares to minimize the risk of loss or theft. They tend
to be large firms with a good reputation. tation. The Authorized Unitholder takes the
shares of the companies in the index and delivers them to the custodian. The
custodian confirms that the shares are legal, stores them in the ETF manager's
account, and delivers the ETF shares to the authorized holder in exchange.
Table 5.2: Different agents related to physical ETFs.

Difference between Primary Market and Secondary Market
The primary market, also called the financial asset issuance market, is where the sale of assets or
instruments to the public takes place. financial instruments that have been newly issued and are
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being offered to investors for the first time. It can be deduced that the assets finance The securities
that are exchanged are newly created and, for this reason, each security can be traded only once
at the time of its issuance. Subsequent negotiations that occur after the issuance are real They will
be traded in the secondary market, where securities already issued and in circulation are traded.
To complicate matters, the vocabulary is not homogeneous, and different exchanges may use
different expressions. Deutsche Boerse, for example, uses designated sponsor instead of market
maker . Madrid Stock Exchange refers jointly to Market Makers and Authorized Participants as
Specialists.
When an investor buys shares of an ETF, what he or she does is place the purchase order in the
market (see Figure 5.2) . The investor buys the shares either from an authorized participant, a market
maker , or another investor. All three behave basically the same, the only difference is that the
authorized unitholder is the only one involved in the creation of new shares of the ETF.
When the authorized unitholder becomes aware of the demand for ETF shares (a demand that is
not fully satisfied by market makers or other investors), he purchases the underlying shares and
delivers them to the sponsor. In exchange, the sponsor creates a package of ETF shares and delivers
them to the authorized participant. In this way, ETF shares are created as needed.
When an investor sells shares of an ETF, the diagram is very similar to that of the purchase (see
Figure 5.2) . The flows are simply reversed. The investor sells the shares either to an authorized
participant, to a market maker , or to another investor.
Again, the authorized participant is the only one who has direct dealings with the sponsor. When
the authorized participant notices that there are an excess of sell orders, he purchases a package of
ETF shares and delivers them to the sponsor. In exchange, the sponsor returns the equivalent in
shares of the underlying index. This destroys ETF shares that are no longer needed.
Note that when you buy or sell shares of the ETF, you do not interact with the fund manager.
Maybe with the authorized participant, but it is not certain.
Surely you buy or sell shares from the market maker . If you look at the order book of the exchange you
trade on, the market maker will typically be the one with the largest blocks of ETF shares, whether for
buying or selling. You could end up buying or selling shares to another individual investor. In any case,
note that the fund manager does not appear at any time, everything is done without his intervention, so
its management is minimized, thus allowing it to have a very low cost. The manager has outsourced the
purchase and sale expenses. Take note, because if you trade frequently you will lose this advantage.
Notwithstanding the above, there are so-called "Limits of Action". These are cases in which the
specialist or market maker is authorized do not act. These are exceptional situations of high volatility,
due to the impossibility of calculating the value of the index, due to the impossibility of calculating the
indicative net asset value.
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Stock market
Figure 5.2: Process diagram when an investor buys shares of a physical ETF. In the case of a sale, the
arrows are reversed.
Rental of Shares by the Fund Manager
Some ETF managers rent the shares in their funds . When the authorized unitholder buys a block
of shares of the index and gives it to the ETF manager, the manager could lend it to other
investors (for example to Hedge Funds that want to go short).
What is going short? It is a common operation that consists of when an investor believes that the
value of a share is going to go down, he can borrow the shares from the manager (or any other
owner of shares) in exchange for a small sum, sell them to another investor, wait , buy them back
from any other investor at a lower price, and return them to the manager. If the stock went down,
the short investor earns the difference between the sale and the purchase minus the cost of rent.
The manager always earns the cost of the rental (and by extension, the TER that we pay for the
ETF may be somewhat lower). The manager is very interested in carrying out the operation,
because it is safe money and does not require any special action. The manager even continues to
receive dividends during the time in which the share remains lent, dividends that he accumulates
or distributes to the final investor.
What's the score? The income obtained by renting the shares can be comparable to the TER. The
ETF can follow its index more closely, and the ETF may even generate annual returns slightly
higher than those of the index if the rental income is greater than the TER.
What is the problem? That everything works well... until it stops working well. If the borrower goes
bankrupt during the short trade, the manager is left without shares, and we buy ETF buyers are left
without part of the investment. In principle, the ETF manager receives excess collateral (assets as
collateral) in exchange for the shares, nothing should happen, but be aware that you are taking on
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additional counterparty risk.

In recent years this practice has been decreasing. They compare In the years 2013–2014
compared to 2011–2012, the most active ETFs in this sense, which lent on average more than
50% of their assets, have gone from 18% to 4%. And the least active, who lend less than 10% of
their assets, have gone from 58% to 82%.
A very interesting study in this regard has been carried out by Mornings tar, see specific data in its
appendix
. And you can also find out about the loan of shares that is carried out on the Madrid Stock
Exchange .
a
Morningstar, A Guided Tour of the European ETF Marketplace
b
Moreno Anaya, What are borrowed shares? How can I see them?
There are three types of physical ETFs, depending on how they replicate their corresponding
index. tooth:
• Full Replication What you would expect, full replication ta of all elements of the index. This
method works very well with very liquid indices such as the Euro STOXX 50. However, there are
times when this method does not work, either because the assets are illiquid, or because there
are an immense number of assets (for example, the MSCI World is made up of about 1,600
assets). On the other hand, these ETFs run the risk of other investment funds taking advantage
of their predictability, and their advantage becomes a disadvantage, due to the so-called front-
running arbitrage (see text box on page 152) . If full replication is not efficient, the following two
methods are used.
• Sampling A subgroup of assets is selected from all that make up the index. They are the most
liquid assets, to facilitate fund management. To minimize the fact that the fund's basket of
assets is no longer exactly the same as that of the index, the assets are chosen to be
representative of their subgroup (their country, region, credit quality, currency, etc.). It is a
subgroup of assets of the index they represent.
• Optimized It is a method similar to sampling , in the sense that a subset of the assets in the
index is selected. But in this case they are selected not because they are representative, but
according to mathematical models that can take into account capitalization, momentum (trend),
volatility, history and various parameters. It represents a balance between how representative
that set of assets is with respect to the index, and the ease of investing in that set of assets
instead of the assets in the index.
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Front–running Arbitrage
Front-running arbitrage is a general problem related to stock brokers and the management of the
information they have. In the case of the ETFs in question, it is that active investment funds can
predict which assets an index fund is going to buy and take advantage of them
.
It may happen that the index provider gives notice a few days in advance analysis of changes in
the assets that will be part of the index, to give the index funds time to take their actions. During
that interim time in which the announcement has already been made but the purchases have not
yet been made, then the front-runners can appro go away They can quickly buy the assets that
will be part of the index. A few days later, when it actually becomes part of the index, passive
managers buy it. And then Ces its price rises, because most fund managers follow the indices,
whether passive (they do it by definition) or active (to avoid complicating life). Finally the front-
runners , who had bought cheap a few days before, sell that company for a higher price. They
will thus have obtained a benefit without risk and almost without effort. And the same thing
happens if the company is excluded from the index and active managers sell short.
The cost that this problem has for ETFs is estimated to be around 0.2 % per year (which would
be one of the components when measuring tracking difference ). This amount can be minimized
with ETFs that have po ca asset rotation (capitalization indices of large companies, for example),
or ETFs that buy the entire market (see for example plo IMI), with indices that minimize changes
(with bands, common practice today), or with optimization of the representative basket. In short:
this is a real problem that needs to be taken into account.
a
Nakamura, The Hugely Profitable, Wholly Legal Way to Play the Stock Mar ket
2. 3.2. Synthetic ETFs

As we have seen in the previous section, physical ETFs are what one expects from them. There
is a clear relationship between the index, its elements constituents, and the constituent elements of
the basket purchased by the authorized participant. This relationship, however, is broken with
synthetic ETFs, where of the basket of securities purchased by the authorized participant may have
nothing to do with the index. It could happen, for example, that an ETF follows Japan's Nikkei 225
82
index, but does not buy listed Japanese companies, but rather European ones .
What is the point of synthetic ETFs? They seem strange, and to a great extent dida they are.
There are several reasons for its existence:
• Sometimes indices are made up of assets that are very illiquid, making it very difficult to buy
and sell them. A synthetic ETF replaces those assets with others that are much easier to buy
and sell. In practice, what is seen is that the annual variation in the value of the ETF is that of
the index minus the TER, and if there are operational difficulties (lack of liquidity, purchase
and sale costs) the value of the ETF will be a little lower. Synthetic ETFs simplify the
management of the ETF and eliminate these operating costs, so the ETF will be closer to the
value of the index minus the TER.
• When a company that is part of the fund provides dividends, the manager either transfers
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those dividends to the investor (distribution ETF tion) or buy more assets (accumulation ETF).
They transfer it The transfer of capital from one country to another can be complex, and
therefore it is easier to estimate those dividends that would have been obtained and
synthesize them using assets that are easier to manage. This allows for example plo the
creation of ETFs that follow international gross return indices, which do not deduct taxes from
the dividends of the companies in the index from their country of origin to the country of
domicile of the fund. This happens unlike net return indices where taxes paid by the manager
are deducted (note that the investor will pay taxes again on these dividends when they leave
the ETF manager and are delivered to the investor). If the assets in the substitute basket are
located in the same country of domicile of the fund, since there is no real transfer of dividends
between countries, the manager does not pay taxes on those dividends.
82
Morningstar, Synthetic ETFs Under the Microscope: A Global Study
• A parent bank, of which the ETF manager is a subsidiary, can of having overexposure to a
market/region/economic sector (because it is their country of origin, due to regulatory
impediments, etc.). This overexposure provides dividends/interest that the parent bank would
want to exchange for other independent sources of income, for ra diversify. Thus, the parent
bank may be interested in providing European assets in exchange for receiving Japanese
assets, for example. In finance this is called a swap .
Counterparty Risk
The most important idea of synthetic ETFs is that they introduce “counterparty risk.” The risk that
the bank providing the swap will not be able to meet its contractual obligations to the ETF
manager. And a financial entity can fail for its own reasons, regardless of the behavior of the
ETF. To mitigate this problem, there are always collateral assets, which will be delivered to the
investor. But it should be noted that this counterparty risk does not exist in the case of physical
ETFs, and that large, solid banks that are supposed to never go bankrupt can also disappear
(such as Lehman Brothers during the 2008 crisis). .
For example, ETF manager db x–trackers is a subsidiary of Deutsche Bank. One of its ETFs is
the CSI300 UCITS ETF 1 CXCVI (ISIN LU0779800910), an ETF that tracks the CSI300 index, of 300
companies representing Chinese sentences. These are the elements of the index, but what assets
make up the substitute basket that the manager buys? This information is on their website. Its two
largest positions are Fomento de Construcciones y Contratas (yes, FCC, the Spanish one) and
Berkshire Hathaway (yes, Warren Buffett's company, American). Others in the top 20 on the list are
Siemens, Daimler, ING and Bayer. The rest are mostly Japanese. It is true that foreign investors
today have limitations in accessing the Chinese market, and that the manager has to figure out how
to implement the ETF, but even so the substitute basket is shocking. And even more so because the
swap was pro provided by Deutsche Bank's London subsidiary db x–trackers. Everything stays in
house, the manager is the same one who provides the swap . So this leaves us with many questions:
XCVIDeutsche Bank, CSI300 UCITS ETF 1C
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What correlation is there between the assets in the substitute basket and those in the index? What
would happen if the assets in the basket go bankrupt?
ETF Manager Parent Bank Country

Amundi Crédit Agricole and Société Générale France
Commstage Commerzbank Germany
Credit Suisse AM Credit Suisse Swiss
db x–trackers Deutsche Bank Germany
EasyETF BNP Paribas France
ETFlab DekaBank Germany
ETF Securities ETF Securities United Kingdom
iShares black rock USA
Lyxor AM Societe Generale France
Ossiam Natixis France
PowerShares Invesco PowerShares USA
RBS Market Access Royal Bank of Scotland United Kingdom
Source United Kingdom
Bank of America Merrill Lynch, Goldman Sachs,
JPMorgan, Morgan Stanley and Nomura
SpotR SEB Sweden
UBS GAM UBS Swiss
XACT Handelsbanken Sweden
Table 5.3: Main managers of synthetic ETFs in Europe. Source: Mor ningstar, Synthetic ETFs Under
the Microscope: A Global Study .
even when the followed index behaves normally? Could collusion occur between the manager and
the swap provider, to exchange what interests them at the expense of the investor?
In fact, it could be the case that the ETF manager and the swap provider exchange devalued
assets, but nominally assigning them unrealistic values. This allows the parent bank to get rid of low
quality assets (illiquid, risky, bad press, low credit quality). cia, etc.), delivering them to the ETF
manager, a subsidiary of its own without discretion, which encapsulates these low quality assets to
sell them, preventing them from being visible to the final investor, who perhaps would never have
bought them on their own initiative .
So due to the above reasons, synthetic ETFs are said to have “counterparty” risk. Risk that,
when necessary, recovery To carry out the investment, the value received would be less than what
was invested if the company providing the swap is not able to meet its obligations, since the value of
the substitute basket would be less than that of the index (see text box on page 154 ) .
Also, notice the logical problem this entails. Let's assume the synthetic ETF discussed above
tracks an index of Chinese companies, but is nonetheless buying European companies. When an
investor buys that ETF, the investment will not end up buying those Chinese companies, and
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therefore those Chinese stocks do not react to the laws of supply and demand. Its price does not
increase despite there being demand. And on the other hand, there are European assets that are
bought and whose value therefore rises, despite there being no real demand for them. Imagine what
would happen if synthetic ETFs were a mainstream form of investing. The prices of the assets could
not be fixed, and it could even happen that the synthetic ETF had more assets on balance than the
values of the index itself. It makes no sense!
In this way, synthetic ETFs that were born to solve liquidity problems, simplify and provide
maximum returns for investors, ter They mine being a product with added risks and under the
suspicion of hidden interests that obtain benefits at the expense of end investors.
Are synthetic ETFs trustworthy? Well, we will have to see one by one. If the entity that provides
the counterparty is the same parent bank, things are going badly. To mitigate this problem, many ETF
managers agree to have multiple swap counterparty providers, minimizing risk.
On the other hand, there are two types of ETFs that can only be provided by synthetic
mechanisms, which are inverse and leveraged ETFs. More information about them in section 5.9.3,
but let us know in advance that they are not recommended at all for our passive investment and
Financial Freedom objectives.
On the other hand, there are two types of synthetic ETFs, at least among the euro peos: the
unfunded and the funded .
Unfunded Synthetic ETFs

The unfunded model is the first model that emerged in Europe, in 2001, and is still the most
common today. This model is also used in Asia and Australia.
It is similar to a physical ETF, but instead of having a basket of assets that replicate the index,
the surrogate basket has been provided by the swap provider, and does not have to have any
relationship to the index.
From the investor's point of view, there is no difference with physical ETFs. In both cases, the
investor buys and sells shares of the ETF on the stock exchange, and in both cases the authorized
unitholder is responsible for creating additional shares of the ETF or destroying those that are no
longer needed.
The difference with physical ETFs is that the ETF manager establishes an agreement with a
financial institution according to which the manager delivers a basket
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Figure 5.3: Process diagram when an investor buys shares of an unfunded synthetic ETF. It is similar
to the case of physical ETFs, but note that there is an additional element: the swap provider. The
common part with physical ETFs has been blurred.
substitute to the swap counterparty, and the swap provider provides the index return.
The process according to which the investor buys ETF shares is as follows (see figure 5.3 , if the
investor were to sell the process would be the opposite):
1. Just as with a physical ETF, the investor buys shares of the ETF on the stock exchange.
2. The authorized participant finds that there is demand for the purchase of ETF shares by
investors, so he asks the sponsor to create more ETF shares, and buys them with the money
paid by the investor.
3. The sponsor receives the request to create more shares of the ETF. The sponsor purchases
from the swap provider a substitute basket of assets for the value of what was paid by the
authorized participant (originally from the investor).
In the future, the ETF sponsor delivers the return of the surrogate basket to the swap provider,
and the swap provider agrees to deliver the index return to the sponsor.
To prevent the promised value of the index from exceeding the value of the substitute basket,
UCITS legislation requires the sponsor to ensure that any gap does not exceed 10%. If the difference
is at any time greater than 10%, the sponsor
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Figure 5.4: Process diagram when an investor buys shares of a synthetic funded ETF. It is similar to
the case of physical ETFs, but note that there is an additional element: the swap provider. The
common part with physical ETFs has been blurred.
is obliged to increase the value of the substitute basket, requiring the swap provider to provide the
missing value. In practice, many sponsors have lower limits (for example 7%), or may readjust the
value of the substitute basket very frequently (every day, or every time ETF shares are
created/destroyed).
If something goes wrong and the swap provider goes bankrupt, the sponsor always has comes
from the substitute basket, which is what the investor would receive if the ETF were to go extinct.
In short: the investor's money is used to buy the assets in the substitute basket, which always
remain in the possession of the ETF manager.
Funded Synthetic ETFs
Synthetic funded ETFs involve another leap in abstraction. As Figure 5.4 indicates, the
purchasing process is very similar to that of unfunded synthetic ETFs. The difference is that the
substitute basket is no longer under the control of the sponsor, but is collateral in the hands of a
custodian.
The sponsor delivers the investors' money, which has been channeled through the authorized
participant. In exchange for this money, the swap provider agrees to provide the return of the index.
As proof that the provider will provide the return of the index, the provider delivers assets equal
to the value of the index to a custodian. To prevent the provider from providing low-quality collateral,
haircuts , corrective factors. For example, investment grade government bonds may be accepted as
is, but stocks of companies in developed countries may have haircuts of 30% (that is, they are
considered to be 30% lower in value), and other types of assets (bonds high yield , small caps
stocks) may be prohibited.
And in the same way as with unfunded synthetic ETFs, the value of the collateral cannot be less
than 90% of the value of the index (the largest difference accepted by UCITS regulations is 10%).
If the provider goes bankrupt, the ETF has to close. At that moment, the sponsor takes the
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available collateral and delivers it to the investors. sores. The problem is that the collateral is not
directly in the hands of the sponsor, as in the case of unfunded synthetic ETFs, but belongs to the
provider. And if the supplier has gone bankrupt, its assets are liquidated to pay its debts. So it could
happen that when the sponsor wants to access the collateral, that collateral is no longer there, and
there is nothing for the final investor. That is, the investor could have purchased an index that
replicates ac safe assets, for example government bonds, but if the swap provider goes bankrupt, the
investor could lose everything.
And in any case, if the ETF closes, the investor will receive the collateral assets, which may be
undervalued with respect to the value expected by the index. Or at a minimum, the investor has
purchased an ETF with some assets in mind, and receives independent ones.
In short: the swap provider provides the index return, by contract. In the event of default, what
the ETF manager has in his or her hands is simply a contract.
5.4. How to Measure the Efficiency of an ETF?

ETFs, like index funds in general, track an index. Therefore, they will be better the more faithfully
they follow their benchmark index.
Although the idea of following an index is easy to imagine, it has its difficulties. tasks when
carrying it out. Let's see what defects we find when moving from theory to practice.
8 485
The efficiency that the ETF shows when tracking the index ( Tracking Efficiency ) is
measured with these two parameters :
• Tracking Difference Consists of the difference found in the long term between the
performance of the index less
Morningstar, On The Right Track: Measuring Tracking Efficiency in ETFs 85 Macdonald, ETF Tracking Errors: Is
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Your Fund Falling Short?
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Figure 5.5: Fictional example showing the relationship between an index (top black line), the ETF that
follows it (gray line), and tracking inefficiency (the subtraction of the ETF price minus the index value,
bottom black line) . Inefficiency can be separated into two components, one short-term (note that in
this case the index is a relatively smooth curve, but the ETF has a lot of noise, on the order of 0.5
euros each day) and another long-term component ( After 365 days, the ETF has lost 2 euros out of
10 (this would imply a tracking difference of 20% per year).
the performance of the index fund. A small negative difference is usual, and is usually equal
to the TER. If the difference is very negative, it means that the fund is very inefficient. If the
difference is slightly positive, it means that the fund outperforms the index, an exceptional
situation but one that can occur, for example, if the fund rents its assets. This is a measure of
how good the fund management is. This is an important parameter for us as long-term
investors, the less negative, or even positive, the better. If you look at Figure 5.5 , you will see
that in the long run (after 365 days, one year) the index curve and the
ETFs separate. This is due to the TER (the payment to the ETF manager), and perhaps other
causes.
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• Tracking Error It is the difference found in the short term between the value of the index and
the fund. It is a measure of the volatility of the value, and is usually measured as the
annualized standard deviation of that difference, of the authorized unitholder's ability to create
and destroy shares of the ETF. A low value indicates that the fund is very faithful in its
tracking. This measure is primarily sought te by those interested in purchasing ETFs for short-
term speculation. It affects us as long-term investors, but only at the time of purchase and
sale. If you look at Figure 5.5 , you will see that the price of the ETF fluctuates from day to
day much more than the value of the index, with a standard deviation of 0.5 euros. This
means that depending on when you buy, you can expect to pay 0.5 euros more or less than
the value of the index.
If you know science or engineering, these parameters will be fa miliary. They are equivalent to
”accuracy” and ”precision”. The following error ment” is like “precision”, the ability to repeat a
measurement and obtain the same result. “Tracking difference” is like the “accuracy” of a
measurement, the ability to provide the exact value. To give a few examples: we could find an archer
trying to launch his arrows. chas and make a target. If every time you shoot the arrow it hits the
center of the target, that is because both its precision and accuracy are very good. If every time you
throw it hits somewhere on the target, although never in the center, that is because it is accurate but
imprecise. And it could also be inaccurate but precise, if every time he threw he hit the same place,
but not in the center of the target.
Synthetic ETFs tend to be better with these parameters, but at the cost of introducing
counterparty risk. Furthermore, simple ETFs have no problem, their tracking error can be around
0.05 %, but as soon as the assets become more complicated (for example, an index like the MSCI
Emerging Markets) the error can rise to 1%. The difference in follow-up is usually similar to TER.
In short, tracking error and tracking difference These are the basic parameters to measure how
well an ETF tracks its index.
5.5. Are ETFs Made for Kids Investors?

According to what we have explained, ETFs (especially physical ones) are exactly what small
investors need: a way to invest. simple, transparent and minimizing risks (risk being understood as
losing value with respect to the market average).
How is this possible? Where has it been seen that large companies finance Do you have the
slightest interest in offering something reasonable to ordinary citizens? Isn't this a trick of the banks
and finance companies to enrich themselves at our expense?
The answer to these questions is made up of three parts.
• The first argument is that financial companies do not offer ETFs out of kindness, but for their
own benefit. They are getting rich, yes. And even more, they get rich without taking any risk .
They earn indirectly every time there is a sale (due to the bid-ask difference), they earn again
by maintaining the investment (TER), and if they rent the assets to third parties they earn
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again. And all this without thinking, without a complex strategy, without the danger of
bankruptcy or dependence on market cycles (whether the stock market goes up or down, the
ETF manager earns the same). ETFs do the same as other investment funds, but better: ten
times cheaper, more transparent, more liquid, and under the ultimate control of the investor.
• Secondly, ETFs have not emerged for the benefit of small investors, quite the contrary. ETFs
provide huge benefits It gives big investors, and it is thanks to that that we can take
advantage. Many investment fund managers apply technical analysis (in section 4.2.1 we
already saw how not advisable that is for you), and for this it is very useful for them to be able
to buy and sell very liquid indices. Other managers are interested in macroeconomics, and
how different countries and regions behave, investing here and there to take advantage, and
using ETFs that track country and regional indices. And also because managers can hedge
the purchase of an ETF using derivatives (which are usually directly associated with indices).
Therefore, fund managers are very interested in the existence of ETFs. They are their biggest
clients (it is said that most of the trading of ETF shares is done directly, without going through
the stock exchange). Thanks to Since they use them, we have enormous liquidity, whenever
we want to buy and sell an ETF there will be a counterparty available.
• And thirdly, ETFs behave as a kind of financial derivative. Its value reflects the value of the
underlying (the assets of the corresponding index), but without being the underlying itself. So
that the in Financial entities can exchange shares of the ETF with each other, regardless of
whether the purchase and sale of the underlying has been temporarily prohibited, if there is
no buyer at that time, or simply mind if the bag is closed at night. And an ETF that follows the
Nikkei 225 index on the Madrid stock market provides a price even when the Tokyo stock
market is closed. And this has incalculable value for financial institutions.
So thanks to the fact that ETF managers win for sure, and that banks and investment funds use
them, small investors can enjoy the advantages of ETFs. Nobody has any interest in doing small
investors a favor, it is simply a pleasant coincidence that the big guys, seeking their own benefit, end
up benefiting us.
5.6. Have ETFs Grown Too Much?

It is sometimes said that index funds have grown too much and that this causes problems that
make them not a long-term solution. And it seems that they could die of success, because someone
has to set the price of the assets so that it then makes sense for index funds to exist.
In 2014, 5.5 % of all European investment funds and 12% of American funds were in ETFs. So it
is still far from being the majority, but it is possible that it will evolve in that sense because, for
example, in Europe the capital invested in ETFs has doubled between 2009 and 2014.
Here we are going to dismantle this idea that index funds accumulate an excessive fraction of
the investment, always keeping in mind that no one knows the future and that something unforeseen
can always happen.
By the way, the following arguments refer to broad and general indices. rales. Small indices can
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have problems if they have an amount of invested capital that is of the same order of magnitude as
the entire capitalization of their underlying. But that is a monstrosity .XCVII .

• There are many independent players investing in listed companies and bonds. There are
individual investors, institutional investors, active investment funds, pension plans, etc. Each
of them has independent interests, long or short term, that can lead them to buy or sell with
different criteria. In this way, although they are interested in indices and not in the particular
assets that make them up, they are also choosing those underlying assets indirectly. That is,
an asset valuation continues to occur, but in groups and not individually.
• There are many types of indices, not just capitalization ones. Other indices may follow
philosophies of strategic beta, dividends, minimum volatility ity, fundamentals, technical
analysis, focused on certain sectors (real estate investment, economic sectors), excluding
companies that do not meet certain conditions (companies contrary to the criteria rios of the
Koran, companies related to weapons, gambling or alcohol), and an additional infinite number
of themes, each more eccentric. And since not all indices are the same, each one follows
their own interests, the re The final result is an aggregate of independent interests. Even if the
entire investment was managed through index funds, the independence of these indices does
not mean that investors can value different parts of the market differently. And that too with It
helps shape asset prices. Managers who in the past selected companies ( stock picking )
today select ETFs. The granularity of the selection changes, but the selection is still the
same.
• There will always be those who believe they are smarter than the market. Whoever buys and
sells trying to make a profit from inefficiencies, whether real or fictitious. Whether with
technical analysis or any other method. By tradition or by new ideas that arise. In this way,
there will always be managers willing to value the assets. And as long as there is only one
active manager left, he will set the price.
• If index funds were so large that they became inefficient (for example due to front-running
arbitrage , see text box on page na 152) , actors will appear in the market looking for their
inefficiencies cias. Buying and selling a certain type of asset, therefore giving it liquidity.
Thanks to this, the more they look for those inefficiencies cias, make the market more
efficient. In fact, if you find companies listed outside the indices, without debt, without
regulatory risk tive, with competitive advantages, with dividend yields of 10%. . . buy them.
But the existence of these companies seems very unlikely.
• Since index funds invest in all companies in the market (at least the majority index funds), this
could imply a logical problem, because these funds invest without criteria. Given a sec
economic tor, an active manager could decide to invest in one company and not another. But
index funds have no criteria, so in pour into a company and its competition. This could be
seen as nonsense, because it invests in companies that compete with each other. However, it
XCVIISee this gold mining ETF: How ETF gets too big for its index
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can be seen positively as diversification in its purest form.
• On the other hand, index funds are self-confirming. If a company zada increases in price,
then its capitalization value increases, and it will have a greater weight in the index. In this
way, the index funds will buy that company in a greater proportion. This could tend to create
an asset pricing problem, because “you buy more the more you buy.” “pra.” It's a whiting that
bites its tail. But this is an excellent positive incentive. Once a company complies with all
current legislation and shows all its information to index creators, it becomes part of the select
club of indexed companies (assuming a select and respectable index). And thanks to this, its
stock price will be higher than it would be if it were not in the index. If it were to stop being a
healthy company and leave the index, it would lose market capitalization useful However, we
believe that the fact that index funds invest massively in transparent companies with good
indicators accounting incentives is not negative, on the contrary, it is the best of all possible
incentives.
• There is to a certain extent a flow of capital that escapes from active funds and ends up in
passive funds. Especially from “expensive” active funds to passive ones, which are usually
much cheaper. This effect is mainly due to the fact that scientific articles show that active
investing provides worse returns than passive investing. So this is a very good incentive for
active managers to improve. Managers have to provide value, “active” managers who
nevertheless buy an index and charge a high price for it are going to disappear (the so-called
closet indexing ) . And note that it is not that there is a jump from active to passive
investment, but rather that these investments were already passive initially, they were false
active ones, charging expensive commissions to simply follow an index.
• If passive management grows, it does not have to do so at the expense of active investment.
People who had not considered investing in the stock market (as is our case), decide to do so
now thanks to the reliability and transparency rence of passive investment. It's not that they
take funds away from active management, it's that those investments were never actively
managed. Therefore, active management does not lose its client base, there are now many
more investors than before, but they invest in a different way.
• The fact that you can invest in broad indices has a great advantage. taja, which is the security
of the price. The capitalization of an individual company may be relatively small, and thus an
institution financial tution could move the price of that stock. Due to the law of supply and
demand, if an actor bought or sold many assets, it could lead to dragging down the price. But
a large broad index has a capitalization (the total capitalization of the companies that
comprise it). they put) that is much more immovable in the face of market manipulations.
Therefore, the more passive investment, the better for the small investor.
• Finally, let's compare stock market investors with some students in class. Let's make three
groups: the best students, the students normal students, and bad students. Let's imagine that
we have to take an exam and that the teacher proposes a new way of evaluating. Those who
wanted to could take the exam “passively”, receiving the average grade of the entire class (of
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those who took the exam). What would happen? Good students would take the exam
because they know they would get a better than average result. Bad students would say that
they prefer the average result and therefore would stop taking the exam. What do we have in
mind? so? That only good and normal students would have taken the exam, so the grade
average is relatively high. po Then a second exam arises, and in this case normal students
realize that if they also ask to do it in ma In a “passive” class his grades would be a little
better, because only good students would take the exam. And that's what happens, not even
the worst stu Not even normal people take the exam. Only the best, who therefore obtain
excellent results for the average. That because most of the students are indexed, they are
automatically extrapolated to the entire class. Returning now to investment, the worst Three
active managers will gradually disappear, and only the best managers will remain. Unless you
are exceptional like Warren
Buffett, the best thing you can do is get on a winning horse, in an index, which, thanks to
passive management, provides a benefit to the entire investment community. And this does
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not depend on the fraction of active investors compared to passive ones .
In short, it is not expected that index funds will be in the majority, nor even if they were would
that imply major problems in the formation of pre-payments. cios. So it is something to take into
account, but you don't have to worry more than other issues.
5.7. What Are the Risks of ETFs?

We have painted ETFs rosy, ok, but there is nothing perfect in this world. Are they really as good
as we say?What are the risks they may entail? Understanding risk as the possibility of losing money
in our investment. Consider these factors:
Market risk
This one is obvious. If we buy the market, we are at the expense of what the market does.
This is neither good nor bad, it is normal.
Similar names, different assets

Two investment funds can refer to the same type of investment (developed Europe,
biotechnology companies, etc.), but what matters are the assets in the hands of the manager,
which can be different. cough. And if they are different, the investment returns will be different
too, so you might think you are losing money relative to another fund. Look at the assets
under management, and see if the ETF is “optimized” so it may not track its index closely.
Exposure to exotic investments

It may happen that you buy commodities, or leveraged or inverse ETFs. These products are
built with derivative products that make the value of the ETF not exactly related to the value of
the commodity (see section 5.9.1) . Or if it is leveraged x2, its value does not vary exactly by
a factor x2 (see section 5.9.3) . Do not trust investments that promise great returns in
something that no one has realized before, small investors are always the last to find out.
87
See Larry Swedroe's article What Would Happen if Everyone Indexed? .
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Counterparty risk
This is important for synthetic ETFs and physical ETFs that present so your assets. It could
be that the third party involved declares bankruptcy during a transaction and does not return
the assets. In general In general, both synthetic ETFs and loans are excessively collateralized
(according to UCITS regulations), so this risk should be minimal.
Closure risk
It could happen that the ETF was not profitable for the manager and that he closed it. Nothing
has to happen, the assets are still there, just They are simply going to be delivered to the
individual investor. Perhaps in the form of equity, and not stocks or bonds. This could have a
small cost for the sale made by the manager, but it does not have to be important. It is a
nuisance because it may involve paying taxes, because it is as if the shares had been sold. It
happened to us and it's nothing more than a curiosity. In any case, do not buy ETFs pe
queños (for example, of less than 100 million capitalization), or that are going to merge with
others (look at the corresponding documentation).
Purchase and sale expenses
ETFs, unlike conventional investment funds, are purchased by the investor as if they were
shares. This implies intermediation expenses with the stock market, and the risk that the price
is far from the NAV. It doesn't have to be serious, but keep an eye on it. Check the operations
with another external source of information, for example with the website of the exchange
itself. This way you can make sure that the price your broker has given you is fair compared
to the order book on the corresponding exchange. All operations are recorded, there you can
see your purchase or sale, when the operation was carried out, how many shares were
exchanged, and at what price.
Closed markets
ETFs provide a price for their assets, even though the index may not be trading. For example,
if you buy a US ETF in Europe, there will be little overlap in exchange hours. Therefore, when
the US stock market is closed, the index is not updated. But the price of ETF in Europe
depends on supply and demand, it may fluctuate. This can also happen in cases of force
majeure, such as during the Arab Spring. At that time the Egyptian stock exchange remained
closed for weeks, but ETFs on Egyptian assets continued to operate on other exchanges.
This ability to value illiquid assets is not negative, in fact there are those who consider it very
positive because the ETF can be considered to be measuring market sentiment. But keep in
mind that when the market becomes liquid again, the value may go against the investor. Be
careful where you go.
5.8. ETF Indices

The most important information we have to know about an ETF is what index it follows. If there
are a large number of ETFs, there are necessarily also a large number of indices. And many indices
have been created solely for use by ETFs.
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5.8.1. Index Calculation Methods

There are several ways to calculate the indices, to choose the proportion of each asset that
becomes part of the index andXCVIII .
Capitalization Indices
This is the most common way to build indexes, as it is the most direct. The greater the
capitalization of the companies, the greater their weight in the index.
Table 5.4 shows an example to calculate the weight of each company in the index. Multiplying
the price per share by the number of shares dis wearables we calculate the capitalization of each
company. From there we calculate the percentage of the total capitalization, and these figures
represent the weight of each company in the index.
Capitalization indices are simple, transparent and easy to understand destroy They also have a
major advantage, which is that once the fund has purchased those shares, future variations in their
price (in their market capitalization) do not require purchases and sales of the fund. If the price of a
stock doubles, while the other components of the index remain constant tes, the weight of that stock
in the index will grow to approximately double. And the fund's assets will continue to represent the
index, without buying and selling, with minimal cost for the manager. That is why capitalization
indices are very efficient in the long term, perfect for our intentions.
However, capitalization indices have received criticism, mainly due to their behavior during
economic bubbles, because they will overweight in the index those assets or groups of assets that
may be overvalued. In this sense, there are two improvements that can be made to capitalization
indices:
• A simple cap index could be very poorly diversified. One asset or groups of assets could
represent the majority of the index, which can be negative because then the index does not
represent not to that country or economic sector, but mostly to those overvalued assets. To
solve this problem, limits are set on the proportion of assets in the index (see the “5/10/40”
rule on page 97) . In the example in table 5.4, the company Arbatros has a weight in the index
of 48%, practically half of the total. You could set a limit on the weight of the main asset and
increase the other proportions so that the total adds up to 100%.
• Adjust the capitalization of companies according to their “float capitalization” te” ( free–float
market capitalization ), which refers to the shares actually available to investors. And many
shareholders have no interest in trading their shares, either because they are family
companies liars or because they are public investments in companies of national interest, and
therefore that part can be excluded from the available capitalization. This is important,
because if most shareholders do not trade their shares, then the company's liquidity may be
relatively small, and it is advisable to minimize its weight in the index to avoid problems. more
liquidity.
Because of these two improvements, an index can minimize the risk of concen bring the entire
index into very few assets. But for that reason the index may not be representative of a country's
XCVIIISee Groves, Exchange Traded Funds, A Concise Guide to ETFs .
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economy, since very large companies des, which would be very representative of the country's
economy, may be capped at a maximum weight. And other companies that can be very
representative tatives may be left out of the index if they do not have sufficient free float
capitalization.
These two improvements (limiting core assets and adjusting for capitali floating zation) are
already implemented in almost all indexes.
Style and segment indexes
To represent different forms of investment, mainly to serve as a reference for active

management, indices have emerged that track particular groups of companies.
Classification by “style”:
• Growth “Growth” companies are those whose revenues or profits grow faster than the
average for the market or a particular sector.
• Value Companies whose share price is low compared to their dividend (that is, the
percentage of dividend return is relative mind high). It is therefore understood that these
companies are relatively cheap.
Regarding the classification by “segment”, on the other hand, companies in the market are
usually divided into large capitalization , medium capitalization, talization , and small
capitalization ( large , mid and small capitalization ). In Spain, ordering the companies according to
their market capitalization, we have to The mere 35 form the IBEX 35, the next 20 the IBEX Medium
Cap and the next 30 the IBEX Small Cap.XCIX .

The reason for investing according to style or segment is to take advantage of economic cycles.
If you think you can know where a country or region is in the cycle, then you can try to invest
according to the index that will perform best at that moment. As we already saw in section 4.2.6 , this
does not work in the long term. So although the “style” or the “segment” are not saints of our
devotion, we comment on them here because they will be found very frequently.
Heavy Indices According to Fundamentals
To try to improve capitalization indices, indices that weight the fundamental variables of
companies emerged. In this way, by specially selecting those companies with better indicators, in
better condition and with better future prospects, it is assumed that in the long run this index will
perform better than the market average.
The advantages of these indices over capitalization indices are controversial. gives. In hindsight
it would seem that these indices provide a slightly better return than the market average. But this is
"the past." According to the theory of efficient markets, it is not at all clear that if one company is
going to provide better returns than another, its price does not already include that improvement.
And although these indices are actually better, they also imply more gas (higher cost of defining
index components, higher component rotation, more purchases and sales), therefore any advantage
XCIX Spanish Stock Exchanges and Markets, IBEX Factsheets
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is offset by its higher TER.
A type of fundamental index that might interest you is the one that weighs by dividends, so that
those companies that provide higher dividends are more present in the index.C .
Equal Weight Indices
This is another way to improve capitalization indices, preventing some components from being
overweighted with respect to others. And how to avoid it? Well, weighing everyone equally. This is
indicated graphically in Figure 5.6 .
When comparing a capitalization index with another of equal weight, it is seen that lower
capitalization assets have greater representation in the index. Therefore, the return of an equal
weight index is comparable to that of small and mid-cap indices.
This type of index also has a problem, and that is that it is only mathematical. correctly at the
time of rebalancing (typically a couple of times a year). During the year, the value of assets evolves,
so their weight in the index will not be exactly the same for everyone. And when the rebalancing
moment arrives again, the fund manager will have to buy and sell assets to regain the same weights.
This forces you to incur purchase and sale expenses, which increases the TER of the ETF.
Heavy Indices According to Price

Finally, there is a subgroup where the index value is calculated directly as the arithmetic mean of
stock prices.
This is the method followed by the leading stock indexes, the Dow Jones Transportation Averag
CI CII
e. (which began in 1884), and the Dow Jones Industrial Average (1896), who began by averaging
stock prices because it was the only practicable method at that time. Another very famous index that
is weighted according to price is the Nikkei 22 5CIII .

Price-heavy indices are an outdated way of measuring the health of a group of companies. They
do not represent the evolution of its value, for that you would have to consider capitalization. It is
used simply out of habit, and because it provides a very long historical series.
CAn example is Bolsas y Mercados Españoles, IBEX Top Dividendo .

CI Dow Jones Transportation Average
CII Dow Jones Industrial Average
CIIINikkei Indexes, Nikkei Stock Average (Nikkei 225)
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Company Number of
Share Price Shares Company Capitalization Weight in
Index
[EUR] [millions] [million EUR] [%]
Arbatross 8 17 136 34.0
Owl 15 6 90 22.5
Swan 12 7 84 21.0
Diucon 9 4 36 9.0
Flemish 6 5 30 7.5
Seagull 24 1 24 6.0
Total 500 100.0
Table 5.4: Method to build an index according to capitalization, assuming companies with bird names.
Company
Share Price Weight in
Index
[EUR] [%]
Arbatross 8 10.8
Owl 15 20.3
Swan 12 16.2
Diucon 9 12.2
Flemish 6 8.1
Seagull 24 32.4
Total 100.0
Table 5.5: Method for constructing an index based on price, assuming the same more companies
already shown in table 5.4 . In this case, it is only interesting to show the price of the share.
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Figure 5.6: Histograms showing the distributions of the same 6 com speakers in 3 indices with
different weights. The top graph shows After the distribution according to capitalization (see table 5.4)
, the central graph according to equal weight, and the lower graph according to price (see table 5.5) .
Note that the com Speaker with the highest weight according to capitalization may be one of the
lowest weight according to price. And vice versa, the component with the least weight according to
capitalization may be the one with the greatest weight according to price. Think about how important
this can be if a company goes bankrupt while being present in your index.
5.8.2. Classification according to Dividend Treatment
There are 3 basic types of indices based on how they treat dividends, depending on what the
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manager does and what taxes the fund pays.
• Price Index . It is the simplest case, simply the value of the shares of the companies that are
part of the index. The dividends that the fund receives are sent directly to the shareholders,
they are not reinvested in buying more shares of the index. The IBEX 35, for example, is a
price index.
• Total profitability indices. They are the index of the price plus dividends, considering that the
dividends are reinvested in the fund. This is the case when the ETF accumulates dividends.
• Net Total Return , where the dividends received (and reinvested) by the fund are
considered to be taxed in the country of origin. This is because the dividends are
generated in country A where the index company is located, but the fund is domiciled
in country B. Country A applies a withholding tax to dividends, which never reach
country B in full. This is usually the case when an ETF reinvests dividends. STOXX
shows on its website the taxes that they consider each country applies when
94
calculating their rates.
• Gross Total Return , where it is considered that the fund receives dividends without
losses. In this case, the fund is considered to reside in the same country as the
companies that are providing the dividends (continuing with the previous example, A
and B are the same country).
The reader should note that the taxes to which these indices refer are those paid by the fund
manager. The dividends or capital gains that we eventually receive from the fund will have to be
declared in our personal income tax return and we will pay taxes again.
5.8.3. Classification by Themes

We provide here a more or less free list of the themes that ETFs can have. The objective is to
give a general idea of what is going to be
94
STOXX, Withholding Tax .
find if you go to books or specialized websites, but in no way urge you to buy. In fact, for us, most of
this zoo of funds is simply an academic curiosity. We are only interested in simple, highly diversified
funds with many assets under management. You can find a lot of information on the internet, for
example at ETF.com .
• Passives.
• Variable income
◦ By world region: World, Europe, Eurozone, EMEA ( Eu rope, Middle East, Asia ),
Asia, Asia ex-Japan (Asia excluding Japan), or even the entire world.
◦ Due to the development of its stock market: developed countries (where the
markets are well established and reliable), mer emerging countries (developing
countries whose markets meet minimum security and organization requirements)
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and frontier markets (countries with an incipient value market res, very risky).
◦ By country: USA, Spain, Türkiye, etc.
◦ By industrial sector. For those who consider that the eco economy is cyclical, and
some sectors can be expected to perform better than others depending on the
phase of the economic cycle.
◦ By size of the investee companies: large, medium and small (this links to section
5.8.1 on the construction of the indices).
◦ REIT ( Real Estate Investment Trust , in Spain known as mo SOCIMI (Listed
Joint Stock Company for Investment in the Real Estate Market).
◦ Of value or growth ( growth ).
◦ Dividends
◦ Low volatility
◦ From selected companies: social interest, environmental, religious (Islamic).
• Fixed rent
◦ By region of the world

◦ For country.
◦ By currency: euro, dollar, etc.
◦ Due to their maturity: treasury bills (less than 18 months), state bonds (between 3
and 5 years), and state obligations (10 or more years). See section 4.1.5.
◦ Government or corporate.
◦ By the quality of the bond: investment grade (bonds in which the issuer has a
high credit quality) or high yield (bonds where the issuer has a poor credit quality,
it is possible that the principal will not be returned, and therefore provide coupons
greater than usual).
◦ Inflation-protected treasury securities (known as mo TIPS Treasury Inflation-
Protected Securities ).
• Money market. Financial assets that have the name What is common is a short
repayment period, which usually does not exceed eighteen months, low risk and high
liquidity. They usually refer to the EONIA index ( Euro OverNight Index Average ).
• Precious metals. Gold, silver, palladium. They are usually considered ref values of
value. Some ETFs are synthetic, others buy the metal and store it.
• Commodities . It refers to agricultural products (for example wheat, cotton, etc.) and
industrial products (such as oil, iron). The corresponding ETFs are usually constructed
synthetically, with futures.
• Assets. Indices that implement strategies to beat the market. Also known as smart beta .
• For fundamentals.
• Hedge funds
• Moment
Although there are many to choose from, the authors consider that most types of indices are
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irrelevant for an investor who aspires to Financial Freedom. As discussed in section 6.4, keep it
simple, what you understand. We focus on large regions of the world, such as developed Europe or
the S&P 500 index. And if you want to experiment, do it with a very small fraction of your capital.
5.9. Some Specific Types of ETFs

We describe here some very common types of ETFs, which the reader will see. tor continuously
in different sources of documentation. For more details From a Bogleheads community point of view,
95
you can look at their website b .
5.9.1. Commodities
The term commodity refers to merchandise, and in the financial field specifically to raw materials.
Examples are food, energy resources getics such as oil and gas, wood, precious metals such as gold
and platinum.
The interest of commodities is that they are supposed to protect against inflation. Speculation
aside, its value is expected to com parallel shipping to prices. Furthermore, its value is assumed to be
very poorly correlated with other assets such as stocks.
96
We, like Rick Ferr i , do not like this type of investment, for three reasons:
• First because it is complex to invest in commodities . Normally its storage cost is high (it is
expensive to store oil, for example), so what is purchased is not the product itself, but a
financial derivative. Commodity ETFs are known for being relatively unpredictable due to the
l–over role , because their price is not directly related to the price of the physical commodity .
• When it comes to buying commodities , the easiest thing to do is precious metals. And if
that's what you want, why buy an ETF when you can buy gold directly? Buying gold bars or
coins is easier and better protects you against crises (after all, if the stock market closes, you
wouldn't be able to trade a gold ETF).
• If the only thing to be expected from commodities in the long term is to follow inflation, that is
a very poor investment. Better to invest in listed companies, where the value of their physical
assets (factories, products in warehouse) also follows inflation. And they also distribute
dividends.
5.9.2. Asset Selection

In English the expression screening or thematic is used. It consists of the fact that, gives a
relatively large list of assets, either a subset of them is selected, or a subset is excluded.
95
Bogleheads, Outline of asset classes
96
See chapter 15 of Ferri, The ETF Book
A typical example is an ETF that only buys Shari-compliant companies atCIV , which in this case
CIViShares, MSCI World Islamic UCITS ETF
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means that the companies do not have income from alcohol, tobacco, pork derivatives, financial
services, weapons, gaming, or adult entertainment. So if you have strong religious principles, you can
invest according to your beliefs.
In Spain, associated with the IBEX, we have several of these indices. For example ply the
indices of economic sectors, such as IBEX 35 companies that are related to constructionCV , or
CVI
the FTSE4Good which contains em dams that meet Corporate Social Responsibility criteria . Note
that this last index excludes nuclear or military engineering companies. tasks, so be aware that each
person will have a different opinion of what is socially good, bad, or irrelevant.
5.9.3. Inverses and Leveraged

These are ETFs that multiply daily percentages of change. If the benchmark rises 1%, the
leveraged index will rise 2%, and the inverse will go down. will drop 1%. In addition to these simple
versions, there are also leveraged and inverse versions with higher multipliers (for example x3, x5, or
x10).
The fact that they amplify the changes is something that sounds sensible a priori . After all, if
what we expect is for the price to rise in the long term, then let it rise more, right?
Well, the answer is a resounding "no." On the one hand because these ETFs are built
synthetically. And on the other hand, because multiplying losses have more weight than gains in the
value of the fund, and the effect is devastating.
If the index persistently rises (or falls) day after day over a season, that's okay. But as soon as it
goes up and down repetitively, it is a disaster for the investor.
Suppose an index has the value 1000 today (see Table 5.6) . His Let's say that it rises 10%
tomorrow to 1100 points, and that the day after tomorrow it falls 15% to 935 points. After these two
days, the index has lost 65 points, which represents 6.5 % of the initial value.
Now suppose we have a leveraged index x2, which multiplies the daily variations by two.
Starting from the value 1000 today, it will rise 20% to 1200 points, and finally it will fall 30% to 840
points. It has lost 160 points, 16% compared to the initial value.
Index Today → Tomorrow → Past Total

Normal 1000 +10% 1100 -15% 935 -6,5 %
Leveraged x2 1000 +20 % 1200 -30 % 840 -16,0 %
Table 5.6: Effect of daily market variation on a normal index and its x2 version, assuming first a rise
and then a fall in price. If there are profits on the first day, the x2 index will lose a lot.
Index Today → Tomorrow → Past Total

Normal 1000 -10% 900 +15% 1035 +3,5 %
Leveraged x2 1000 -20% 800 +30% 1040 +4,0 %
CVSpanish Stock Exchanges and Markets, IBEX 35 Construction

CVIFTSE and BME, FTSE4Good IBEX Index
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Table 5.7: Effect of daily market variation on a normal index and its x2 version, assuming first a
decrease and then an increase in price. If there are losses on the first day, both indices end up
almost the same.
The “normal” index has lost 6.5 % in two days. In a first approximation mation, we could have
assumed that the x2 leveraged index would have lost twice as much, 13%. However, this is not the
case, it has lost 16%, much more than double that.
And if the opposite had happened, the index would have started per Taking the first day, we
would have the case shown in table 5.7 . The final result is almost the same (+3 , 5% or +4%),
despite the x2 factor. So we have that when the index evolves in the shape of a saw, rising and falling
with Subsequently, if the index rises, the leveraged index makes profits similar to those of the
conventional index. But if the conventional index goes down, the x2 index loses twice as much.
Similar profits, but double losses. Are you interested?
If you want to see this effect with real data, you can compare the traditional IBEXCVII with its
CVIII CIX
leveraged version or with its inverse version . Or better yet compare with the x10 versions of
both sCX
, look at the charts and see how you could have lost your entire investment.
In short, leveraged and inverse ETFs are special instruments. culation, only to be used in the
short term, and have no place in a long-term portfolio.
5.9.4. Real-estate market

These ETFs follow indices of companies in the real estate sector, known internationally as
REITs, or in Spain as SOCIMIs. This is a well-known group, because in principle it is considered that
they may be relatively uncorrelated from more general company indices.
Because they only rise with inflation like commodities (the value of land), although these at least
pay dividends. Better general companies.
CXI
The names of these indices and ETFs They usually refer to EPRA ( European Public Real
estate Association ) or NAREIT ( National Association of Real Estate Investment Trusts ).
In any case, this group is not so different from another that follows an economic sector such as
telecommunications or construction. And because it is something of a minority However, the cost of
ETFs is somewhat higher.
5.9.5. Emerging Market Stocks

Developed countries have relatively low growth rates thin and stable. Improvements in the
economy normally come hand in hand with increases in productivity, fundamentally technology. But
these societies already use the latest in technology.
CVIISpanish Stock Exchanges and Markets, IBEX 35

CVIII Spanish Stock Exchanges and Markets, IBEX 35 Double Leveraged
CIXSpanish Stock Exchanges and Markets, IBEX 35 Inverso
CXSpanish Stock Exchanges and Markets, IBEX Factsheets
CXIFTSE, EPRA/NAREIT Europe Index
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Developing countries, however, have more room for growth, as they are expected to catch up
with developed countries in the long term. Therefore, their growth, measured for example as
improvements in GDP, can be greater. In fact, statistically this has been the case for the last few
decades.
Furthermore, an argument in favor of having a portion of emerging countries in the portfolio is
that they tend to be poorly correlated with more developed countries.
A country is said to be emerging when it is on the way to becoming a developed country
(examples being the US and Japan), especially in relation to financial markets. A country where the
stock markets nes and bonds are sufficiently liquid, where there is a stock exchange and a regulatory
body.
Emerging countries do not have the level of efficiency and high standards developed, but they
typically have some infrastructure that includes banks, stock market and reliable currency.
Deciding which countries are emerging and which are not is somewhat complicated. Diff
Different index providers can make different decisionsCXII . The International Monetary Fund
includes, for example, Argentina and Venezuela as emerging countries, but the most well-known
index providers do not do so. acids (Argentina is known as the Serial Defaulter , due to the frequency
of its payment suspensions). The usual index providers are similar, the only relevant difference is that
MSCI currently includes South Korea as emerging, and the other providers do not.
A place to start looking for ETFs that track emerging indices These is the JustETF website (this
goes for any other ETF), in the ETFs section related to Emerging Markets.CXIII . The ETFs that
follow this index are shown there. Select from the menu on the left those stock exchanges where you
want to buy (those for which your broker on line is cheap). Look at which ETFs distribute dividends
(that's what we want, but you may prefer to accumulate). Make sure they are domiciled in friendly
countries (Ireland and Luxembourg are usually fine), that they have access to tives worth more than
100 million euros (large enough to take advantage of economies of scale, to be profitable so that it
does not go bankrupt) , and if possible they are physical (not synthetic).
Be careful, the same fund manager can offer several similar products but with very different
prices. For example, iShares offers an ETF in Europe that has tracked the MSCI Emerging Markets
since 2005. Its TER is 0.75 % and is made up of 910 companies .CXIV . However, in 2014 they
created a new ETF that tracks the same index (and they specify it as Core , because it is their long-
term buy and hold product). This second ETF has a TER of 0.25 % (3 times less!) and 1,728
CXV
companies in its portfolio (twice as many!) .
CXIIF. Luque, what is an emerging market?

CXIIIJustETF, Emerging Markets .
CXIViShares, iShares MSCI Emerging Markets UCITS ETF (Dist) .
CXViShares, iShares Core MSCI Emerging Markets IMI UCITS ETF . The expression “IMI” in its name refers to the
Investable Market Index , which indicates that shares of large, medium and small companies are purchased; not just
large and medium as usual iShares, Investable Market Indices .
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5.9.6. Global Indices of the World

Global indices allow, as their name suggests, to invest throughout the world. Invest in a huge
basket of stocks, including dozens of countries and thousands of companies. It is the maximum
degree of diversification, all in one.
To begin with, it must be said that there are two types of indices that represent "everyone",
depending on how broad that definition is. If we look at the MSCI indices:
CXVI
• The MSCI World that follows the entire “developed” world. This index
It is made up of 1,639 companies from 23 developed countries.
• The MSCI ACWI ( All Country World Index )CXVII which is an am version expanded from the
previous MSCI World, adding the MSCI Emerging Mar kets (approximately 90% for
developed countries and 10% for emerging countries). As of July 2016, it is made up of 2,476
companies from 46 countries, and represents 85% of the total capitalization ( free-float ) of
companies in the world.
If you want to see what possibilities you have, take a look at the JustETF website, which shows
what options exist in Europe.
Imagine that you wanted to do the same thing on your own, buy ac tions of thousands of
companies, in many countries. It would be very complicated. However, thanks to investment funds,
and in particular ETFs, you can do it in a very easy and cheap way. So they are a highly
recommended option.
5.9.7. Smart Beta

There is a very particular group of ETFs that has been growing a lot in recent years, they are
smart beta or “strategic beta” ETFs.
This group of ETFs use alternative indices, which are not based on the usual capitalization
indices. They try to take advantage of market inefficiencies in a transparent way.
There is no exact definition of smart beta , rather it is defined by what it is not. And as we have
already said, they follow any index that is not capitalization.
Some of these ETFs track thematic indices, others weigh companies. index prey all equally, or
based on their fundamental values (PER – Price to Earnings Ratio –, earnings per share, etc.), others
try to minimize volatility (and estimate variability and correlations of the sample of companies). There
are many possibilities.
Smart beta ETFs are halfway between the passive ETFs already described and active
investment funds .CXVIII CXIX.
CXVIMSCI, World Index
CXVIIV er brochure MSCI, All Country World Index

CXVIII Morningstar, A Global Guide to Strategic-Beta Exchange-Traded Products
CXIXMorningstar, Assessing the True Cost of Strategic-Beta ETFs
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Some of its features are:
• Smart beta ETFs are on average more expensive than equi ETFs capitalization securities. In
the extreme case of the main indices (S&P 500, Euro Stoxx 50), the TER of smart betas is up
to 3 times higher than that of their capitalization equivalent.
• Smart beta ETFs are much cheaper than investment funds active version, but more
expensive than capitalization ETFs.
• Smart beta ETFs involve higher buying and selling expenses (higher bid-ask ). This is
because these ETFs are smaller, with lower volume, and market makers have less room to
minimize the bid-ask . Also, by comparison, broader capitalization ETFs have an advantage:
they have the derivatives market which implies much greater liquidity. There are more
investors interested in capitalization indices because futures and options can be used (to
hedge positions for example), and that reduces the bid-ask .
These ETFs have grown a lot lately. At the end of 2015, there were 850 ETPs in the world
defined as “strategic beta”, with assets worth $478 million (approximately 1% of all European ETFs).
We do not believe that they are relevant for a long-term investor, because they add complexity
and cost. And we already know that we should not invest in something that we do not fully
understand; or that the price is the best prediction Tor future investment returns, the more expensive
the fund/ETF the less the investor will receive.
Therefore, it is good to know this group of ETFs, and perhaps try with a small fraction of the
savings, but we do not think it is a good idea to put too many eggs in this basket.
5.10. Losses from Taxes Paid by the Fund

Investment funds provide many possibilities that an even investor particular could not do by
himself. And one of these advantages also becomes a problem, because by allowing easy
investment internationally Finally, funds (and ETFs) have complex tax obligations.
There is the English expression Tax Leakage , which refers to the withholding taxes that fund
managers have to pay for owning shares that are located in other countries (countries that are not
where the fund is domiciled). The countries in which the actions are located charge a percentage
dividends before they are sent to the country where the fund is domiciled.
This tax implies paying three times for the same dividends.CXX .
1. It is paid once in the country in which the shares are located, if it is different from the country
of domicile of the fund. This is what we are interested in analyzing in this section. For
example, the different countries of the companies that are part of the Euro STOXX 50 charge
a fraction of what they divide two of the shares, before sending them to the fund manager,
who may be in a different country than the above.
2. When the fund manager is domiciled in a country other than our tax residence, then the
country of the fund in turn charges this withholding tax on dividends. If everything goes well
CXXFuhr, How Tax Will Hit Your ETF Holdings .
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and we declare that we are "non-residents", the usual thing is to deduct 15%, otherwise they
will deduct the usual rate in that country. For example, if we invest in the US we have to send
the W-8BEN form so that we can get a 15% discount instead of 30%.
3. Finally, the investor will pay the corresponding taxes locally. tes to the rest of the dividends
received. Thanks to agreements to avoid double taxation between countries, it is possible to
request the return of all or part of what was withheld by the country in which the fund is
located (from section 2 above). This is a bureaucratic process that depends on the two
countries in question.
The diagram in Figure 5.7 shows the different withholding tax losses between countries in four
similar cases. It is considered that the actions ge They earn dividends in their home country, which
are transferred to the fund, and finally to the investor. Be careful, the investor will have to declare the
profits in personal income tax and pay for them, this is not indicated in the diagram.
• In the first case, all the agents are located in the US, and all the dividends generated by the
shares (100%) are transferred to the fund without withholding (100%), and finally to the
investor (100%). This is the simplest case, in which no borders are crossed. The example is
shown with the US, but any other country would work, for example a Spanish investor, buying
an ETF domiciled in Spain, which follows the IBEX 35.
• In the second case, the final investor is in Europe, while the fund is in the US. Therefore, the
United States applies a withholding tax of 30% in principle, which will be 15% if the W–8BEN
form is sent. This amount can be claimed with some bureaucracy, so at the same time
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Invested company
Investment fund Final investor
Without
US ACTIONS retention
100%
Without
US ACTIONS retention
100%
15% retention
US ACTIONS
100%
15% retention
US ACTIONS
100%
Figure 5.7: Example showing the different tax losses when investing in US stocks depending on the
tax residence of the fund and the investor. Diagram based on: Draper, ETFs and Tax .
The final investor receives 70% or 85% of the dividend. Note that, when paying taxes in their
personal income tax, the investor will be able to deduct that 15% already paid. If you have to
pay 21%, the 15% would be considered already paid and you would only have to pay an
additional 6%. If they have withheld 30% and you are responsible for paying 21%, it can be
done, but it may not be worth it.
• In the third case, each agent is in a different country. However, taking advantage of the fact
that Ireland (along with Luxembourg) does not apply withholding tax on dividends, the final
European investor, wherever they are, receives 85% of the dividends initially generated.
• In the fourth case we see what happens when the fund is not domiciled do in a friendly
country. Germany has been chosen, but any other European country would do (the friendliest
countries are Ireland and Luxembourg). In this case, both the US and Germany charge
withholding. It has been assumed that the investor resides in Spain, but any other country is
valid, as long as that is not the same country as the fund's domicile. Like the second case
with the US withholding, it can also be declared that (with nuances) what has already been
withheld by Germany counts towards what must be paid in personal income tax in Spain.
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This issue of tax deductions is complex because it is very pending of the countries involved. In
principle, relatively high percentages are applied (for example 30% for US stocks), which can then be
returned in part (or sometimes in full) after claiming it. But it depends on bilateral agreements
between countries. If you get into these troubles, ask an advisor.
Index creators typically take the worst case scenario when calculating their net indexes,
assuming full tax payment with no devo lution due to double valuationCXXI . But this is the worst
possible case, and in practice managers always manage to recover more.
To avoid these losses, fund managers use several systems. Firstly, synthetic ETFs, which are
the only ETFs that can track a gross total return index. This is because the dividends that would be
taxed are not really there. Synthetic ETFs buy other stocks or other financial products.
On the other hand, there is dividend optimization , which consists of a physical ETF lending the
shares that will give dividends to a local investor. This local investor holds the shares for a while,
receives the dividend, and then returns the shares to the fund manager. What does this achieve?
That the local investor does not pay the withholding. There only needs to be an agreement between
the fund manager and the local investor to share the tax on the dividends that would have been paid.
In this way the fund manager gets more income than the total net return, but less than the total
gross.CXXIICXXIIICXXIV . This ultimately translates into lower TER for final investors.
11 6117
There are analyzes similar to the one presented here available online t . In general we
encounter the problem that most of the literature on ETFs refers to the US, and that what there is
about Europe is very fragmented since each country is slightly different.
By the way, some practical examples on the payment of taxes related to dividends in Spain are
shown on the Don Dividend website orCXXV , multiple tax issues in Taxes Libertad Financiera, and a
CXXVI
description of Spanish taxes in the KPM G dossier .
5.11. Typical ETF Expenses and Commissions

The objective of this section is to clarify the expenses an investor incurs when purchasing an
ET F CXXVII
.
It is very important that we understand the costs, because they are the greatest indicator of the
return we will obtain from the investment. The higher the cost, the lower the return .CXXVIII .
ETFs offer great advantages over traditional investment funds finals, but they also transfer part
CXXIV see for example STOXX, Withholding Tax .

CXXIISpitalfields Advisors, An Introduction to Securities Lending .
CXXIIIAmery, Dividend Tax Leakage in Popular Equity Indices .
CXXIVEconowiser, Dividend Tax Leakage .
CXXVSee Don Dividendo's website, Dividend Taxation in Spain .
CXXVIKPMG LLP, ETF Investor Tax Guide
CXXVIICNMV, Exchange Traded Funds (ETF)
CXXVIIISee Sensible Investing - The shocking impact of charges on investment returns
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of the costs to the investor. Even so, after accounting for all the costs, these tend to be much lower in
ETFs than in traditional funds (for example: 0.20 % per year of the invested capital in the case of
ETFs, compared to 2% per year for traditional investment funds ).
Here is the overview, now take the values offered by your broker and compare yourself.
5.11.1. Expenses for being Investment Funds

ETFs have management and deposit fees (the TER), which are charged daily, pro rata
temporis , to the net asset value of the fund's units. Typical values are 0.10 % per year for large ETFs
(the ones we recommend), 0.30 % for ETFs that track the IBEX 35, or up to 1% for esoteric indices.
Example: if you have 100,000 euros invested in a TER 0 , 30% fund, you are paying 300 euros
per year to the fund manager. These 300 eu These are automatically deducted from your investment,
transparently, without you doing anything. Since it is paid daily, consider that your investment sion
costs about 300 euros/365 days= 0.82 euros/day.
Note that traditional mutual funds typically charge subscription missions (for buying them) and
reimbursement (for selling them), which can be up to 5%. These commissions do not exist for ETFs.
Detailed information on the ETF's expenses and commissions can be consulted in the
prospectus that must be available on the manager's website and on the supervisor's website (in the
Spanish case, the CNMV) .
Furthermore, it must be taken into account that by empirically measuring the difference between
the ETF and the index, in the long term we may find a difference. It is the so-called ”tracking
difference”, which is ideally equal to the TER, but may not be, and which is discussed in section 5.4 .
5.11.2. Trading Expenses Like Shares

By carrying out transactions on the stock market through an intermediary or financial entity, you
will have to pay the so-called “intermediation expenses”. To which must be added the "intermediation
fee" and the "settlement fee", paid to the company that manages the stock market.
As an example, if you buy 1000 euros in shares of an ETF, you can expect to pay 10 euros in
commissions (typically 0.10 % of the value, with a minimum of 10 euros). This represents 1% of the
purchase value.
Note that this cost is only incurred when buying or selling. If you do not carry out any operations,
you pay nothing. And in the previous operation, if you maintain the purchase for the long term, by
prorating the cost (1%) over, for example, 20 years, the annual equivalent is 0.05 %, a negligible
amount.
In addition, the value of the ETF will be slightly different from that of the index due to two factors:
the authorized participant has an operating cost, and the spread (the difference) between the bid and
the ask (the purchase and sale prices). The US ETF spread can be viewed at ETF.com (for large and
co ETFs). known is of the order of 0.01 %). As an example in Europe, the cost of a buying and selling
cycle in Xetra is indicated as the Xetra Liquidity Measurement , which for a large ETF can be 0.20 %.
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5.11.3. Expenses for Being Listed Securities

By having a securities account opened with the intermediary, you will have to pay administration
and custody expenses. This is sometimes charged on the face value of the shares, other times on the
effective value of the securities, and other times a minimum per value or market.
For example, you could pay 0.10 % per year in administration fees. traction and custody. This
means that on an investment of 100,000 euros, you would pay 100 euros annually, which would be
withdrawn from your account.
5.11.4. Other expenses

There are also other additional expenses for specific operations, such as collecting dividends or
moving the shares to another intermediary. These costs They must be clearly specified in the
contract signed when opening the account.
5.12. How to Follow the Evolution of an ETF?

We can separate this problem into two parts, depending on whether our ETF tracks a major
index (the IBEX 35, Euro STOXX 50, S&P 500, and the like) or not.
To the extent that the ETF tracks a well-known index, we can relax oversight and assume that
tracking error is negligible. If the index is little known or complex, you will have to go to the stock
exchange or to the manager himself.
5.12.1. Newspapers
Following the evolution of the major indices is very easy, it does not require re no special effort.
All newspapers display this information, both in their print and online versions.
Online economic newspapers show it directly in their masthead, for example El Confidencial, El
Economista and Cinco Días .
The most general newspapers show it in their respective sections, such as El País and El Mundo
.
We find it very convenient to find this information in online newspapers, because it allows us to
know how things are going at a glance, while also knowing the news of the day. This has its negative
side, because it makes us react when things happen, and we do not believe that it is positive to buy
or sell according to the momentum of the moment.
Internationally, newspapers like the Financial Times are very good, because they also include an
ETF search engine. The Wall Street Journal also includes an excellent website on the state of the
markets.
5.12.2. Stock Markets

The stock exchanges themselves provide all the relevant information about the ETFs listed on
them. In Europe, good examples are Bolsas y Mercados Españoles , Euronext and Deutsche
Boerse . The index information is directly on the first page. To know the evolution of a particular ETF
you will have to search by its name or ISIN.
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Stock exchanges are a very good source of information because they allow you to compare the
value of the ETF with that of the index, and check if there were some undesirable difference. It also
allows you to view the ETF's order book, which shows how many purchase and sale offers there are,
at what price, and for how many shares.
Stock exchanges usually have a specific app. Deutsche Boerse is a good example. It allows you
to enter the indices or actions that are followed, and shows them in a very easy way for the user.
5.12.3. ETF Managers

Naturally, the managers of each ETF themselves are the most interested in showing that the net
asset value of their fund correctly follows its respective index. And furthermore, thanks to the
regulation, managers are obliged to provide various documents to the investor, such as information
sheets ( fac tsheets , showing the basic data visually), its key data (KIID, Key Investor Information
Document , a short document that best describes how the fund is managed), prospectus (detailed
report on the fund's performance). fund) and annual accounts (showing what has happened during
the year in question).
iShares , for example, is an ETF manager that shows all this very well. In their annual report they
comment on the difference between the ETF and the index, and the possible reasons. Because in
principle we know that the ETF has to follow the value of the index minus the TER. The ETF could
have done worse (due to problems tracking an index, or sampling problems in selecting some and
not all of the assets in the index), but it could also do better (due to profits from renting shares, or
because the indices it accumulate dividends assume high tax withholdings that the funds can
frequently reduce).
5.12.4. Our broker

The broker itself with which we buy the ETF shares also shows us its price. This would be the
most important value, since it is the one that exactly represents our investment. However, it requires
access to the broker, online in our case, with a username and password. Since we like to minimize
the times we type our passwords, we only monitor our online broker from time to time, each time we
buy more ETFs.
Many online brokers provide their own app for your mobile or tablet. Saxo Bank or ING Direct
are two examples.
5.12.5. Economic news managers

For example Reuters. They also have an app, very convenient for mobile phones.
5.12.6. Mobile phone applications

Apart from the mobile applications already indicated above (brokers, news managers, stock
exchanges), there are very useful applications.
• My Stock Portfolio . Because ETFs are bought and sold like stocks, it is possible to use
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software designed for stocks. You must use the corresponding ticker. This app takes the
values of Google and/or Yahoo shares and allows you to know the status of the investments
in real time. You can define several portfolios, which shares make up each of them, how
many shares, when they were purchased and at what price. The app does the math and
allows us to know our status at all times. Very simple and recommended.
• Yahoo Finance . Like the previous one, on the one hand better because Yahoo is a well-
known company, but also worse because it wants to know everything about the user (identity,
information about phone calls). We prefer the previous app.
• Financial Calculator . It has a lot of options for doing calculations, for example about loans
and mortgages (answers questions like how much does one end up paying on a mortgage
based on the initial capital, the interest rate and the number of years?), compound interest
calculator, and things more specific to financial markets.
5.12.7. Specific web pages

There are many web pages that can be useful. Perhaps not so much for providing current data,
but for providing information related nothing like historical values and correlations.
• JustETF, for example, provides historical values, index recommendations to follow particular
countries or sectors, and allows you to search for ETFs.
• Portfolio Visualizer , which provides a wealth of visual information, e.g. the efficient frontier,
correlations and calculating the re that would have provided a portfolio formed with particular
ETFs with historical values.
• Portfolio Charts where the author, who is also seeking Financial Freedom, shows the analysis
he has carried out on various portfolios of well-known authors, or even those defined by the
user himself. espe Especially interesting is the possibility of calculating its SWR and its
volatility. At the end of the day we want durability and a route with few bumps in the road.
There are also spreadsheets prepared by investors to keep their own accounts up to date on
dividends and income. On some occasions they have made these spreadsheets online available to
122 123
anyone at . Much appreciated, and we recommend you take advantage of them.
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Don Dividend, Profits
123
No More Waffles, Track Your Dividend Portfolio With My Dividend Spreadsheet
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Chapter
How to Build a Portfolio

ETFs
So we have already come to the conclusion that we are going to save as much as possible,
because by doing so for a number of years we will achieve financial freedom. Of all the forms of
investment, investment passive sion seems to be the best. And ETFs are better than conventional
investment funds. After analyzing them, we have seen their strengths and weaknesses. Now it's time
to use these building blocks, ETFs, to build investment portfolios that provide us with long-term
passive income.
This chapter is very much based on two authors or groups of authors. All of them are Americans,
since it is normal for citizens there to have to save for their retirement on their own. Both apply
common sense, focus on how to invest what you have saved through your work (not that you are
going to invest to get rich), and how to avoid making mistakes when investing in the stock market.
• The group of authors called Bogleheads . They are generally fi nancials, which have arisen
around Jack Bogle (hence his name) and his investment fund manager Vanguard (note that it
is may involve a conflict of interest). This company was a pioneer in passive investing, and
today it is by far the cheapest in the world. In fact, they focus on providing simple and low-
cost investment, generally guided by the motto "the investor is obtained from
benefits what the manager stops taking.”
• Harry Browne, who was a very charismatic person, with a podcast, and a financial advisor
among other things. Developed the idea of the Per Wallet permanently ( Permanent
Portfolio ) as a way to protect savings. He became interested in failsafe investing, where each
asset in the portfolio is chosen for performing well in one situation. different economic
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situation, especially in times of crisis. It's not that the portfolio has to withstand crises, it's that
the portfolio has been designed to perform well during crises.
Let's see then how to build a portfolio using ETFs, take advantage “The whole is better than the
sum of its parts.”
6.1.
Core/Satellite Investment System
The investment in core/satellite is known in English as core and explore . This investment
strategy consists of dividing the investment into two parts: a core and one or more satellites.
The core is made up of a low-risk ETF, which offers a cos reduced tee and a diversified
exposure to a general index (see Figure 6.1) . The core objective is to provide a return in line with
market returns (known in financial markets as beta). This will be the fundamental part of the
investment.
In addition, there are satellites: usually more specialized investments di designed to generate
additional profits (known in financial markets cieros as alpha). These satellites are riskier, so they are
expected to provide more benefits.
The reason for adopting a core/satellite system is to mitigate volatility. ity, ensuring that only a
fraction of the portfolio will be exposed to the most extreme swings of the market.
This form of investment is very widespread among investment funds. A conservative fund
provides the nuclear portion and several risky funds provide the satellites. However, it is with ETFs
that this strategy shines, since ETFs are excellent elements with which to build the core part (low
cost, diversification), without removing the fact that they also provide the satellite part.
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5% Markets 40% 5%
Emerging EURO REIT
European Bonds
25% 25%
S&P 500 Euro STOXX 600
Figure 6.1: Example of core/satellite inversion. Most of the investment sion is carried out in very safe
assets, in this case European bonds, and the rest in investments with greater volatility. This is a very
common model, but the reader should note that it may not fit your profile, or that it is not even clear
that European bonds provide sufficient profitability to justify their risk of bankruptcy.
6.2.
The long-term
Considering what the future of an investment will be is something about which little can be said.
In fact, the impossibility of predicting returns is what has brought us here, to ETFs. The lack of
success of fund managers to improve market averages, or the inability to detect crises.
This is not only on everyone's lips, like when John Maynard Keynes was asked about his
economic predictions, which he answered in a flash. sion “in the long term we will all be dead.” This is
also what investment funds have to explicitly indicate in their dossiers: income Past weaknesses do
not guarantee future returns.
As a lesser evil, you can see the historical behavior of different types of actions (there are many
sources of information on this matter).CXXIX ) . This is shown for example in table 6.1.
The first thing to take into account is inflation, which is always part of investment returns. No
investment that provides a priori a profit below inflation makes sense.
Table 6.1 allows us to estimate that a portfolio composed of one third
Long-Term Return Expectation After Discounting Without Discounting

Inflation Inflation
Public fixed income

State bonus 1,5 4,5
State obligations 2,0 5,0
Corporate fixed income
CXXIXJames, Long-term Investment Performance
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High Grade Bonds 2,0 5,0

High Yield Bonds 4,0 7,0
US stocks
Large companies 5,0 8,0
Medium companies 7,0 10,0
Small companies 7,0 10,0
REITs 5,0 8,0
International actions
Developed countries 5,0 8,0
Small country stocks 6,0 9,0
Emerging markets 7,0 10,0
Commodities 0,0 3,0
Table 6.1: 30-year return expectations for index-tracking ETFs, including capital growth and
dividends. 3% annual inflation is assumed. These figures are estimates, there is no guarantee that
they will be fulfilled. plan in the future. REIT refers to Real Estate Investment Trusts . Source:
Portfolio Solutions LLC (Ferri, The ETF Book ) .
fixed income (government bonds, 2%) and two-thirds of shares of large companies in developed
countries (for example S&P 500 and/or Euro STOXX 50 that yield 5%) achieve a return of 4% in the
long term.
Spain has had official inflation of around 3% per year for the last 20 years. This could change. In
the late 70s and early 80s, inflation remained at levels of 20% for several years. However, given the
policy of the European Central Bank, it is not expected that this will occur again.
In general, markets reward risk. Those assets that your The more market fluctuations potentially
have greater benefits. yores. Historically, small companies have grown more than large ones, in the
same way that emerging markets have the capacity to grow faster than developed countries. This can
serve as a guide.
Similar calculations can be found on the internet. For example, in the Political Calculations blog,
in which in one of its entries it allows us to estimate
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Annualized Time-Averaged Return on Investment
Figure 6.2: Range of annualized returns for a typical US portfolio dense (such as the S&P 500) during
the period between 1950 and 2009. Not including expenses, taxes or inflation. Source: Malkiel, A
Random Walk Down Wall Street .
How the evolution of the S&P 500 has been over long series of years .CXXX . This allows us to
estimate the value of the large American companies in Table 6.1 . The table indicates the value 5 ,
0%, but in recent decades the S&P 500 has provided a return (by reinvesting dividends and
discounting inflation) close to 8%. From this it follows that the table can even be considered
pessimistic.
Figure 6.2 shows how expected volatility decreases when averaging over longer time periods.
From one year to the next the stock market is unpredictable, it can rise 53%, but it can also lose 37%
(that's what happened to the US stock market between 1950 and 2009). However, over the long
term, the annualized return evens out and becomes more predictable. There is There are 10-year
periods where you lose money, but there are also 10-year periods where you made 19%. In the long
term, yields have been slightly above 10%, but do not forget that expenses, taxes and inflation must
be taken into account.
Be careful, overconfidence is very common and indicating very high returns as something
certain. There are those who even talk about a 25% annual return. This is exceptional, and not the
CXXXPolitical Calculations, The S&P 500 at Your Fingertips .
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average, which is what interests us.
6.3.
How Long-Lasting is an Investment in Investment?
you say?
There are many people who have managed to achieve Financial Freedom, each one using the
method that was most comfortable for them. And it can be seen that these methods have evolved
over the years, because what worked in the past no longer works.
Historically, properties were purchased, and this is the way in which our parents saved. But this
way of investing has many benefits. problems as we saw in section 4.1.2, and as we have
experienced in the crisis of 2008. The price of houses can drop a lot and remain at a minimum for a
long time. And on top of that it is a very illiquid asset, difficult and expensive to sell. Buying houses to
rent them is no longer a good way to invest.
Back in the 80s, Certificates of Deposit (CD) were fashionable in the US. What later arrived in
Spain as “fixed-term deposits”. This was the method followed by Paul Terhorst, discussed in his
bookCXXXI . At the time it was a good method, but over the years inflation ended up being higher
than the returns provided by fixed-term deposits, losing purchasing power year after year, so it no
longer makes sense to invest like this.
The 90s were the golden age of bonds in the US (see sec. tion 4.1.5) . Vicki Robin and Joe
Dominguez comment on it in their bookCXXXII . However, over the last few years, the world's major
governments have embarked on a low interest rate policy to stimulate the economy. mine, so bonds
provide lower returns than inflation. So again, bonuses are not a solution today either.
Later, those who invested in stocks that provided tion dividends (see section 4.1.8) . Highly
commented on in many blogs
on the internet, perhaps also because it is the time in which the internet emerged and grew
exponentially. This is possible thanks to the recently emerged online brokers, at very low costs.
However, investing in stocks requires time and effort (analysis of which companies to buy, monitoring
the companies purchased), there is a danger of bankruptcy of the invested company, it is difficult to
buy in distant markets, etc.
Finally, in recent years investment in funds that track indexes has been very popular (as we
have commented in section 4.1.9) . Thanks to books like Boglehead 'sCXXXIII or that of Maarten van
Lie rCXXXIV . This improves the purchase of shares, offering what they could not offer: diversify
greatly, both by number of companies (perhaps buying up to thousands of them), and by countries
(the fund can buy in very distant places), buying companies where a small investor may not have
CXXXITerhorst, Cashing in on the American Dream

CXXXIIRobin, Dominguez and Tilford, Your Money or Your Life
CXXXIIILarimore et al., The Bogleheads' Guide to Retirement Planning
CXXXIVvan Lier, How to Make a Million in 10 Years
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access (due to low liquidity, countries with trade limitations).

And here we are now, taking advantage of index funds, which are pos probably the best option
for the average citizen.
It is important to note that no savings and investment strategy has lasted forever. This is what
this section is about. Index funds will most likely be efficient for many years, and in fact are robust
enough to withstand foreseeable future unforeseen events . What I can't All we have to do is protect
ourselves from unforeseen events , so be flexible if you have to change your strategy tomorrow.
6.4.
Examples of Portfolios
In this section we show several portfolios that serve as examples. The ob objective is to choose
what proportion of the capital to invest in each type of investment. The information comes from
Vanguard, Portfolio al location models , the Intelligent Investor website, and mainly from the Portfolio
Charts website.
The Portfolio Charts website is excellent. Here you will find a huge amount ity of information on
passive investment portfolios. The author does not show any preference, and it is up to the reader to
decide if they want complexity in exchange for possible higher returns, or if they will settle for a
portfolio that is simple to implement and still good enough.
Some interesting ideas discussed on this website:
• Discusses multiple portfolios from different authors, giving you an idea of the different levels
of complexity.
• Provides information about the different types of assets. There is a car Some consider
investing in gold or REITs (real estate investment trusts), but others do not.
• Historical values, using very characteristic graphs for mos trace the evolution of the portfolio.
What interests us is not only the long-term return, but also that the journey does not have
many bumps. If two portfolios provide a similar long-term return, but one of them has lower
volatility and is more constant, it is clear that that one is better.
• A calculation of the SWR ( Safe Withdrawal Rate ) for each portfolio. Be your It says 4% as a
first approximation. But is it the same for all portfolios? More complex portfolios can provide a
higher SWR, simpler portfolios can provide a lower SWR. Goes lores between 3% and 5%
are usual. Remember that the SWR is nothing more than an approximation obtained with
historical values, no one knows what the future holds.
• And very importantly, you can do tests by entering the parameters of your own portfolio, thus
seeing how it would have behaved in the past.
The portfolios presented here are very simple, and you may be tempted to add complexity.
However, it is not at all clear that the increase ment in complexity produces an increase in benefits.
From our point of view, investing doesn't have to be complicated and doesn't have to require a lot of
effort. A more complex portfolio will have higher costs in time (your time, to keep it running correctly)
and money (cost of rebalancing, higher TER), so simplicity is a positive.
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We generally choose international stock ETFs because nowadays it doesn't make sense to stay
confined to domestic stocks. If Spain re presents 2% of the world economy, why ignore the other
98%?
It is often said that you have to age yourself in fixed income, although it is not clear that this is
still valid as it has been in the past (see section 6.5 on this).
Stocks have better long-term investment return expectations than bonds. On the other hand,
state bonds are very stable, being a kind of warehouse for bad times. If tomorrow there is a crisis and
the value of the shares plummets by 50%, we will always have the bonds. If we are in the savings
phase, we can rebalance, selling bonds and buying cheap stocks, waiting for the stocks to recover
their value. If we are in the spending phase, then we can sell bonds, if the dividends are not enough
to live on, and so on. We would have to sell devalued shares to pay our current expenses, which
would be an economic disaster. See section 6.9 about this.
It is very important to choose low-cost forms of investment. Take note of the book ”Where are
the clients' yachts? ”CXXXV , whose title says it all: we clients don't buy yachts, but our savings
managers do. So never forget that the profits that the investor receives are those that the manager
fails to receive.
When searching for indices, you can start searching by FTSE ( Financial Ti mes Stock
Exchange ), MSCI ( Morgan Stanley Capital International ), STOXX for stocks; and Barclays and
Markit for bonds.
There are many ETF management companies. The best way to find them is through the stock
exchanges where they offer their products. For example, the websites of Spanish Stock Exchanges
and Markets, Xetra , Euronext and London have pages on the matter.
You can also select ETFs through more specialized websites das, such as Financial Times,
JustETF or Morningstar.
Prices (TER) are typical values. They do not represent any particular ETF and may not even be
valid by the time this book reaches you.
Finally, you can find automatic recommendations on which particular funds to invest in on a
multitude of websites. These will make you pre questions to assess how you react to losses and what
returns you expect to obtain in the long term, and this is very good because it forces you to plan
Think about what could happen, and think about the worst (after all, when things are going well, there
is nothing to think about). Some websites are: iShares , JustETF and Vanguard.
What do Will and Fog invest in?
We have decided to invest in the simplest way possible, considering that we are going for the
CXXXVSchwed, Where Are the Customers' Yachts?: or A Good Hard Look at Wall Street
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long term and that therefore we give more weight to stocks than to bonds.
Fog invests in ”Two Simple Funds”, giving 70% of the weight to the developed world ETF, and
30% to an aggregate of Euro bonds peos.
On the other hand, Will does something very similar, buying 1/3 of the S&P500, another 1/3 of
developed Europe, and another 1/3 of EU bonds. clothes
In any case, the indices are made up of well-known companies. established and developed
countries. And on the other hand, the ETFs chosen are low-cost, well-known, transparent, and
very efficient. As you can see, even though it is a stock market investment, minimizing the risks
as much as possible. But don't forget to do your homework and choose according to your needs
and in tereses. We discuss what we do as an example, but this may not be the best for you. In
fact, it is certain that better performance and lower volatility can be obtained, but what is not so
certain is that it can be done with this simplicity and transparency.
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Two Simple Backgrounds
It couldn't be simpler: two only ETFs. This portfolio is based on ideas from Harry Markowitz
(Nobel Prize winner) and Rick (Richard) Ferri (author of The ETF Book ). Rick Ferri is in favor of
weighing stocks more than bonds, 60/40 instead of 50/50, which is reasonable because stocks
yield more in the long term. In any case, this is up to the investor's taste. Marcos Luque provides
a simulation based on this fund
, where long-term returns are seen above 4% per year after having
discounted Spanish inflation.
Thanks to the diversification capacity of ETFs, they can be combined buy products that are
equivalent to thousands of assets. In this example, Al-World invests in about 3,000 companies in
47 countries around the world, so to developed and emerging markets, and if this were not
enough with a TER of up to 0.25 %.
European bond index follows government bond aggregate mental and corporate, all in one.
TER Ratio
FTSE All–World Index 50% 0,25 %
Barclays Euro Aggregate Index 50 % 0,25 %
Allan Roth's Second Grader Wallet
Allan Roth, author of How a Second Grader Beats Wall Street , has created Do this portfolio
keeping in mind that it has to be simple, cheap, tax efficient (although this is more important in
the US) and diversified.
Name
This asset allocation is clearly intended for the jockey investor.
come or with the capacity to accept the risk (the percentage of bonds is relatively low). Roth's
idea of keeping it simple is applied to markets around the world. Even for investors near or in
Average cost 100% 0,25 %
to
M. Luque, Vitae Calculator .
retirement, these three ETFs should do a good job.

Allan does not believe that you can beat the market, and therefore recommends investing
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directly in investment funds or ETFs that track indexes. In any case, for those people who want
to feel the risk, re eat the core and casino system. That is: invest 95% in following market
indices, and the remaining 5% in investments of your choice.
The global index focuses a lot on the US and less on Europe, and we have decided to
overweight Europe with another specific index.
Name Proportion TER

MSCI Europe Index 50% 0,35 %
FTSE Global All Cap Index 40% 0,18 %
Barclays Euro Treasury Index 10% 0,25 %
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Rick Ferri's Core Four Wallet
According to Rick Ferri, ”you only need a few asset classes in the portfolio, anything outside of
that becomes diminishing returns. The mutual funds you choose to represent the asset classes
in your portfolio should be the lowest-cost funds you can purchase.”
As in the previous portfolio, the entire world is selected and Europe is overweight. In addition, a
real estate investment company index (REIT) is also followed, because it is partially offset.
related to general capitalization indices. Finally, a fraction of bonuses to reduce volatility.
STOXX Europe 600 Index 30 %

FTSE Global All Cap Index 24%
FTSE EPRA/NAREIT Eurozone Index TER Ratio
6%
Barclays Euro Treasury Index 40 %
Name cost
Average 100% 0,26 %
0,30 %
0,18 %
0,40 %
0,25 %
Harry Browne's Permanent Wallet
Harry Browne was an American writer, politician, and financial advisor. give. He proposed this
portfolio because it was simple and diversified; and is well known among the small investor
community (Brownehead for example). He called it the Permanent Portfolio because the
objective is to maintain 4 assets distributed in 4 equal parts. If one asset grows above the others,
they are readjusted (selling the high one and buying the low one) to once again have 4 equal
parts.
This portfolio is made up of four asset types that are very poorly correlated. In this way, it is
assumed that the portfolio will be able to generate profits in any circumstance. Stocks generate
profits in times of prosperity or declining inflation. Gold to protect against periods of high inflation.
Long-term bonds for periods of low interest rates, especially during deflation. Short-term bonds
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because in times of crisis, although nothing performs well, at least it protects purchasing power.
We do not like to invest in gold because long-term commodities only grow at the rate of inflation
and do not pay dividends. Without em However, if you have the heart of an Austrian School
economist, perhaps you can find a place for gold in your portfolio.
Name Proportion TER

STOXX Europe 600 Index 25% 0,30 %
Markit iBoxx € Eurozone 25 25% 0,15 %
FTSE MTS Eonia 25% 0,15 %
Gold 25% 0,60 %
William Bernstein's No Brainer Wallet
Bernstein, author of The Four Pillars of Investing , suggests a portfolio with a very long-term
horizon, with a distribution in four equal parts. He designed his portfolio from the US point of
view. By Europeanizing your portfolio we could invest a quarter in the eurozone (EMU,
European Monetary Union ), another quarter in small European companies, another quarter in
the world, and another quarter in European bonds.
It has achieved a 6.9 % annual return from 2004 to 2014, with the S&P 500 having increased 7.7
% during the same period. Although the return has been slightly lower, its much lower volatility
favors this no brainer portfolio, which has allowed its followers to sleep more peacefully at night
.
EURO STOXX 50 25% 0,09 %

MSCI EMU Small Caps Index 25% 0,40 %
FTSE Global All Cap Index 25% 0,18 %
Barclays Euro Treasury Index 25% 0,25 %
Name TER Ratio
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a
More information on the web: MarketWatch, Lazy Portfolios .
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Very Patriotic Spaniards Wallet
Like Antonio R. Rico tells us on his website El Inversor Inteligente, this is the portfolio of very
patriotic Spaniards.
This portfolio can be interesting to start, to learn, to lose the fear of investing, since the IBEX 35
is an index that is close to us. It's easy to get information and know if it's going well or something
wrong.
However, we do not like this portfolio (beyond its value as an example and as a starter) for
several reasons. On the one hand, it is not very diversified, since Spain is a small country and
yet it has a lot of weight in the portfolio. And on the other hand, because the indices that follow
the IBEX 35 are more expensive than if they were more general indices. But of course, to taste
the colors. In fact, if you are truly a patriot, put your money where your heart lies.
TER Ratio
IBEX 35 25%
MSCI World Index 25 %
Barclays Euro Treasury Index 50 %
6.5.
The Age in Bonds
Name There is a common practice in the world of do-it-yourself
investments, and it is to distribute 0,33 %
investments into two main groups, stocks and bonds, according to preset 0,45 %
0.25 %
percentages.
The rule is, taking into account all our investments in the stock market, that the percentage of
bonds is equal to our age and the rest in shares of listed companies.
In a broad sense, both bonds and stocks are understood here to refer to investment funds that
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invest in bonds or stocks.

For example:
• If we are 30 years old, the norm indicates that we would have to buy 30% bonds and the rest
(70%) in stocks. This would allow us to start at a young age saving more, because actions
have states ethically more likely to revalue.
• As the years progress, for example at 50 years old, the amount of bonds would equal that of
stocks, 50% / 50%.
• At age 65, when we retire (if we have not already achieved Financial Freedom), we will have
65% in bonds and 35% in stocks.
• At the limit, upon turning 100, 100% of the investment would be in bonds.
This bond age rule naturally allows us to adjust our after investments to our risk profile. Start with
riskier assets when you are young, but also with assets with higher expected profitability. As time
goes by we will buy more bonds, which are less risky (we will be better protected against unforeseen
crises) but also give me nor return (which we probably no longer need, since it is enough for us that
our investments simply last us in life).
And how is this done? How is the balance maintained between both types of assets? Assets are
bought or sold depending on whether we are in the savings or spending phase.
• In the savings phase, the type of asset that is below what corresponds to it is purchased.
• In the spending phase, the type of asset that is above what it corresponds to is sold.
CXXXVI
This strategy is well documented (for example in Boglehead 's books). and Rick Ferr
i CXXXVII
) because it is the usual recommendation of the ases investment sources.
This strategy has several positive points. On the one hand, its simplicity, so that anyone can
implement it. and on the other hand, it requires minimal maintenance. Only buy or sell when
appropriate, just as we would do anyway.
With this strategy, the investor would buy well-known indices, with great liquidity and
transparency. By calculating the percentages to see what to buy or sell, we have a certain feeling of
investing (and not just com buying without further ado), when really what we are doing is a simple
and proven buy and hold .
If we had to say something negative, we would say that bonds today provide very low returns.
So low that they are below inflation, and it is not clear that it is worth it. Or at least it is not sensible to
invest in something knowing that in the long term we are going to lose purchasing power. This
strategy is simple, but it may be outdated.
A curious note is that there are investment funds that already implement this to automatically.
They are target date funds. See for example Morningstar (select funds > quick fund search > target
date category). The investor buys a single fund, and the manager is in charge of taking the
CXXXVI Larimore et al., The Bogleheads' Guide to Retirement Planning

CXXXVIIFerri, The ETF Book
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percentages into account, making it impossible to be more simple. In this case we will have to see if
the TER of the fund is really low, or if the investor can do the same on his own since in the end it is
very simple. They can be a good option for an investor who does not want to complicate his life. Even
professionals use them, since a pension plan that we had purchased ba these products internally.
We, for our part, prefer transparency and doing it ourselves, so we don't buy them.
6.6.
How many ETFs in Portfolio?
Based on what we're seeing, there are a huge number of possibilities. One might want to
purchase multiple mutual funds, ETFs in this case, that are very specific and achieve excellent
returns in specific niches of the market.
We could therefore ask ourselves if, statistically, it is worth buying many funds or if, on the
contrary, a simple investment in only 2 funds is sufficient.
People tend to see the stock market as a way to get rich, where you have to look for bargains
and take advantage of inefficiencies to make money. Buy low and sell high. This would lead us to be
very active in purchases and sales.
However, in this book we are interested in buy and hold , the Bogleheads philosophy, buying
today and holding the asset for many years, pro probably forever. One may wonder if simply two
investment funds General versions are capable of obtaining satisfactory results. Results comparable
to those provided by a multitude of specific funds.
This exercise has been carried out by many people, a very complete presentation has been
made by the user GFierro in Ranki aCXXXVIII . GFierro has simulated groups made up of between 2
and 21 funds (20 simulated portfolios). The funds have been chosen from among 93 MSCI indices
(considering that the ETF faithfully tracks its index). They are variable income indices, fixed income is
not considered here. These indices are capitalization, style and regional. Examples considered are
smal l cap value Latam ex–Brazil and Eastern Europe Large+Mid Growth . Since the possible fund
combinations for each portfolio are enormous, thousands of simulations have been performed, noting
the best return, the average return, and the largest loss.
The reference it uses are two general funds, one from development markets rrolled and another
from emerging markets, large and mid-cap.
The amazing thing is that when you do the math, two low-cost general funds provide basically
the same results as those provided by two by simulations, or sometimes even better.
Let's see some conclusions:
• Choosing funds is very risky. Two specific funds can give ren Huge annualized returns, up to
26% over 15 years. But the problem is choosing those two brilliant funds, given that it is also
true that the two worst funds provided systematic losses of 6% per year for 15 years. It's very
risky.
• Two diversified funds provide comparable average returns rable to combinations of funds,
CXXXVIIIGFierro, How many Funds do I need in my Portfolio?
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around 10%. But this is the return of the index, that of the corresponding fund will be lower
due to the costs. In fact, large generalist funds tend to have cheaper TER than smaller, more
specific funds. So 2 general ETFs are at least as good as several specific ones.
• The more funds, the worse. The simulation shows that the more fon two, the worse the
average annualized return. For example, in 15 years you can go from 9.4 % by investing in
two random funds to 8.6 % if you invest in 21 random funds. And to this we must add the
expenses that come with having to make more purchases and sales to maintain a multitude
of funds in the portfolio.
• The 2 general benchmark funds, by maximizing diversification, minimize spikes. This way,
your maximum return or maximum loss is on an average. We are not going to get rich, but
we are not going to lose excessively either.
In short, two well-diversified funds perform equally or better in many ways than a myriad of
exotic funds. Therefore we do not need to complicate our lives. Two simple and general backgrounds
are enough.
6.7.
Dividends: Accumulation or Distribution?
The participants of an ETF have the possibility of receiving dividends. Managers usually provide
two very similar ETFs, which follow the same index, but one of them distributes dividends and the
other accumulates them. Distributing dividends is common among ETFs, being a common
characteristic common with stocks, and which differentiates ETFs from traditional funds, for which it is
exceptional that dividends are distributed.
The listed fund may pay periodically (for example annually te, semi-annually, quarterly) to
investors with dividends disbursed contributed by the companies that make up the reference index.
The total volume to be paid will be the difference between the net asset value of the fund and the
value of the reference index. Be careful, because this payment may imply the charging of
commissions by the intermediary.
It must be taken into account that, as with stocks, the payment of dividends modifies the net
asset value of the ETF. As the dividend is distributed (measured in euros per share), the price of the
ETF decreases by the same amount. Furthermore, the dividend will be collected by whoever remains
invested. ted on the rights assignment date, also called record date , regardless of the date on which
it was purchased.
Regarding the main question of this section: is it better to buy accumulation or dividend-paying
ETFs? This answer depends on two factors: taxes and your intentions.
If you live or plan to live in European countries such as Germany or Switzerland, know that
investment funds pay taxes differently than in Spain. In Spain, if a fund accumulates dividends,
nothing happens. These dividends become part of the fund's capital. Taxes will be paid upon sale,
upon realization of profits (if any). This is positive because by delaying the payment of taxes, the
capital grows more than if it is paid year by year. And also, you do not have to pay the broker again to
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reinvest the dividends. In Germany and Switzerland, however, fund managers have to report the
profits they have earned via dividends, and the investor Sort has to pay for them when filing the
annual tax return. Therefore, if you live in Spain you can take advantage and buy accumulation ETFs,
but if you are thinking of going abroad, an ETF that distributes dividends will make your life easier.
On the other hand, there is personal taste, since it is a joy to see the dividends arrive. It gives
energy, you see the results, you see that this method is effective in reaching Financial Freedom.
Without dividends, the funds accumulate silently, which is positive and efficient, but not exciting.
Furthermore, the choice between accumulation or distribution funds applies to both the
accumulation phase and the Financial Freedom phase. He surrendered The growth of the
investments will be comparable in both cases, so you have to decide if you want to “live off the
dividends” or from the periodic sale of the capital of your investments.
We have chosen ETFs that pay dividends, both for the possibility of traveling around Europe
(and wanting to do so with as little complexity as possible), and to see the dividends enter the
account and be sure that everything is going well.
So think about it, and choose what suits you best. It's your responsibility bility.
6.8.
The Benefits of Diversification
We have repeated multiple times that we must diversify, not put all our eggs in the same basket,
spread our investments. Ok, but what do we mean? What does “diversification” mean in practice?
These ideas are today commonly accepted by the financial world. true. You will find many books
13 4135
on the subject, both academic and popular , and web pages for documentation.
But let's first look at a visual explanation.
6.9.
ea Malkiel, A Random Walk Down Wall Street , especially its chapter 8.
6.10.
to chapter 17 of Ferri, The ETF Book
6.8.1. A Practical Approach to Diversification

One way to approach this problem is to imagine that we invest in company A for a year, and we
simulate the result. In particular how many times you lose money. Losing money is the fundamental
parameter. Earning money seems normal to us, but losing it feels very bad.
Suppose that within a year, A has a 50% chance of growing in price +30% and another 50%
chance of losing -20%. Half the time we will lose money.
Now suppose that we invest half in the previous company A, and the other half in another
company B. Company B has a 50% chance of going up +20% and a 50% chance of losing -10%.
Assuming this probability distribution, what outcome can we expect a year from now? There are 4
possibilities:
• A is up +30% and B is also up +20%. The combined value rises +25%.
• A rises +30% but B loses -10%. The combined value rises +10%.
• A goes down -20% but B goes up +20%. The combined value does not change.
• A drops -20% and B loses -10%. The combined value drops by -15%.
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As you can see, in the case of investing in both A and B at the same time, the probability of
having losses is one in four, 25%. This probability is less than 50% if we only invested in A or only B.
This is the practical demonstration of the usefulness of diversification: reducing the probability of
suffering losses.
Let's now see how this is put into practice: by the amount of assets and by the type of assets.
6.8.2. Diversify by Number of Assets

The idea is that the price of assets on the stock market is largely unpredictable. They go up, they
go down, and no one knows why. Nobody can predict it, and a good way to see it is to see that the
results of the investment funds that try it are bad on average.
What if the stock price had an unpredictable component (ma thematically random), and another
from the “market” (the same for all the stocks in that market)? The random part represents the
impossibility of knowing how the investors, who may be many and independent, are going to behave.
Figure 6.3: Figurative diagram showing the benefits of diversification. The more assets in the index,
the lower the volatility, but beyond a certain number of assets (30–50) there is no improvement. The
return on investment will be whatever it is, but the greater the number of assets, the less variable that
return will be from year to year. Furthermore, as we will see in the next section (diversification by
asset types), the more independent the assets of the index are, the lower volatility. In short, there will
always be volatility in asset values, but we can at least minimize it by selecting broad indices.
The market part represents the macroeconomy and changes that affect all companies together, such
as new fiscal measures taken by a government.
In this case we could reduce the risk (the variability in price) of our investment simply by
spreading the investment over more assets. Note that we are not interested in the return on
investment, but rather whether this return is highly variable or not.
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When accounting for the variability of a group of assets, the “market” part is the same for
everyone, but the random part tends to compensate (at a given moment, one company can become
more expensive and another can become cheaper). The more assets are accumulated, the more
likely it is that the random effect will offset each other, leaving only the variability of the market.
So when the number of assets is long enough, we just the variability of the market remains.
Practically, it is often said that from 30–50 assets, the variability of individual assets can be ignored.
This is why indices usually have this number (or more) of assets. A much larger number (for example,
an index of thousands of companies) is not necessarily better (unless they are really very
independent, such as from different countries), and yet many assets can make the ETF difficult to
implement (keep an eye on the TER).
Figure 6.3 graphically shows this argument. For a given group of companies (or Spanish or
European in general), the variability of It grows by including more companies in the index, because
the random components cancel out. But there is a part that does not disappear, and that is the
macroeconomic component. On the other hand, note that it is better for you to invest in European
companies in general, and not just Spanish ones, because the companies are more dependent, their
variations are more random and tend to cancel each other out better.
6.8.3. Diversify by Asset Types

When assets are purchased, or when different assets are part of an index, it is advisable that
they be poorly correlated (that they rise or fall independently). Or in the best of cases, they are anti-
correlated (that when one asset goes up, the other goes down, and vice versa).
When several assets are correlated (for example companies from the same country and the
same economic sector), it is enough to buy one of them. Buying several highly correlated assets does
not add value, because they all behave the same (see Figure 6.4) . In this way, I do not It is worth
buying an ETF that tracks the MSCI Europe and another that tracks the STOXX Europe 600,
because both represent companies very well. European chalks.
However, if assets are anticorrelated, good things happen. beneficial for the investor. On the one
hand, variations are cushioned, because when one asset rises the other falls. This is nothing more
than simple mathematics.
When two assets are anti-correlated, the combined effect is very positive for the investor, as it
reduces risk. The classic example is the case of stocks and bonds, since they are assumed to be
relatively anti-correlated (at least that has been the case in the past). See Figure 6.5 .
If what we want is to obtain maximum profitability in the long term, one could buy only shares.
But this has a problem, which is that it also has the maximum risk of loss (higher volatility).
At the other extreme, we could invest only in bonds, which gives us
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Figure 6.4: These graphs show the average behavior of two ac tives. Asset A and B can be
anticorrelated (upper graph), or correlated (lower graph). Note that when the assets are related, it
practically does not matter whether you bought A, or B, or A+B. The volatility is the same. However,
when A and B are anticorrelated Two, the average is much more constant, the volatility is lower.
What do you prefer, investing according to the average of the upper graph or the lower one?
very low volatility, but at the same time very low profitability. Is there a better option?
If we consider the objective of obtaining the best possible combination of profitability and risk,
what we will have to do is invest in a part of each. In the case shown in Figure 6.5 , the combination
of 75% bonds (government, of the highest credit quality) and 25% stocks achieves the lowest
possible volatility. If what you are looking for is peace of mind, this is what you have to choose.
In any case, even if you are looking for minimal risk, it is not advisable to invest mostly in bonds,
because for the same risk, a small number of stocks provide you with a little more return with the
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Figure 6.5: When two assets are anticorrelated, buy a combination The combination of both results in
results that may be better than buying only one or only the other of the assets. For example, in this
case you get the lowest volatility with a mix of 75% bonds and 25% stocks.
same risk. See for example that in the case at hand, investing 50% in bonds and 50% in stocks
provides the same risk in the long term as 100% in bonds, but with greater profitability.
Typically you'll want to avoid extremes and find yourself somewhere in the middle. 50%/50%, or
with an amount of bonuses according to your age (see sec. tion 6.5) . If you want high returns, try
75% stocks and 25% bonds, as the long-term returns are a little lower than 100% stocks, but the risk
is lower. Or if you want the greatest possible stability, invest 25% in stocks and 75% in bonds,
because this way you will achieve the lowest possible risk (but be careful, because you will still have
some volatility, there is always some risk).
The curve shown in figure 6.5 is the so-called “Efficient Frontier” for the case of two assets. This
idea is part of the so-called Modern Portfolio Theory (MPT) for which Harry Markowitz won the Nobel
Prize in Economics in 1990. It's a classic idea in the world of finance, so you'll find plenty of books
and websites that explain it.
6.9. The Benefits of Rebalancing

Probably the biggest problem for small investors is that we are like small boats dragged by the
winds and currents of the news. companies and large financial institutions. Studies emphasize again
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and again that investors who manage to minimize their purchases and sales, mini mite their
expenses, who manage to isolate themselves from the news and stay on track even in times of crisis,
those are the investors who do best.
The idea that investors tend to “buy high and sell low” is one of the most repeated phrases.
Everyone knows it, but in the end we all end up falling at some point. It may seem far away now, but
in the midst of the storm, when the value of your investments has plummeted, you will be tempted to
sell. Right at the worst moment.
How to fight this error? On the one hand, it may be reasonable to sell a company's stock if that
company is doing poorly. However, by investing in broad indices, we are more protected against the
bankruptcy of particular companies, and this is already an improvement.
On the other hand, there is the so-called “rebalancing”. Rebalancing consists of ”buying low and
selling high”, just the opposite of what we had mentioned before. And do it without thinking, without
having to make decisions, without the tension of being wrong. So where is the trick?
The solution is to establish percentages for each type of asset from the beginning. For example,
50% stocks and 50% bonds. If the value of stocks rises relative to bonds, you will have to sell stocks
and buy bonds. And vice versa, if the value of stocks goes down relative to bonds, you will have to
sell bonds and buy stocks. In practice everything is simpler, because if you are in the savings phase,
you will not have to sell anything, just buy the “cheap” asset. And if you are in the Financial Freedom
phase, you will not have to buy anything, just sell the “expensive” asset. In any case, always with the
intention that the percentages are again the initial ones, 50%/50% in this case.
For it to have an effect, it would have to be rebalanced more frequently than the typical duration
of crises. But not so frequently that we incur transaction costs. Once a year is a typical period of time.
The following figures 6.6, 6.7 and 6.8 show the difference between rebalancing or not in a
portfolio composed of 50% of the MSCI World index and the other 50% of an aggregate of European
government bonds. All of these graphs assume the reinvestment of dividends, and their value begins
by agreement at the value 100 in December 1998, ending the series in January 2017.
The Lost Decade
The Expression Lost Decade began to be used in Japan in reference to its economic crisis of the
1990s–2000s, although given its Sine die stagnation can also extend into the next decade. It can
also be applied to the US from 2000 to 2009, due to the recessions at the beginning and end of
the period.
The MSCI World index also shows a “lost decade” between the 2001 peak and the recovery of
that value in 2013 (see figure 6.6, top panel, after all the US economy represents approximately
half of the world economy).
But notice that if you wait long enough, investments have always eventually recovered their
value. It will take, many years will pass, but in 2017 the MSCI World index is twice as valuable
as during the “lost decade”.
Also, do not invest all your capital in risky assets, buy a part of bonds that will help you balance
in times of crisis.
In short, prepare for crises. If you expect to live to be 100 years old, and counting on a major
crisis every 10 years, do the math on how many crises you are going to experience. And don't
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forget that "this time is different" and "it is the worst crisis in history."
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Date
Figure 6.6: Graphs showing the evolution over the years of the investment of two passive funds, on
the one hand the MSCI World and on the other hand an aggregate of European government bonds.
The investment in a portfolio with an initial weight of 50% for each fund is also shown. No more
purchases are made, only the initial investment is allowed to evolve. Note in the graph below that
although the initial distribution is 50%/50% in each fund, the shares soon rise in value and take on a
greater weight in the portfolio. The MSCI World shows large variations, while bonds are more
constant. Fi Look at how the crises of 2008 and 2011 are clearly visible. By taking a portion of each
asset, the evolution of the portfolio's value is smoothed out. Note that these graphs imply the
accumulation of dividends, that since they are graphs of the indices they do not include the TER of
the funds (a real investment like this will be slightly less profitable), and that the fact that the MSCI
World and the bonds converge at end is a coincidence.
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Figure 6.7: These graphs show the same information as figure 6.6 , but in this case it is rebalanced
each year. The weight of stocks and bonds is adjusted (by selling and buying) at the end of the year
to return to 50%/50%. This rebalancing implies an improvement in performance, because it naturally
forces you to sell high and buy low, although this difference is negligible at first glance. The following
figure 6.8 makes this rebalancing effect visible. Note that each year you have to sell on average 3%
of the expensive asset to buy the same 3% of the cheap asset. 6% annual sales and purchases,
which after 18 years implies having bought or sold more or less 100% of the portfolio (the entire
portfolio!). Since the typical cost of an operation with a broker can be more or less 0.25 % of the
operation, this means that after 18 years we would have paid 0.25 % of the value of the portfolio. But
note that this is a high estimate, which will normally be half, because you either buy or sell, but not
both at the same time as in this example. And by the way, taxation has not been taken into account
here, which implies having to pay for capital gains.
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Figure 6.8: This graph shows the difference that would have been between reba whether or not to
launch a portfolio composed of two funds, 50% of MSCI World and 50% of an aggregate of European
funds. Note that rebalancing slightly improves performance. After 18 years the difference is a non-
negligible 11% (approximately 0.6 % annually). This benefit is about 44 times greater than the cost of
rebalancing ( 0.25 % of the value of the portfolio in 18 years, as discussed in Figure 6.7) . It may
seem like a lot of growth to you, but note that with rebalancing the annualized return has been 5.7 %
and without rebalancing it was 5.1 %, modest considering that we have to discount inflation.
6.10. Which Fixed Income ETF to Choose?

Fixed income indices are a little different from equity indices. In capitalization stock indices,
which are the most common, the weight of a company in the index increases when the value of a
company on the stock market increases. The better the company does, the more representation it
has in the index. This is what happens with the simplest indices (in slang, plain vanilla indices).
In a similar way, bond indices also consider the price of bonds. The problem arises because the
more indebted companies become, the more bonds they issue, and the greater weight they take on
the index. That is, fixed income indices give preponderance to countries or companies that are worse
off, that are closer to bankruptcy. That's why we believe that only investment grade bonds make
sense, not high yield ones. In this way, if a company that issues investment quality bonds becomes
too indebted, coming close to bankruptcy, it will suffer a worsening of its rating, becoming considered
high risk (high yield), ceasing to be part of the index. and thus protecting index investors.
Fixed income is important because it is (generally) anti-correlated with stocks, and this adds
important characteristics to the portfolio (see sec. tion 6.8) . But bonds are also important because
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they allow us not to lose capital during equity crises (as we have seen in section 6.9) .
Fixed income is the stable part of the portfolio. We can accept low returns in exchange for
knowing that in the worst of a crisis it will not have lost value. Of course, an important idea is that not
just any fixed income is worth it. Let's look at some examples:
• Corporate income, for example, is relatively correlated with the value of shares, so what was
discussed above would not apply. So corporate bonds are not exactly what we are looking
for.
• International fixed income is subject to the fluctuations of the change of currency neda. This
may be acceptable because it adds diversification, but our currency may depreciate
compared to others, the ETF may drop in value, and we may lose the long-awaited stability
when we need it. If what we want is international exposure, a stock ETF is better, because it
is cheaper and gives a higher return.
• Long-term public debt (in the case of Spain, bonds and obligations). This is what we are
looking for, but due to the duration of the portfolio it can be very sensitive to changes in central bank
interest rates.
• Short-term public debt (in Spain, treasury bills). It's what we're looking for, but it's so short-
term that performance is practical. ethically null, probably negative considering the TER.
So there is no perfect solution. In general the Bogleheads community recommends a simple

aggregate of government bonds (simple and cheap; our choice), and the professionals talk about
short-term government debt (but they are less liquid, and less clear).
By the way, although we focus a lot on Europe, a Hispanic reader would act in a similar way.
Perhaps an interesting idea is that it is in your best interest to be invested in a strong currency. In
Europe the euro is easy and convenient, in the US the dollar, and for other countries you will have to
see what is more comfortable for you. In Mexico and the rest of Latin America probably the dollar. We
value any reliable currency that keeps us away from the risk of the government devaluing it.
6.11. Emotional Errors and Investment Contract Zionist

One of the basic problems when investing is being carried away by the media, feeling the urge to
buy or sell at the pace set by the news. We have already seen in this chapter that it is not reasonable
to expect to get rich by buying and selling in the short term. And much less us, not being
professionals.
We have to be strong and resist emotions. Do not sell when the media says that we are involved
in a crisis and the stock market has collapsed, because we will be selling cheap. Do not buy when
everything seems to be going well and the stock market is at its highest, because we will be buying at
a high price. You have to set a course and follow it.
The emotional mistakes we investors make are very well documented. ted by Boglehead
sCXXXIX . Here is a summary:
CXXXIXSee chapter 19 of Lindauer, Larimore and LeBoeuf, The Bogleheads' Guide to Investing .
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Overconfidence
We all believe we are very wise and that we control what we do. But it doesn't hurt to always
take a step back and be more humble. This is closely related to those surveys in which a
person is asked to compare their abilities (for example to drive a car or do simple
mathematical operations) with that of an average citizen, and most of the respondents
respond that they are above of the average, which is obviously impossible. We make buying
or selling decisions thinking that we have everything under control, but the stock market is
uncontrollable.
Loss aversion
This can cause us to sell when the value of the shares has fallen. leaded, so as not to have
even more losses. And probably the next thing that happens is that the stock goes up.
Remember that the market is im predictable.
Paralysis by analysis
The number of options available (listed companies, investment funds version) is huge, and so
are the things to keep in mind (im positions, legislation). Wanting to choose the best option
can leave us unemployed, when a simple investment may be enough. Especially considering
that the best option today may be mediocre tomorrow.
Custom
Closeness on a day-to-day basis can cause you to invest in things that do not have to be the
best. This happens, for example, if we buy a house because it is what all families do, or if we
invest in a poorly diversified index such as the IBEX 35 with other much better indices
available.
follow the majority

Acting in a group has the advantage of being able to compare with other people around you. If
the group does well, everyone is happy; If things go badly for the group, at least things go
equally bad for all of us. This thinking is common among investment fund managers, and that
is why they try so hard to follow the indices (even though they are paid not to do so). And if
they make decisions and make mistakes, they will have losses and will be reprimanded; But
as long as they closely follow their benchmark, whether rising or falling, they will keep their
job.
emotional anchoring
We can take sentimental references that prevent us from changing even when there may be
good reasons to do so. An example is owning a house after the housing bubble, in the event
that There are good reasons to sell it (for example, because you no longer want to live there).
Its value may have plummeted. Would you calculate the losses you are willing to accept? Or
would you wait for “the price to recover”, perhaps 10 years?
To avoid these problems, it is recommended to make an “Investment Contract”. nysta.” This
"contract" is nothing more than writing down the investor's ideas: what they want to achieve, how
much they want to invest, how they want to invest, how often to do it.
The goal is to set a course, force yourself to follow it, and thus avoid the risks of the emotional
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mistakes indicated above. You no longer have to make decisions on a daily basis. Having a plan,
what is appropriate is to follow it, not consider whether gold is cheap this month or whether it is
advisable to sell investments in Japan.
Write it down and if you want to give it more seriousness, sign it. In section A.3 you will find will
bring an example.
From time to time, no more frequently than once a year, you may review it. Maybe you want to
change the bond/stock percentages or something like that. And once the decision is made, follow it
and don't get carried away by feelings.
6.12. Methods to Withdraw Capital once

Financial Freedom Achieved
Once Financial Freedom has been achieved, we have to think How we are going to extract the
income from the accumulated capital. This section gives an introduction to this topic. By the way, we
emphasize that here we consider dividends and capital gains interchangeably.
CXL CXLI
This section has been prepared from the Boglehead s websites and Portfolio Charts .
They are great websites and we will never tire of recommending them. In Portfolio Charts you can
even define your portfolio and see what would have happened from the 70s to the present. Yes, they
are in English.
Suppose you have been saving for many years and fi has finally managed to reach Financial
Freedom. Let's say you invest it in a simple way (for example with passive investing). You are in
versions provide you with dividends and long-term capital gains. The question is, how exactly could
you live off that performance? What income are we talking about?
Normally it is considered that no more than 4% of the capi such accumulated total (the so-called
Safe Withdrawal Rate , as already seen in section 3.4) . The moment our expenses are 4% of our
income tera, or in other words, that we have accumulated 25 times our annual expenses, it no longer
makes sense to continue working. The wallet will never run out. Note that these are “a posteriori”
results, therefore “a portfolio with certain conditions would not have been depleted based on the
behavior of the stock market over the last 40 or 100 years.”
This “4% SWR” is a very simple rule and can be further detailed. There are multiple ways to
extract money once you are living off what you have. muled Reality will always be more complex than
what we explain here, on the one hand because we surely have additional income (for example, a
retirement pension), or perhaps just the opposite (extra health expenses due to poor health). And
whatever the case, you have to take into account the management costs and taxes.
The following forms can serve as an initial guide.
CXLSee Bogleheads: Safe withdrawal rates

CXLIView Portfolio Charts : retirement spending methodology
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6.12.1. Extract “the inverse of the number of years we have left”
This method consists of spending our capital little by little, a proportional part each year, until at
a given date there is nothing left.
For example, if we are 60 years old and we estimate that we will live until we are 90, then we
have to spend what we have saved for 30 years. So each year we will extract 1/30 of the initial
capital. If we have today, at 60 years old, 300,000 euros, then each year we will extract 10,000 euros.
Note that the amount is adjusted each year, so that when 20 years have passed, and there are
then 10 years left until the deadline, then we will withdraw 1/10 of the remaining capital. A relatively
large proportion.
This approach has several dark points. Firstly, because by spending everything on a given date,
which could be dangerous if we were in exceptionally good health and were left with an empty bag
and many years ahead of us. On the other hand, the value of the investment is expected to continue
to grow (unless the investment consists of short-term government bonds). And if the investment
continues to grow, this implies that we are going to spend a lot in the end compared to what we start
spending at the beginning.
6.12.2. Extract at ”constant purchasing capacity”
The first year the amount to be extracted is decided, and from then on it is maintained forever. It
is simply adjusted for inflation each year, because the objective is for the purchasing capacity to be
constant. That in the future we will be able to pay for the same goods and services that we could pay
for in the first year. This amount is independent of the value that the portfolio will take in the future.
For example, if you accumulate 300,000 euros and choose a 4% SWR, the first year you will
withdraw 12,000 euros. The second year the corresponding inflation will apply. If it has been, for
example, 2%, then that second year you will extract 12,240 euros. And so on for successive years,
regardless of the value of the portfolio, regardless of whether its value rises or falls.
This is the usual method used in most studies. Therefore, in the absence of any other indication,
SWR refers to this method.
6.12.3. Extract a ”constant percentage of the portfolio”

The SWR is chosen and applied each year, depending on the value of the portfolio. In this way,
we will extract an amount that will fluctuate up or down depending on the evolution of the markets.
This method has a curious effect, and that is that mathematically it never runs out. If the value of
the portfolio falls a lot, very little will also be extracted. This is very secure, but in exchange for this
security you have to be able to greatly cut costs, if necessary. This is mathematically simple, but may
be impossible in real life.
For example, if you have a portfolio of 300,000 euros, and you decide to withdraw 4% each year,
you will withdraw 12,000 euros in the first year. Ok, up to this point, it is as in the previous case. If in
the second year the value of the portfolio rises to 350,000 euros, then you will withdraw 14,000 euros.
But if the next year the value drops to 200,000 euros, then you will have to withdraw only 8,000 euros
that year. See the volatility of the stock market directly in your pocket.
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6.12.4. Combined method

In this case, we act differently depending on whether the value of the portfolio rises or falls from
one year to the next.
The first year we assume a given SWR. Whatever it is, for example 4%. In subsequent years:
• If the portfolio has decreased in value, we maintain the previous year's spending, as in the
case of "constant purchasing capacity."
Figure 6.9: Example of expenditure evolution according to the combined method. Notice how
spending grows as the stock market goes up, and when the stock market goes down spending stays
constant.
• If the portfolio has increased in value, we recalculate the 4% SWR, as in the case of ”constant
portfolio percentage”.
In practice, what we do is recalculate 4% SWR for each good year, maintaining it in the bad
years. What can be seen in the graphs is that spending increases in good years (ascending curves),
and then remains at that maximum level in bad years (horizontal lines). See figure 6.9 as an example.
Go to the website to do tests yourself and see the evolution of the total capital (which, by the way,
does not change much compared to the usual method "at constant purchasing capacity", reason: the
main factor is if the year after starting a global crisis).
For example, you have a portfolio of 300,000 euros and the first year you withdraw 4%, 12,000
euros. If in the second year the value of the portfolio rises to 350,000 euros, you will withdraw 4%,
14,000 euros. This amount can no longer go down. If the stock market falls the following year, say to
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200,000 euros, you would continue to withdraw 4% of the maximum (corrected for inflation), which in
this case corresponds to the previous year, 14,000 euros.
6.12.5. Variable Percentage Withdrawal

This is a relatively complex method proposed by Bogleheads community member Longinvest.
The objective is to maximize the amount that can be withdrawn annually, with the condition that the
capital has to last exactly a certain number of years, which is the life expectancy of the investor. After
the death of the investor, there will be no invested capital left. In this way the investor will have
maximized the use of capital. This is achieved by taking into account the years remaining, the asset
classes, and the expected return on investments. See the Bogleheads thread about it orCXLII .
CXLIIhttps://www.bogleheads.org/forum/viewtopic.php?t=120430
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Chapter
Crisis
Buy only what you would like to own if the markets closed for 10 years.
Warren Buffett
The topic of how to deal with a crisis is so important that it deserves an entire chapter.
Until now we have shown that on average you can live on income, live on the profits generated
by investments. But averages are a way of understanding the system mathematically, a way of
solving the system that will be valid for most cases and in the long term. However, this is not enough,
we want maximum assurance that everything will go well.
Furthermore, it is a fact that there are periodic crises, perhaps more than ever because in this
globalized world we are all connected to each other, for better and for worse. Crises are not going to
disappear, and what we have to do is size our investments so that we can protect ourselves when
things go wrong (which they will, for sure).
If you have come here thinking about finding the Holy Grail that will allow you will be able to
resist any crisis, don't be fooled, it doesn't exist. Losses can be minimized, but not avoided. There are
going to be seasons in which what you invested is worth less than what you paid, that's how it is.
Since our interest is in the long term, realize that you are going to go through many crises, every
few years. Look back at the crises of the past and be aware of them. Look for example at the “Lost
Decade” in section 6.9 , or a video by Mike and Lauren that gives a good overview of the
problem.CXLIII .
To get an idea of the losses you will have, you can look at the expected annual volatilities in
your investments, which for large indices is usually in the order of 10% or 20% (see Table 4.3 for
CXLIIIMike and Lauren, Introduction to the Stock Series with Jim Collins
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example). So put yourself in a situation, and imagine that in a normal year the value can rise or fall
(which is what interests us now) by 10% or 20%. And now think that you have 100,000 or 1 million
euros and that you lose that amount. The years of work that this entails. If this worries you, stop
reading, close this book, and go about your business. No problem. If you believe that in this
environment of uncertainty you can move forward towards Financial Freedom, congratulations, we
will meet you there.
7.1. When Will the Next Crisis Come?

The idea of crisis gives rise to thinking about something exceptional, an unexpected
catastrophe, something improbable and inevitable. But it is not like that, there are crises with
continuously. Major or minor, but in a globalized world there is always a crisis somewhere. Even if
there is “nominally” no crisis, pre Look around you and you will see that everyone has the “feeling” of
being in a crisis.
Let's go back to the last 30 years. Has there been any crisis of global resonance?
• The crash of 1987, with the so-called Black Monday , the worst drop in the history of the
American stock market (the DJIA fell 22.6 % in one day).
• Japan's housing crisis of the late 80s (and they still haven't recovered).
• The international crisis in the early 90s, and especially in the United Kingdom and Italy
(removing their currencies from the European Monetary System) and the successive
devaluations of the peseta.
• The Mexican economic crisis of 1994 and its “Tequila Effect”.
• The Asian financial crisis of 1997, when the Asian Tigers fell cos.”
• The Russian debt crisis of 1998, where the ruble was devalued and the government stopped
paying its creditors.
• The Argentine debt crisis of 1998 and its subsequent corralito.
• The dotcom crisis in the year 2000 and following.
• The great international financial crisis of 2008.
• The Greek debt crisis and its first bailout in 2009.
• The European debt crisis, especially the Greek one and its second bailout in 2012.
• The Russian financial crisis of 2014, along with the war in Ukraine.
• The Greek debt crisis and its third bailout in 2015.
• The Chinese stock market crisis of 2015.
About 14 relevant crises in 30 years, more or less one every two years. What can you think of?
When will the next one arrive? How many crises are you going to experience in your life?
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And we can go back further in time. It is estimated that until the end of the Middle Ages there
were about 25 famines per century. Now those were crises!
So relax and take it easy. Despite all these crises, stock markets have always recovered and
improved past prices.
In fact, in retrospect, if you could travel back in time, wouldn't you go back in time and invest in
those failing economies? At the end of the day we know after the fact that they will recover. The crisis
is the perfect time to buy cheap, but you only know that after the crisis has passed, not during.
Recession vs Depression
They are two related terms. Both terms indicate an eco crisis nomic, with the depression being
more pronounced than the recession.
There is a joke among economists that a recession is when When your neighbor loses his job,
depression is when you lose your job. There are several ways to define a recession. A quick and
simple definition is often used, which is to consider a recession as two consecutive quarters in
which real GDP (adjusted for inflation) has fallen. Finally, a severe (GDP falls by 10%) or
prolonged (3 or 4 years) economic recession is called depression.
7.2. Ideas to Protect Us from Crises

There are several comments that can be made about how to survive the different crises that
arise:
• Absolute security cannot be achieved. It can be argued that the system could withstand the
worst known case, made worse with a certain margin of safety. But a Black Swan could
always happen, as in the case of Japan's Fukushima nuclear power plant accident in 2011,
where the second largest earthquake known in human history was followed by a tsunami
wave about 4 stories high. height Could the plant have been designed to hold up? And in the
same way, can one protect oneself from the crisis of 1929 or that of 2008? One must do
everything possible to protect oneself, but it will hardly be perfect. And that is why they are
global crises, because no one saw them coming or could protect themselves.
• Diversification, don't put all your eggs in one basket. Whether through ETFs that are highly
diversified, for example following the MSCI World, buying stocks and bonds, and for example
owning owner of an apartment and renting it. This allows you not to depend on a single
source of income.
• In the long term, in the wealth extraction phase, most of the fund should be in relatively safe
investments. For example in state bonds. Today it is no longer clear that states are
bankruptcy-free, but among what there is to choose from, they are still some of the most
reliable available.
• Be able to minimize expenses during the time the crisis lasts. This is important not only
because it allows you to redeem less capital from the fund, but also because in a crisis the
value of the shares plummets, and possibly we could find ourselves selling at very low prices.
In any case, this idea of being able to adjust expenses depends a lot on the person, their
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medical problems, children, etc.
• If things get really bad, you can always go back to work. jar to have additional income. But the
reader notices the subtle difference between having spent years of freedom and returning to
work to complement lower income, compared to another person who has simply spent his
entire life working. It is better to have tried and perhaps fail, than not to try in case you fail.
You choose.
• We have done the accounts with long-term average values. Therefore, the estimated returns
already take into account, for example, the Greek debt crisis of 2011, the global crisis of 2008,
the dotcom and Argentine crisis of 2000, the Russian crisis of 1998, the Asian crisis of 1997,
etc etc. The crises are already taken into account. Including additional considerations in the
calculation is a positive thing to add security, but note that it somewhat involves considering
crises twice.
• Spread the investment over periods of time (this is called Cost Averaging ) to avoid extremes.
Thus we average purchases over long periods of time, and the price we pay for the shares is
an average that is neither very expensive nor very cheap.
• The fact that the stock market goes down is not a negative thing, it is an opportunity to buy
cheap orCXLIV . If we had bought shares during the time when the stock market was at its
lowest, those shares would have cost us relatively cheap. Later we know that they have been
revalued zated. Note that if you are going to buy those stocks anyway, what better time than
when they are cheap? Those stocks have been worth more in the past, so they can be
expected to recover in the long term, so it's perfect. It's not a problem, it's rather a blessing!
• During major crises, there are stages of deflation and price declines. This was the case during
the crisis of 1929 and that of 2008. This is a small effect, true, but it is in our favor. This allows
us a slight respite, because with the same amount of currency we can buy more goods and
services. And this help comes to us during a crisis, when we need it most. Isn't it a dream
come true?
• One might worry about periods of hyperinflation, where prices rise uncontrollably. This
happened in Germany in the 1920s, Hungary after World War II, or Zimbabwe in 2008. In
these countries, at the worst of the crisis, the price of goods doubled in 1–3 days. How can we
protect ourselves from hyperinflation? Well, on the one hand, buying international goods that
do not depend on the local currency. On the other hand, buying a security like gold or its
modern equivalent, Bitcoin (this is Harry Browne's Permanent Wallet, shown on page 208) .
• It is true that the value of shares on the stock market plummets in the event of a crisis, and that
is a problem. But that's not the point. You really have to ask yourself if there is another better
option. The stock market is not an isolated element of the country's economy. If there is a
global crisis, global stock markets will surely suffer, true, but unemployment will also rise,
public pensions will worsen, and house prices will fall. Everything will be bad, and it is not clear
CXLIVRead for example Graham, The Intel ligent Investor .
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that stocks will perform worse. Therefore stocks are a reasonable way to save.
• Something that makes crises worse is that the information we receive is always pessimistic,
and we must be calm and stay the course. When the 2008 crisis hit, the nadir came in early
2009, when many indices fell to half their previous peak. That's bad. But it's worse that the
media assumed that they were going to continue falling, which was an even bigger disaster. At
that moment the easiest thing is to throw in the towel and sell at a loss. However, look where
we are now. There are always those who will say that they “saw the crisis coming,” but keep in
mind that countless investment professionals give recommendations every day. Someone will
have to get it right. It's like playing the lottery, there is always someone who gets the number
right, but not because they know more than the others but by chance. Don't lose your head, be
calm, keep going.
• And finally, perhaps what needs to be done is to turn the question around. It is not about
seeing what to do to avoid crises, but about what to do to avoid making mistakes. The IBEX 35
was created in 1989 with a base value of 3,000 and at the beginning of 2017 it is worth about
10,000 points, more than triple that. The strange thing should be finding someone who has lost
money in these 28 years. Don't worry about how to earn more, when to buy and sell, but rather
what to do to avoid losing the performance of the IBEX 35, and that is independent of crises.
Epilogue
This book is finished and in it we have discussed a lot of what we have learned over the last few
years. We hope that the reader takes advantage of it and takes advantage of it. May you go with
energy, with good spirits, because it takes a lot of strength to continue along this path of Financial
Freedom. Remember that effort pays off in the end.
Perhaps it is worth noting that buying shares is only possible in “rich” countries where there is
legal certainty and long-term plans can be made. We believe that although at first this book may
seem distant to people living in developing countries, in reality it is not. The world is changing very
quickly, and by the time this book is read, the cost of buying and selling stocks or funds will have
fallen even further. Being cheaper, easier, and safer, what this book exposes can only extend
throughout the planet.
The reader may have other ideas. It may be that instead of buying ETFs you decide to buy
conventional investment funds, stocks that provide dividends, houses to rent, crowdsourcing or any
other form of passive income that arises. Search, compare, and if you find something better, go for it.
The reader will do well to make the best of his surroundings. We have chosen ETFs, but for you there
may be better things.
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It would also be good if this book served as a guide to introduce certain economic criteria into
our lives. Consider the price of things, the time you spend on different activities, what other things
you could have chosen. It is something that we did not consider when we started, and now these
concepts help us make decisions, we are aware of them and we use them.
Finally, this book is also the result of do it yourself or do it yourself . The technological revolution
has brought with it another revolution, that of handing power to the citizen. Power to learn, know,
travel, act on the environment. Take advantage of it, because no one is going to do it for you.
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Thanks
This book has been the result of the continued efforts of Will and Fog du for a couple of years.
We would like to thank several people and institutions that, perhaps without knowing it, have
contributed to this book coming to light.
Firstly to Bogleheads , Jacob Lund Fisker and Mr. Money Mustache , because they lit the spark
that started it all.
To the Juan de Mariana Institute for having given us a vision of the world when we noticed that
something was missing and we didn't know what it was. And those who stopped by to give one of the
Saturday talks served as inspiration for this work.
To the Kantian Funanbulist, for having been the first reader, and having contributed so much to
the book from a spiritual plane.
To Álvaro the Japanese, because he has given us a vision of the world that has naturally led us
to Financial Freedom.
To Roberto the landowner, for showing us how passive income is implemented in real life.
Palpable example that this is possible.
To Martín Huete, the forum members of the passive management thread on the Rankia
website , the bloggers looking for passive income, The Voluntary Life podcast; who with their ideas
made us think that what we have done and described is possible.
To Linux, LaTeX , the Free Software Foundation , for having given so much in exchange for so
little. This book has been possible thanks to them.
To our parents, whom we love very much, who have unintentionally taught us what bad
investments are.
To those who have read the book, they have found traps, and they have let us know. Thank you
Luis Alberto.
And to all those in our lives who told us that “you won't be able to do that”, they gave us the
strength to get up in the morning and keep going day after day.
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Appendix
Recipe book
This appendix shows different lists of steps to follow when purchasing ETFs. They are only
142
recommendations that have been useful to us, modify them to your liking .
A.1. Steps to follow

The following are the tasks that we are carrying out to achieve guide Financial Freedom. You
have to carry out some periodic tasks and other specific ones.
•
Once at the beginning, when starting this path to Financial Freedom.
•
Choose the online broker (see section A.2) .
•
Prepare an “Investor Contract” where you make clear what your intentions are (see
section A.3) . You don't have to write it, you just have to be able to argue it. Here you
can explain the exchange you want to trade on (see section A.4) , the index you want
to follow (see section A.5) , the particular ETF that tracks the desired index (see
section A.6) , make sure who understands the information available (see section A.7) .
•
Every quarter buy shares. By accumulating each quarter I got We can reduce the cost of the
purchase, because the brokers have a cost
•
More general information in CNMV, Exchange Traded Funds (ETF) . minimum which is usually 10 euros,
42
regardless of what is purchased. That is why it is advisable to save for 3 months (for example about
330 euros/month) and invest about 1000 euros in one go. The broker's cost can be equivalent to 1%
of the investment, an acceptable amount. See how to make the purchase in section A.8 . When
buying you should try to maintain a balance between different ETFs, developed and developing
countries, stocks and bonds (see portfolio examples in section 6.4) .
• Periodically, for example once a month, it is advisable to log into the online broker's account
and check that everything is going well. There are no surprises. For example, there has been
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no ETF liquidation, and whose share value would therefore not be updated. For this, it is good
to set an alert on your mobile phone once a month. And perhaps print a summary of the
status as provided by the broker.
• If necessary, at the end of the year you can buy or sell any of your assets. The goal is to
offset gains or losses to minimize zar your personal income tax payment. The so-called tax
harvesting in English. We have never needed it.
Most of the tasks are supervisory. The idea is that this I want minimal effort, nothing more than
making a periodic transfer and checking from time to time that everything is going well.
What Shares to Sell?
Imagine that you have been buying stocks every month during you the last few years. At a given
moment they consider selling some of them, but which ones? The ones you want? This is
important, because depending on which shares we choose, this is how their price will be, and
therefore the ga finances or losses. Spanish legislation is clear and strict, the FIFO ( First In First
Out ) method is used, in which the first shares to be purchased will be the first to be sold. So
there's nothing to choose from, just keep track of what you bought, when and at what price.
recommendations
Once again, please be very careful. Here is a small list of precautions that have been useful to
us, it never hurts to review it again.
• Don't invest in anything you don't understand. We propose the simplest ETFs precisely
to avoid problems. If you don't understand, please don't buy.
• Contrast the information. Remember that companies finance They generate enormous
amounts of money... and they have the greatest interest in keeping it for themselves. If
you are not sure, please do not buy.
• Only invest money you don't need. If you think you can ne It won't take long, don't get
involved.
• As a corollary to the above: do not invest on credit (also called leverage). There are
those who propose that if you are sure of yourself, invest on credit, and thus you will
multiply your profits. Don't forget that you will also multiply your losses, potentially losing
even more than what you invested. Do some math and you'll see that he's not interested.
• Don't think about what you could gain, but what you could lose. Because for long periods
of time you will lose money, for sure. And if you can't accept a crisis, don't invest.
• Calculate expenses in advance, before doing anything. Don't let the bill catch you by
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surprise.
A.2. How to Choose an Online Broker?

This section presents a list of ideas that should be taken into account when choosing a broker
with which we are going to operate on the stock market.
This is a task that in principle is only done once, at the beginning. Or at least very occasionally.
What will be done is create a bank account, with its own IBAN, from where the purchase and
sale operations will be carried out. This account can receive and send money either through a single
authorized account, or accounts that are in our name (to avoid money laundering). of third parties).
• First of all, we must not forget that we have to select a company that we trust, that is not a
financial bank. The CNMV gives some ideas about this in a guide they have prepared .CXLV .
• Online brokers are much better instead of traditional banks. You have to pay for branches,
and that makes them more expensive even when providing the same service. In any case, a
conventional bench can be used to start, to practice and feel comfortable at first.
• Opening accounts is basically free, so you can always try a broker or a conventional bank. If
you want to change, there is no problem with later transferring the shares to another definitive
account.
• A first place to look could be the Bolsas y Merca website. dos Españoles (BME), where you
can find the companies that are authorized intermediaries with respect to
ETFsCXLVICXLVIICXLVIIICXLIX . They are well-known and reputable companies. There are

many others, but these are good to start with.
• On the other hand, there is a lot of information on the internet. A quick search It shows
145 146 147
countless web pages where comparisons have been made s or in JustETF.
• There are brokers that can provide the service in English, in case you travel abroad (for
example Saxo Bank and Interactive Brokers). Saxo Bank manages everything from Denmark,
and then offers service in any language.
• The brokers themselves usually have specific websites about ETFs, where they show the
peculiarities of both the product and what they offer.
• Several brokers have simulators to practice before opening an account (for example Saxo
Bank and Renta 4).
CXLVCNMV, Investment Services Companies .

CXLVISpanish Stock Exchanges and Markets, ETF Intermediaries .
CXLVIIV Argas, Cheapest Broker to operate shares in Spain 2016
CXLVIIIRankia, Broker Comparator
CXLIXThe International Investor, International stockbroker directory and comparison tables
to
CNMV, Your rights as an investor
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• Some companies subcontract to others (for example the ING service is actually provided by
Renta 4).
• Some brokers offer many more products and services than they need. we need, which can be
complex for a beginner user. For example, Saxo Bank focuses a lot on CFDs ( Contract For
Difference ) and other financial derivatives.
• Some brokers provide multiple information materials (websites, videos deos) about its use
(see for example Saxo Bank and Renta 4).
• The typical expenses are usually those for the purchase and sale of shares (whether national
or international, typically 0.10 % - 0.25 % of the value of the operation, with minimums of
about 10 euros per operation), custody commission (which usually does not applies if a
transaction is carried out from time to time), currency exchange commission (which can be
avoided by always buying ETFs in euros but that operate in other currencies, in other words,
the currency exchange is paid by the ETF internally), and transfer of the shares to another
entity (something that we do not have to need).
• Be careful, if we are not residents in Spain we must indicate it (that is, open an account for
non-residents ).
• The entity has the duty to identify what type of user we are, whether professional clients or a
retail client. For this he will make us pre questions and it will ask us to define ourselves
explicitly, either once at the beginning, or every time we access the web page. This is due to
the European MiFID directive (see text box).
MiFID
MiFID ( Markets in Financial Instruments Directive ) is a European directive that seeks to protect
small investors, preventing them from contracting a product that carries excessive risks.
Currently te (MiFID I regulations) all UCITS funds (all ETFs) are considered non-complex. But
this will change with the new MiFID II directive, which has been ratified by the European Union in
April 2014, and will be implemented by countries from 2016. Under MiFID II, synthetic ETFs are
considered complex products. For more information, see the CNM guide V a .
In short, one can start with a broker that is close and trustworthy, for example our usual bank. In
the future, if one wants to change, the values can be transferred to another broker.
A.3. Example of Investor Contract

If you write down your objectives and how you are going to achieve them, you will be clarifying
your ideas and avoiding complications due to emotional errors. This is one of the main risks for a
small investor, which would lead us to follow the news and the consensus, buying high and selling
low. See section 6.11 for more details.
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CL
We show here a document that has been helpful to us . Take this as an example and modify it
to your liking.
Note that this document makes things very clear, to avoid having to think and make decisions.
Decisions are made once a year and then followed month by month. Of course, if there were a cause
of force majeure, this contract would cease to make sense, but it has served to guide us when we
have had doubts.
A more elaborate Spanish version is shown on the Rankia website “Compilation with the best of
passive management”. In it the author details his objectives and the way to achieve them. Everything
is very well defined, to avoid making “hot” decisions. Highly recommended.
Investor Contract
Investment philosophy We are a couple who in 2016 are in the savings phase.
How much to invest We are going to save a third of our net income. At the moment our joint
income is 3000 euros per month, so we will invest 1000 euros per month.
When to invest Together we will invest every month, but instead of each of us investing 500
euros in our account every month, we will wait two months. That is, one month one of us will
invest 1000 euros, and the following month the other.
What to invest in Since we are young and in the aho phase rro, we can accept volatility in
investments in exchange for higher expected returns in the long term. Which leads us to invest
mostly in stocks. We also minimize government bonds because they provide a very low yield.
Therefore, we decided to invest 80% in an ETF that tracks a global index from around the world
and 20% in European government bonds. Similar to the “two simple funds” portfolio (see section
6.4) .
In the long term we will increase the percentage in bonds by 1% annually. We will buy ETFs that
distribute dividends, not accumulation ones. They are less tax efficient, but they are easier in
case of changing residence and paying taxes in other countries.
Rebalancing At the time of making the monthly purchase, I will calculate We will set the
percentages, and we will buy the corresponding ETF (stock or bond) to keep the percentages as
close to 80%/20% as possible. To minimize costs, we will only make one purchase per month.
Additional income Any additional income, increase in sa salary, dividends, extra pay or return
of income, will be invested following these rules (unless justified cause).
Review of this contract This investment contract will be reviewed once a year, at Christmas.
CLSee chapter 9 of Larimore et al., The Bogleheads' Guide to Retirement Planning .
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A.4. How
Pos. to Choose
Stock market which Stock Market
Economy to Trade?City Capitaliza
Campus [1000MS
Depending
1 on which
New Yorkcountry we live in, the natural choice
Stock Exchange USA would be to chooseNew
the York
local stock 19 1
exchange. For
2 example,
Nasdaq if we live in Spain, the first option USA
is the Spanish stock market.
NewThis
Yorkmakes 66
3
everything easier,Japan
due toExchange Group taxes and proximityJapan
the language, Tokyo there are
in case of problems. However, 46
many more4options.
Euronext Fr. Hello. Belg. Port.
the 21 most importantamsterdam 38
See for example table A.1, which shows markets in the
5 London Stock Exchange Group United Kingdom and Italy London 33
world.
6 Hong Kong Stock Exchange Hong Kong Hong Kong 30
Capitalization
7 is a measure
Shanghai of the value of companies,
Stock Exchange Chinathe result of multiplying the value of
Shanghai 24
8 number
shares by the Toronto Stock shares.
of those Exchange Canada toronto 23
9 Deutsche Boerse (Xetra) Germany Frankfurt 19
Volume is a measure of economic activity, that of the value of sales made during a given period
10 SIX Swiss Exchange Swiss Zurich 16
(one year in11the case of table
Shenzhen A.1)Exchange
Stock . As a curiosity, note that some stock exchanges are
China more active
Shenzhen 15
than others,12so that the Hong
National StockKong stockofmarket
Exchange India barely moves
India a third of its value during
mumbaithe year, 14
while NASDAQ13 has Bombay Stock greater
a volume Exchange India
than its capitalization (its shares are bought mumbai
and sold more 14
14 Australian Securities Exchange Australia sydney 14
once a year).
15 Korean Exchange South Korea Seoul 13
• We 16 have BME
to choose
Spanisha Exchanges
stable country,
(BME)with a tradition
Spainof protecting propertyMadrid
privacy, which 12
17 us peace
gives BM&F of Bovespa
mind in the long term. An emerging Brazilcountry may be politically
Sao Paulo
unstable or 11
18 JSE Limited South Africa Johannesburg 10
establish regulations by surprise that prevent us from operating.
19 Taiwan Stock Exchange Taiwan Taipei 8
• In principle
20 we will Exchange
Singapore prefer to invest in a large stock market rather than a Singapore
Singapore small one. The 8
21 market
Madrid Moscow Exchange
is number 16 in the world according Russia
to capitalization. We couldMoscow
in principle opt 7
for others.
Table For21
Al: The example For example,
main stock markets inwithin the European
the world, orderedUnion the difficulties
according in moving
to their capitalization as of Jun
capital are minimal,
summaries so we
of the World could choose
Federation either Euronext, the London Stock Exchange or
of Exchanges.
Deutsche Boerse. If we buy in a bag with little money As a result, we could send buy and sell
orders larger than those usual in the market, so we could have liquidity problems (see
example shown in figures A.1 and A.2) .
• Information available. We hope the bag provides a lot of information. training on the values
offered therein, especially through a website. Examples would be BME (Spanish Stock
Exchanges and Markets les), Euronext or Xetra . In general the information they provide is
similar, but some may provide more information. Xetra for example pro provides the iNAV (
Indicative Net Asset Value , a measure of the value of the underlying shares of the ETF,
149
which ideally has to be very close equal to the value of the ETF) and the Xetra Liquidity
150
Measur e (a measure of the cost of a buying and selling cycle of the same stock).
149
Investopedia, Indicative Net Asset Value .
150
Boerse Frankfurt, Xetra Liquidity Measure
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Figure A.1: Screenshot of the db x-trackers Euro STOXX 50 UCITS ETF (DR), offered on the
Frankfurt Stock Exchange. That day there were 78 ope rations, with 202,638 shares sold, with a
volume ( turnover ) of about 6 million euros.
Figure A.2: Screenshot of db x-trackers Euro STOXX 50 UCITS ETF (DR) - the same ETF in the
image above -, offered on OMX (Stockholm Stock Exchange), and on the same day. There has only
been one purchase and sale of 407 shares, worth 151,811 SEK, which at about 9 SEK per euro, is
equivalent to 16,000 euros. In short, on OMX there is almost 400 times less volume than on Xetra, so
we as individual investors, by buying and selling, would move the value significantly.
•
The currency in circulation, which in our case will be the euro. The United Kingdom uses the
pound as its currency, but the London Stock Exchange nevertheless Dres accepts euros on
many of its products (this is indicated). London is said to be the largest euro market in the
world... outside the euro zone.
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•
The cost of operating on the stock market. Each online bank/broker has prices to operate
depending on the market. Normally the country where the bank/ online broker is located will
be cheaper, and thanks to the euro zone all European stock exchanges cost the same.
•
Taxes. Each country can impose specific taxes on goods. stock market sales. For example, in
London there is Stamp Duty , which involves paying 0.5 % of the value of the shares when
purchasing rCLI , although fortunately this does not apply to the ETFs offered thereCLII . On
Go There is also a 1% Stamp Duty tax on the purchase of local shares .CLIII (which also does
not apply to ETFs domiciled in Ireland). There is the possibility that the so-called Tobin Tax
will be implemented in the European Union (see text box on page 255) . In this case, the
British government has already said that it is not going to implement it, so if something like
this ends up being imposed in continental Europe, the London stock market in euros will be
very attractive.
Tobin Rate
The Tobin Tax was suggested by the Nobel Prize in Economics James Tobin, originally
intended for the currency market. sas, to avoid short-term speculative operations (for
example, having euros buy dollars, and then sell them again in exchange for euros, in the
hope of profiting by closing the cycle). Over time, this currency tax has led to a more
general tax dedicated to financial transactions (for example, buying and selling of
shares). In fact, at the end of his life James Tobin himself distanced himself from this
evolution.
There is debate about whether a Tobin Tax (of the order of 0.5 % or less) nor) would
achieve what it proposes, and in this sense the case of Sweden is paradigmatic. It was
implemented there in the mid-80s, and then eliminated in the early 90s.
•
When buying and selling, it is important to look at the stock market hours. Prices are most
liquid mid-session, and that is where we want to operate. If we send an order during the hours
when the stock market is closed, the operation will be carried out by the matching algorithm
when the stock market opens the next morning. This is not a problem, but we run the risk of
moving away from the previous day's closing price because there are not enough agents in
the market. Therefore, always better in the middle of the day.
•
Large, international ETF managers (iShares, db x-trackers, Vanguard, etc.) offer their ETFs
on multiple exchanges. Others, such as the case of BBVA's IBEX 35, are only offered in BME.
In summary, for a Spanish investor it is very easy to operate in the stock market. handkerchief
154
Much specific information is available . The large European stock exchanges are also an option,
perhaps even better because they have a greater range. ity of funds and liquidity than the Spanish
one. More distant exchanges, such as those in the United States, can be problematic both due to
CLI GOV.UK, Tax when you buy shares .

CLIILondon Stock Exchange, What Are ETFs
CLIIIIrish Tax and Customs, Stocks and Marketable Securities .
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currency exchange and taxes.
TO 5. How to Choose an Index to Follow?

There are countless indexes, and the best places to find out about them is on the providers' own
websites. Of them the most famous acids are:
•
FTSE ( Financial Times Stock Exchange ) For internal equities tional. Those used by the
Vanguard fund manager.
•
MSCI ( Morgan Stanley Capital International ). For variable income international.
•
S&P Dow Jones ( Standard & Poor's Dow Jones ) Well known in the US because it provides,
among many others, the S&P 500 indices (the 500 largest American companies) and the Dow
Jones Industrial Average (the 30 largest American industrial companies).
•
STOXX Based in Zürich, Switzerland. Its European indices STOXX Europe 600 and Euro
STOXX 50 are widely used.
•
Barclays For fixed income.
• 54
Spanish Stock Exchanges and Markets, ETFs Listed on the Spanish Stock Exchange .
• Markit For fixed income.
But although there is a lot to choose from, not everything works. We have to discard all the ETFs
that do not suit us, which are the majority. We want an index that meets the following conditions:
• An index from which it is easy to obtain information. For example, let it appear in the
newspapers and on television.
• An index that is passive, requiring minimal intervention on the part of the manager. The
manager only has to buy shares and hold them, it is not an active ETF. In this way we will be
able to reduce costs.
• An index to invest in the long term waiting for the stock market to go up ( long ), and not in the
short term waiting for the stock market to go down ( short ). This means you don't have to be
worried day after day about the evolution of the stock market.
• An unleveraged index. That is, do not buy shares on credit. These indices are usually
represented with multipliers (for example x2 and x3), and can be long or short . What they do
is buy financial derivatives to amplify variations. They are products with a lot of risk and
therefore we are not interested.
• An index that has great diversification. In principle, the more companies that are part of the
index, the better. A few dozen assets are fine, several thousand much better. The IBEX 35 is
good, but the S&P 500 or the STOXX Europe 600 are better.
• A stock or bond index, depending on what we want (see example portfolios in section 6.4) .
• An index that follows a country or region that we can trust with our money and have long-term
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hopes for. This is seen a lot with the so-called emerging markets, or better yet with the
extreme frontier markets. Do you trust that Argentina will not go bankrupt again in the coming
years? Would you invest in the Middle East countries?
• Of the indices with similar objectives, it is better to choose the simplest one. To follow the
Spanish economy there are two main indices, the IBEX 35 and the MSCI Spain.CLIV .
However, we can dismiss this second one because it is a minority (although it also has
several positive characteristics).
If you live in Spain you may find it easy to get started with the IBEX 35. It is easy to obtain
information about both the index and the companies that are part of the index, it is passive, with
reasonable long-term expectations. It has the problem of not being very diversified, because 35
companies from a single country is not enough, but it is worth a start. As soon as you feel confident,
you can move on to better indices, such as the STOXX Europe 600, the famous S&P 500 or the
MSCI World.
A.6. How to Choose an ETF that Tracks an Index

Certain?
Once we have decided which index to follow (see section A.5) , we need to choose the ETFs
themselves.
In this case we are going to choose an ETF that follows the IBEX 35 in Spanish Stock
Exchanges and Markets.
Figure A.3: The 4 ETFs that currently follow the IBEX 35 index in BME.
The screenshot of the Madrid Stock Exchange (see figure A.3) shows the ETFs available there
that track the IBEX 35.
The 4 ETFs are similar and surely any one would work for us, but it is Let's choose which one
interests us most. There are those who have published comparisons on the internet to decide which
ETF to choose .CLV .

ETF Structure: Physical or Synthetic The addition “DR” in the name of the ETFs emphasizes that
CLIVMSCI, MSCI Spain Index .

CLVSqueeze The Market, ETF's that replicate the IBEX35 .
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they are Direct Replication , physical, unlike synthetic ones. Perfect, physical ETFs are what we are
looking for.
The IBEX 35 Share ETF , provided by BBVA, does not explicitly say mind that it is physical. And
its brochureCLVI explains that instead of buying the shares that are part of the IBEX 35, the fund
managers will be able invest significant fractions of assets in deposits, other investment funds, public
bonds, financial derivatives, currencies... a full-fledged synthetic ETF. Come on, a gem. It is a risky
investment and certainly not recommended.
Dividends: Accumulation or Distribution To begin with, the difference between the db x-trackers
CLVII CLVIIICLIXCLX
1C and the db x-trackers 1 D Deutsche Bank focuses on whether or not the ETF
pays dividends. 1C refers to Capitalization (accumulates dividends), and 1D refers to Distribution
(distributes dividends from IBEX 35 companies among the owners of the ETF). But both are the
16 0161
same, with the same managers (see the explanatory brochures of both funds s ).
In addition, both IBEX 35 Action of BBV ACLXI

and the Lyxo r
CLXII
they also distribute well
dividends. db x-trackers 1C is the only one that accumulates dividends, which is exactly what we
want, to delay the payment of taxes.
As a curiosity, distribution ETFs follow their index in a very direct way, very easy to appreciate.
There is a multiplier that relates the value of the index and that of the ETF. For example, on the day
Figure A.3 was taken, the IBEX 35 was worth about 8,700 euros. The multiplier of the distribution
ETFs shown there is 100 for the IBEX 35 Action ETF (and therefore worth 8,703 euros), 50 for the db
x-trackers 1D (worth 19,23 euros), and 10 for the Lyxor (value 85 , 46 euros). On the other hand,
accumulation ETFs are more complex, because by including dividends their value grows with respect
to the price index.
TER Action IBEX 35 is more expensive than the other two, with a TER of 0.38 % compared to 0.30
%. The difference seems small, but it is almost 1/3 more than 0.30 %.
It is certainly a surprise that the IBEX 35 Action is the most expensive, because synthetic ETFs
are usually cheaper than physical ones, as they have more freedom of action on the part of the
manager. For example, at the time the Euro~STOXX~50 db x-trackers had a TER of 0.00 %. Yes,
CLVIBBVA, ACCION IBEX 35 ETF Prospectus

CLVIISpanish Stock Exchanges and Markets, db x–trackers IBEX 35 UCITS ETF (DR) 1C
CLVIIISpanish Stock Exchanges and Markets, db x–trackers IBEX 35 UCITS ETF (DR) 1D
CLIXDeutsche Bank, IBEX 35 UCITS ETF (DR) 1C
CLXDeutsche Bank, IBEX 35 UCITS ETF (DR) 1D .
CLXISpanish Stock Exchanges and Markets, ACCION IBEX 35 ETF .
CLXIISpanish Stock Exchanges and Markets, Lyxor UCITS ETF IBEX 35 (DR) .
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you read correctly, without commissions, but in exchange it was synthetic and its added risks were
significant.
Assets Held by the Fund All three have similar assets, amounting to hundreds of millions of euros.
These amounts are large enough that there is no fear that any of these funds will be closed due to
lack of profitability.
Like the larger the ETF, the better (because it has a lower TER). You can choose the ETF from
among those with the highest assets under managementCLXIII .
ISIN
ISIN is the acronym for International Securities Identification Number (see more information on
their website) . It is a unique 12-character code that is used to uniquely specify financial
products, such as bonds, stocks and derivatives. It is made up of 2 letters to indicate the country,
9 characters that specify the product, and one more control character.
A quick way to obtain information about an ETF can be to search the Internet for its ISIN. In the
case of ETFs that follow the IBEX 35, their ISIN codes are:
• ”ES0105336038”, IBEX 35 ETF Share

• ”LU0592216393”, db x–trackers IBEX 35 UCITS ETF (DR) 1C
• ”LU0994505336”, db x–trackers IBEX 35 UCITS ETF (DR) 1D
• ”FR0010251744”, Lyxor UCITS ETF IBEX 35 (DR)
The same financial product can be sold on multiple stock exchanges. In each of these markets,
the ETF (or stock, or bond, etc.) will have a different symbol (or ticker ), even though it always
has the same ISIN.
Typical securities of the countries in which the ETF is domiciled are ES (Spain), LU
(Luxembourg), FR (France) and IE (Ireland).
Finally, the “C” or “D” codes of the db x–trackers ETFs refer to whether they are Accumulation or
Distribution of dividends.
Domicile of the Fondo Acción IBEX 35 is domiciled in Spain (its ISIN begins with ES), Lyxor in
France (FR), and the db x-trackers in Luxembourg (LU). This may be relevant when paying taxes,
since If you are a resident in Spain, everything is easier with a Spanish background. With a fund
domiciled abroad, that foreign country can apply a re withholding tax on the profits generated before
that money leaves the country and reaches Spain in the hands of the investor. In the exceptional
case of Luxembourg (and Ireland, whose ISINs begin with IE), the country does not apply any
withholding tax (which is why almost all European funds are domiciled in these two countries), so
there is no problem. In the case of the Lyxor ETF, France will likely retain a portion of the
CLXIIISee for example tables 82, 83 and 84 of Deutsche Bank, European Monthly ETF Market Review
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dividendsCLXIV , and then when filing the personal income tax declaration you have to pay the
corresponding amount in Spain and claim from France what was unduly withheld. Therefore, to avoid
tax problems, we ruled out the Lyxor ETF.
ETF symbol
The ETF symbol or Ticker is the indicator of an ETF on a given stock exchange.
• ”BBVAI”, IBEX 35 ETF Share
• ”DXIBX”, db x-trackers IBEX 35 UCITS ETF (DR) 1C
• ”DXIBD”, db x-trackers IBEX 35 UCITS ETF (DR) 1D
• ”LYXIB”, Lyxor UCITS ETF IBEX 35 (DR)
To specify an ETF on a specific exchange, the ETF symbol and the exchange symbol are joined
together, separated by a dot. For example, the iShares Core S&P 500 UCITS ETF, whose ISIN
is IE00B5BMR087, has the following symbols:
• ”CSPX.AS” at Euronext in Amsterdam
• ”CSPX.L” on the London Stock Exchange
• ”CSPX.S” on the SIX Swiss Exchange
Other factors to take into account are:
• A lot of liquidity, although the liquidity of ETFs is more related to that of the underlying assets.
An index of large companies is always better than one of small ones, because at a given
moment the fund manager may have trouble finding buyers for the underlying assets. This
can be observed by the order book on the stock exchange, how many shares and at what
prices are being traded.
• Another factor is that the bid–ask spread is as small as possible. This is related to tracking
error (see section 5.4) , and the lower it is, the more faithful the ETF will be to its index. The
market maker makes sure it is small.
Conclusion After studying the characteristics of the ETFs according to the points mentioned above,
we will choose the one that best suits our needs. facts. We do not provide advice on purchasing any
particular product in this book, so do your research before making a decision or ask a professional.
Go ahead once again that the IBEX 35 is an index that is good to start with, due to its proximity
and simplicity. But we recommend more global, more diversified indices, with large purchase volumes
and cheaper.
We would still have to read an ETF sheet in detail, in order to lay out all the details, a task that is
explained in section A.7 .
CLXIVSee Deloitte, Taxation and Investment in France 2014 .
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A.7. How to Decrypt an ETF Token?

Once we have an idea of the ETF or ETFs we want, we have to do our research. We have to
read the information provided by the fund manager.
ETFs are required to provide, among other documents, a sheet with the corresponding
information. Both a summary sheet on both sides and a more complete document. An easy way to
search for information tion is to put the name of the ETF in an internet search engine. Figure A.4
provides a typical example.
Let's look at the information provided point by point.
• Name of the ETF. The UCITS regulations require that the UCITS and ETF labels appear in
the name. This is an essential indication, as it assures us that the ETF is recognized
throughout the European Union. See section 4.1.4 for more information on UCITS.
• Explanation of the objective of the ETF. Here is provided a brief description product
description. We have to check that it fits what we want. The following parameters will be more
explicit, but here already
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Fund name UCITS ETF
Aim
Here is a general explanation of what this investment fund does, what its index is and how it manages to
track it.
Key data Information on net asset value

Home Irish NAV (Net Asset Value) 314.16
UCITS compliant Yeah Daily NAV change 1.41
Ticker XYWZ Daily NAV change [%] 0.45%
Asset class Variable income Total assets [million EUR] 2,718,282
Currency coverage No Shares of the issue 8,652,540
Management fee (TER) 0.10%
Securities loan profitability 0.04%
Base currency EUR Performance information
Start date 17/06/2010 Distribution frequency T r i mestra l
Distribution
Rebalance frequency Quarterly Application of income
31/07/2016
Product structure Physical End of fiscal year
Product methodology Replica Badge EUR
Distribution frequency Quarterly
Application of income Distribution
Madrid Stock Exchange
ISIN IE0000000000
Bloomberg Code XYWZ MC
Product Details Product symbol XYWZ
Fund manager Management Ltd Quote Currency EUR
Issuing company My Authorized Participant Quote start date 01/01/2011
Administrator Sagacious Auditors
Custodian Safes & Co
Product License Great Indices SA Market Makers in the stock market
Registration fees No Markets Reunidos SA
Exit fees No We are Makers SA
Performance fees No MM International S.A.
Minimum purchase 1 share
Registered countries
Index information Germany Italy
Index name IBEX 35 Austria Luxembourg
Index Provider Great Indices SA Dianamrca Norway
Index Currency EUR Spain Netherlands
Index type Price Finland United Kingdom
Index ticker total return XYWX France Sweden
Price ticker of theindex XYWY Ireland Swiss
Figure A.4: Example of an ETF summary sheet. See the explanation of the different elements in the
text.
We can find keywords that will tell us whether or not it is appropriate for our interests.
• Key fund data. This is a summary of what the other parts of the fact sheet show.
• The domicile refers to the location of the fund management company. Within the
European Union, Ireland and Luxembourg are common places.
• The management fee (known as TER, Total Expense Ra uncle ). This parameter
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indicates the total annual cost of the ETF, and includes the manager's expenses, fund
transaction costs, legal expenses them, auditors and similar expenses. Note that other
expenses are not included in the TER, as they are unrelated to the ETF manager, e.g.
p the commission for purchasing the shares by the broker. Obviously we have to select
a fund with a low TER, the lower the better. The largest and most general ETFs have
TER of the order of 0 , 10% - 0 , 20% (the recommended ones!), other more specific
ones (for example of particular countries) can cost of the order of 0 , 30% - 0, 20% .
fifty %. Actively managed ETFs can cost 0.5 % - 1%. Investment funds and pension
plans are in the 1% - 3% range. You can see these figures on the Mornings website
tar.
• The return on securities lending is the profit that the investor receives in exchange for
the risk of lending the fund's assets (see text box on page 150) . Since in this case the
TER is 0.10 % and the return on securities lending is 0.04 %, it is expected that the
tracking difference (see section 5.4) of the ETF will be 0.06 % per year.
• Base currency, in which the shares of the underlying companies are traded. If it were
not in euros, it would imply a currency exchange risk, because that currency could be
devalued against the euro and therefore the investment would lose value. Although the
opposite could also happen, that the euro devalues against the dollar, so the
investment made in dollars would have more value than at the time of the investment.
To avoid this currency risk, the ETF could be “currency hedged”, at a slightly higher
cost, but this is not the case here.
• The start date refers to when this fund was created. As ETFs are relatively modern, it
will rarely be more than
10 years old. The older you are, the greater stability and security. dad.
• The rebalancing frequency indicates when the index provider recalculates the different
weights of the companies in the index. If it is very frequent, the index will be very
accurate, but it will be more expensive for the ETF to track.
• Product structure. It is the so-called replication method, which can be physical or
synthetic (see section 5.3) . We prefer the physical method (where the manager
actually buys the shares of the index), and avoid the synthetic method (in which the
manager also agrees to follow the index, but buying other shares not necessarily
related or even buying fictitious derivatives. financial).
• Product methodology indicates how the ETF is implemented. In this case, “replication”
refers to “full replication”, where all the assets in the index are purchased (it could also
be “sampling” or “optimization”).
• The application of income could be “accumulation” (the divi dividends of companies in
the index are accumulated, reinvested in the ETF itself) or “distribution” (dividends are
distributed to investors). In this case, they are distributed every three months.
• Product details display two types of information: em dams involved in providing this ETF (see
table 5.2. ), and the applicable commissions (which are none in the case of ETFs, they are
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only indicated due to similarity with conventional investment funds).
• Information about the index the ETF is tracking: What is its name? bre? Who provides it? In
what currency is the index calculated (pay attention to the evolution of exchange rates)? What
type of index according to its treatment of dividends (see section 5.8.2) ? Note that in is In
case the index is "price" (not counting dividends). If we would like to know past returns
including dividends, we can look at the corresponding ticker.
• Information about the net asset value, the value of the fund's assets. This information
depends on the day the report sheet is displayed. tive. If the size of the fund is very small (for
example less than 10 million euros), then the fund manager will hardly get It will be profitable,
and you may decide to close it. It is therefore convenient for us to invest in large funds, with
hundreds of millions of euros of assets, to be sure that they are profitable. In this case, its
assets are enormous, in the order of 2,718 million euros.
• Identification of the ETF (ISIN and tickers , see text boxes) and information about the stock
exchanges on which this ETF is offered.
• ETF market makers, which provide liquidity and a secure transaction every time you want to
carry out an operation. See text box on page 147 .
• To avoid paying extra taxes, it is important that the ETF is registered in the country in which
we reside, or failing that in a tax-friendly country, such as Ireland or Luxembourg.
The previous points allow you to understand the information presented in an ETF sheet. But
where can you find more chips? Where can you find more information about ETFs? The following are
some places to look:
• On the fund managers' own websites. For example iShares , Deutsche Bank and Vanguard.
• On general websites like Morningstar , which is a reference, and JustETF .
• In search engines, which have sections for the financial world. For example pl Google and
Yahoo . You can put the background ticker (or the action) and they give information at the
moment (in the left area of the screen). Example: DXIBX for Deutsche Bank's IBEX 35.
A.8. How to Purchase an ETF?

Once we have chosen the ETF, we have to purchase the shares.
It is a good idea to sign up for a simulator to practice making your first purchases. They are free
and do not require anything; Renta 4 and Saxo Bank offer them.
If we bought every month, the broker's expenses could be relative mentally high (because
normally there is a minimum expense per operation of about 10 euros). That is why it is usual to buy
less frequently, for example every quarter.
This section describes how to purchase the ETF share. This can be extended to any stock on
any stock exchange.
Gather relevant information Before starting the purchase, you must have the basic information at
hand: name and ISIN of the ETF to buy. And it is also highly recommended to have the explanatory
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brochure in front of you, in case you We would have to look at some information (for example, which
exchanges it is offered on). In our case, suppose we are going to buy the db x-trackers IBEX 35
UCITS ETF (DR) 1C , whose ISIN is LU0592216393.
Enter the online broker account This will require the corresponding username and password.
It is advisable to buy during the middle hours of the day. This is because that is when there are
more buyers and therefore there will be more liquidity. This way we will have less chance of the ETF
price deviating significantly. vally from iNAV (there are brokers that provide this value). In any case,
this is not very important for small investors like us because the amount we are going to buy is much
smaller than the usual volume.
View queued orders It is advisable to view the orders that are queued to be placed (important:
brokers usually present the information with a delay of 15 minutes, not in real time). Ideally there
would be several and they would also change greatly. Otherwise, what will happen is that only the
authorized participant's orders will be available: one for buying and one for selling, for relatively large
amounts. What is the problem? ma? That the authorized participant undertakes to buy and sell at any
time, fine, but at a pre-established distance from the iNAV, which may be relatively large, for example
0.5 %. Therefore, in this case, the user may pay 0.5 % more (or less). Deutsche Boerse shows the
list of operations queued to be carried out (see figure A.5) . Note that you are actually buying at a
price slightly more expensive than what you could sell (due to the so-called spread ).
It is important to take into account the spread , because it is comparable to an envelope cost to
be paid by the investor when buying and selling. Our objective is the long term, and therefore this
cost is minimized, but it should not be forgotten. This way when you make the purchase check the
difference between the bid and the ask . As additional information, if you buy in Xetra you can look at
the Xetra Liquidity Measure or in the US the ETF.com website provides the spreads of US ETFs.
Note that for the large indices they are measured in hundredths of a percent, and that for the largest
(SPDR S&P 500 ETF), it is even less than 0.01 %.
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Figure A.5: Screenshot of a typical Euro STOXX 50 ETF on Deutsche Boerse. Those who want to
buy are shown on the left, with Bid prices of 30,585 euros per share or cheaper, and with the number
of shares that interest them. On the right are shown those who want to sell, who offer at an Ask price
of 30 , 600 euros per share or more. The difference between the Bid and the Ask , 0.015 euros ( 0.05
% of the share value), is the so-called spread .
Calculate the number of shares we want to buy For example For example, suppose we have 1500
euros saved and we want to buy db x-trackers 1C shares with them. We can see its latest price on
the BME website (see figure A.3) , which turns out to be 19.41 euros. 1500 euros divided by 19.41
euros/share is equivalent to 77.28 shares. Since there are no fractional shares nary, it has to be a
whole number, and we choose the lowest, 77 actions.
Calculate how much it will cost to purchase 77 shares at 19.41 euros/share, which is 1494.60
euros. But to this we must add the purchase costs, which are usually 0.20 %, with a minimum of 10
euros. 0.20 % of 1494.60 euros is 2.97 euros. However, as it is less than the minimum of 10 euros,
10 euros are paid. In total, shares plus purchase costs are 1504 , 60 euros.
Send the purchase operation For this there are three types of orders accepted by SIBE (Spanish
Stock Exchange Interconnection System), which are the same as in the purchase of shares.CLXV .
Different exchanges or brokers may implement other orders, but we do not believe they are relevant
to our plans (e.g. stop-loss orders).
Limited These are the ones we recommend. They allow the price of the operation to be set, that is, a
maximum price for purchase or minimum price for sale. This way we avoid paying an absurd
price, because the price can vary (probably the price is given to us by the intermediary 15
minutes late). For example, if a share is now worth 100.00 euros, we could agree to buy it 0.5
% more expensive (for a maximum price of 100.5 euros). In this way, the purchase would only
CLXV Very good explanation with examples in CNMV, Securities Orders Guide
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be made if there was an equal or cheaper counterpart ( 99.00 euros, 100.00 euros, 100.40
euros, or 100.50 euros), but if it were even more expensive (example: 100 , 60 euros), the
purchase would not be made and the order would be on hold for a while (which depends on the
intermediary, possibly one day). Additionally, a limit order can be executed in whole or in part. If
it is partial, there will be several groups of shares purchased at different prices, from different
sellers. For example: if we want to buy 10 shares at a maximum of 100 , 50 euros, we could
end up buying 8 shares at 100 , 40 euros and 2 shares at 100 , 50 euros). Given the possibility
that the orders are executed in different sections at different prices, the investor must inform
themselves of the commissions that this operation would generate, because normally the
intermediary considers each group of shares as an independent operation.
To market In these orders the price is not specified, so it is negotiated at the best price offered by the
opposing party at the time the order is entered. The risk for the investor is that the execution
price is not controlled. If it cannot be fully executed against the opposite side's best order, the
remainder will continue to be executed at the next offered prices, in as many tranches as
necessary until it is completed. These orders are useful when the investor is more interested in
placing the trade than in trying to obtain a favorable price. Normally, market makers ensure that
the price of the ETF is always very close to its net asset value, so in principle “market” orders
would be safe. Despite this, we prefer not to take risks and always use “limit” orders.
For the best, they are orders that are entered without a price, similar to orders nes “to market”.
However, the difference lies in what happens when there is not enough counterparty at the time
of order execution. In this case, “market” orders continue to sweep the order book, searching
for the next bids, until they are completed. However, “for the best” orders remain at the first
offer.
Example: if we want to buy 10 shares with a “for the best” order, 8 shares are available at 100
, 40 euros and 20 shares at 100 , 50 euros. However, only 8 shares would be purchased at
100.40 euros, leaving the other 2 desired shares waiting at that same price (equivalent to a
“limit” order at that price). The “for the best” order is used when the investor wants to ensure
immediate execution, but also You also want to exercise some control over the price,
preventing the order from being executed at multiple prices.
Other types of operations Other types of operations can also be sent rations. For example the so-
called stop-loss . These are “sleeping” sell orders, which are only activated if the price falls beyond a
limit set by the investor. This prevents large losses. However, not We believe that these orders are
not relevant because what we want is to invest for the long term, hoping that over the years the value
of the shares will rise. Over a period of many years it is very possible that the stock market will fall
below a value that we now define, which would automatically activate this stop-loss , selling (and
incurring trading costs). buying with the broker), and what is worse, selling at a time when the stock is
worth very little.
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Appendix
Deduction of the equations
In this appendix several equations shown in chapter 3 are derived. The demonstrations are
divided into three groups: the savings equations, the spending equations, and the effect of both
combined.
The savings and spending equations are very similar, but there are several nuances to take into
account. For example, whether dividends are withdrawn or reinvested, and whether the saving or
spending occurs at the beginning or end of the year.
8.1. Savings equations

The formulas from section 3.1 on savings are derived here. We first calculate how the fund
grows when we accumulate our savings.
Let's call g the expenses, a the savings, and I the total income. All these figures are given in
annual values of euros/year.
Naturally, it is true that everything that is earned is either saved or spent. This is:
I=a+g
Let's call r the relationship between savings a and total income I : (B.1)
to
r=I (B.2)
We calculate how the fund grows as we accumulate our savings. In a first development we
ignore the effect of dividends and capital gains.
From which it follows that the amount saved each year a and the amount spent g is:
Foreword............................................................................................12
Introduction........................................................................................11
26
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1.1. What is this book about?.....................................................11

1.2. What is Financial Freedom?................................................12
1.3. Why Write this Book?.........................................................13
1.4. Who has Written this Book?................................................14
1.5. Who should read this book?................................................14
1.6. Are there other people doing the same thing?.....................15
1.7. Why is what this book discusses so unusual?.....................15
1.8. But Is This Morally Acceptable?.........................................16
1.9. Our history...........................................................................18
Planning..............................................................................................22
2.2. Importance of Savings.........................................................25
2.3. Some Ideas to Save..............................................................26
2.4. Saving, for what?.................................................................28
2.5. Personal Economy Diagrams..............................................29
2.6. Have a plan..........................................................................35
2.7.3. Financial Companies....................................................41
2.8. The Distribution Pension System........................................44
2.9. Create a Company by Achieving Freedom Fi financial......47
Theory................................................................................................59
3.1. How much can we save?.....................................................60
3.2. How much can we spend?...................................................64
3.3. Combined Effect of Savings and Spending.........................67
3.4. Simulations..........................................................................70
Investments........................................................................................77
4.1. What Form of Investment to Choose?.................................78
4.1.1. Types of Passive Income..............................................79
4.1.3. Pension plans................................................................83
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4.1.4. Investment Funds..............................................................88

4.1.6. Types of Public Debt in Spain...................................104
4.1.7. Types of Fixed Income in the US..............................105
4.1.9. Investment in Index Funds.........................................107
4.2. Investments that don't work...................................................113
4.2.4. Companies That Provide Dividends Grow you.........120
4.2.5. Act According to Dates or Events..............................121
4.2.6. Economic Cycles........................................................121
Invest in ETFs..................................................................................126
5.1. A little history....................................................................128
5.2. What are the Main ETF Managers?...................................134
5.3. How does an ETF work?...................................................135
5.4. How to Measure the Efficiency of an ETF?......................148
5.5. Are ETFs Made for Kids Investors?..................................150
5.6. Have ETFs Grown Too Much?.........................................151
5.7. What Are the Risks of ETFs?............................................154
5.8. ETF Indices.......................................................................155
5.8.1. Index Calculation Methods........................................155
5.8.2. Classification according to Dividend Treatment........160
5.8.3. Classification by Themes...........................................161
5.9. Some Specific Types of ETFs...............................................163
5.9.2. Asset Selection...........................................................163
5.9.3. Inverses and Leveraged..............................................164
5.9.4. Real-estate market......................................................165
5.9.5. Emerging Market Stocks............................................165
5.9.6. Global Indices of the World.......................................166
5.10. Losses from Taxes Paid by the Fund...................................168
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5.11. Typical ETF Expenses and Commissions.....................171

5.11.2. Trading Expenses Like Shares...............................172
5.11.3. Expenses for Being Listed Securities.....................172
5.12. How to Follow the Evolution of an ETF?......................173
5.12.3. ETF Managers........................................................174
5.12.5. Economic news managers......................................174
5.12.7. Specific web pages.................................................175
How to Build a Portfolio..................................................................195
ETFs.................................................................................................195
6.1.
Core/Satellite Investment System......................................196
6.2.
The long-term....................................................................197
6.3.
How Long-Lasting is an Investment in Investment? you say?
200
6.4.
Examples of Portfolios......................................................201
6.5.
The Age in Bonds..............................................................210
6.6.
How many ETFs in Portfolio?...........................................212
6.7.
Dividends: Accumulation or Distribution?.......................213
6.8.
The Benefits of Diversification.........................................214
6.8.1. A Practical Approach to Diversification....................214
6.8.2. Diversify by Number of Assets..................................215
6.8.3. Diversify by Asset Types...........................................216
6.9. The Benefits of Rebalancing.............................................218
6.10. Which Fixed Income ETF to Choose?...........................223
6.11. Emotional Errors and Investment Contract Zionist.......224
Achieved.......................................................................................226
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Sep 2021
left” 226
6.12.2. Extract at ”constant purchasing capacity”..............227
6.12.3. Extract a ”constant percentage of the portfolio”....227
6.12.5. Variable Percentage Withdrawal............................228
Crisis................................................................................................235
7.1. When Will the Next Crisis Come?....................................236
7.2. Ideas to Protect Us from Crises.........................................237
Epilogue...........................................................................................239
Thanks..............................................................................................240
Recipe book......................................................................................241
A.1. Steps to follow......................................................................241
A.2. How to Choose an Online Broker?.......................................243
A.3. Example of Investor Contract...............................................244
A.4. How to Choose which Stock Market to Trade?....................246
TO 5. How to Choose an Index to Follow?..................................250
A.6. How to Choose an ETF that Tracks an Index.......................251
Certain?.........................................................................................251
A.7. How to Decrypt an ETF Token?...........................................254
A.8. How to Purchase an ETF?....................................................258
Deduction of the equations...............................................................262
8.1. Savings equations..............................................................262
8.2. Expenditure equation.........................................................269
8.3. Combined savings and spending.......................................273
Resources.........................................................................................285
Books............................................................................................285
Articles.........................................................................................285
Websites.......................................................................................286
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Contact the Authors..........................................................................293

r
For example, following the previous equation, if we save 1/3 of our income we can work two
years in a row and enjoy a third of free time. tions. This is a figure of speech, but it gives an indication
of where our intentions are going.
Now suppose that initially P 0 amount of money has been saved ro. During the current year,
capital ( P 0 · i ) is generated and reinvested. And also at the end of the year an amount is saved and
added to the fund.
We first calculate how much money we will have saved at the beginning of the first year ( P 1 ).
P 1 = P 0 (1+ i )+ a (B.8)
We now calculate what has been accumulated for the following year ( P 2 ), which is the money
with which we begin the second year. Again we leave P 1 invested during the year and add a at the
end of the year:
P 2 = P 1 (1 + i ) + a (B.9)
Equation B.9 is recursive, and requires substituting B.8 into it. After making the change you get:
2
P 2 = P 0 (1 + i ) + a [(1 + i ) + 1] (B.10)
If we continue with the following years, we will see that at the beginning of year n , the
accumulated is:
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1
P n = P 0 (1+ i ) n + a ^ (1+ i ) n - +(1+ i ) n + ... +(1+ i )+1 ^ (B.11)
Equation B.12 contains an infinite series. To simplify it, we define S as the sum of the elements
of the parentheses that multiply p .
1 2
S =(1+ i ) n - +(1+ i ) n - + ... +(1+ i )+1 (B.12)
P n = P 0 (1+ i ) n + aS (B.13)
We have to apply a trick that consists of multiplying both sides of B.12 by (1 + i ) and simplifying.
1 2
(1+ i ) S = (1+ i ) n +(1+ i ) n - + ... +(1+ i ) +(1+ i ) (B.14)
The right side of the equal can now be put in function of S.
(1+ i ) S =(1+ i ) n + S - 1 (B.15)

In this way we manage to solve the value of the series, which is:
(1+ i ) n - 1
S=
Yo (B.16)
Now substituting B.16 into B.13 , we obtain
P n = P 0 (1+ i ) n + a (1+ i ) n - 1
Yo
(B.17)
Equation B.17 is quite general, however we can go to a particular case in which we
start from an initial situation in which nothing had been saved, P 0 = 0.
Yo
P n = a (1+ i ) n - 1
(B.18)
It is best to show these equations in terms of the equivalent of the number of years that this
capital would allow us to live, P n g . To do this we combine equations B.5 and B.6 :
r
a=g1-r (B.19)
Finally, substituting equation B.19 into B.18 we obtain the formula that tells us how much we
save over the years.
Capital accumulation
g Pn r (1+ i ) n - 1
Pn = =
g 1-r Yo (B.20)
For example, in 20 years, with a return on investment of 4% ( i = 0.04 ), saving 50% of our
monthly income, we will achieve P n
g
= 30. That is, saving the equivalent of what we need to live
without working for 30 years. Of course, in year 31 we would have run out of savings and we would
have to go back to work.
We now solve in equation B.20 for the number of years M that it takes to obtain an amount of
capital P 0 g .
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Sep 2021
P g = r (1+ i ) M - 1
0 (B.21)
1-r Yo
i 1 - r P 0 g = (1+ i ) M - 1 r (B.22)
(1+ i ) M = 1+ i 1 - r P 0 g r (B.23)
r
M ln(1 + i ) = ln 1 + i P0g (B.24)
Number of Years Necessary to Save an Amount of Capital
1
ln ^ 1+ i - r r P 0 g ^ (B.25)
M =
ln(1 + i )
For example, in the case that we want to save the equivalent of 30 years of our expenses,
assuming that we save half of our income ( r = 0 , 50), and that the return on investment after
considering inflation is a humble 2 % ( i = 0 , 02), then we have to work for M = 24 years.
In the limiting case where i = 0, the logarithms simplify and i des appears. This is a very similar
formula to B.7. The difference is that in the former it was assumed that the equivalent of what is spent
in a year is saved ( P 0 g = 1).
1 — and
M= 1-rPg (B.26)
0
r
8.2. Expenditure equation

This mathematical development is related to section 3.2, which explains how much we can
spend. We calculate here how the fund decreases when we consider that we spend a part of it each
year. Of course, we assume that the investment dividends are reinvested. In this way there are two
opposite effects: what we extract to live and what the fund grows by itself.
Suppose that initially an asset P 0 has been saved and that at the beginning of the year an
amount g is withdrawn. The rest ( P 0 - g ) grows with an interest rate i that will depend on the
investments made. At the end of the year, a quantity i · ( P 0 - g ) is obtained, which is the return on
the investment. This return is reinvested for the following year. Let's calculate how much money we
start with the first year P 1 .
P 1 = P 0 - g +( P 0 - g ) · i (B.27)
We are really interested in obtaining equation B.27 as a function of (1 + i ). Rearranging it we

obtain:
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Sep 2021
P 1 = P 0 (1 + i ) - g (1 + i ) (B.28)
We now calculate the amount accumulated the following year P 2 , the money with which we
began the second year. Again we extract g at the beginning of the year, and leave the rest invested.
P 2 = P 1 (1+ i ) - g (1+ i ) (B.29)
Equation B.29 is recursive, and requires substituting B.28 into it. After doing so you obtain:
−
P2 = P0 (1+ i ) 2 g ^ (1+ i ) 2+ (1+ i ) ^ (B.30)
If we continue with the following years, we will see that at the beginning of year n , the
accumulated is:
1 2
P n = P 0 (1 + i ) n - g ^ (1+ i ) n + (1 + i ) n - + ... + (1+ i ) +(1+ i ) ^ (B. 31)
Equation B.31 contains an infinite series. To simplify it, we define S as the sum of the elements
of the parentheses that multiply g .
1 2
S =(1+ i ) n +(1+ i ) n - + ... +(1+ i ) +(1+ i ) (B.32)
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P n = P 0 (1+ i ) n - gS (B.33)
We apply a trick again, which is to add 1 to S and multiply it by (1 + i ). On both sides of the
same. In this way, a new element is obtained on the right side of equation B.32.
+1 1 2
( S +1)(1+ i ) = (1+ i ) n +(1+ i ) n +(1+ i ) n - + ... +(1+ i ) +(1+ i ) (B.34)
We now replace most of the terms on the right side of the equal with S.
+1
( S +1)(1+ i )=(1+ i ) n +S (B.35)
In this way we can calculate the value of the series:
(1 + i ) [(1 + i ) n - 1]
S= (B.36)
Yo
Now substituting B.36 into B.31 , we obtain
(1+ i )[(1+ i ) n - 1] g
P n = P 0 (1 + i ) n Yo (B.37)
We rewrite it now by changing the capital saved by the number of years that would allow us to
live without considering the increase in capital ( P n
g
). We calculate the accumulated capital based
on the number of annual expenses.
Evolution of Capital as a Function of Time
Png = P 0 g (1+ i ) n - (1+ i ) [(1+ i ) n - 1 ] (B.38)
Equation B.38 allows us to know how much capital we have accumulated, considering the
returns on investment and the extraction of capital to live.
We can now ask ourselves how many years N can this capital last? meaning that year after year
we extract capital at the rate g until P n g = 0.
0= P 0 g (1+ i ) N - (1+ i ) (1+ i ) N - 1

(B.39)
P 0 g (1+ i ) N = (1+ i ) ^ (1+ i ) N - 1 ^ (B.40)
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ig 1
0 (B.41)
1+ i P = CLXVI (1+ i ) N
1 ig
0
(1 + i ) N = 1 1 + iP (B.42)
(1 + i ) =
N
ig
1 - 1+ i P 0 (B.43)
N ln(1 + i ) = - ln 1 - P0g (B.44)
After operating we arrive at equation B.45.
As an example, if an asset is saved equivalent to what is spent in 10 years ( P 0

g
= 10), with an
investment return of i = 0.04 , then the fund will last 12 years. 20% more, wonders of compound
interest.
It may happen that the logarithm of the numerator is applied to a quantity that is zero. This would
cause N to be infinite, and therefore the fund never runs out. In other words, there are resources in
perpetuity. This is achieved when:
1 - 1+ i i P 0 g =0 (B.46)
And rearranging:
Condition so that the Fund is Never Depleted
P 0 g = 1+ i i (B.47)
Substituting a typical stock market return value into equation B.47 ,
CLXVI = 4%, we obtain M = 26 years. In other words, if we save the equipment worth 26 years of our
expenses, then the fund will never be depleted. If we assume i = 0.03 , we obtain M = 34 years. In
practice, of course, we will want this value to be M = 30 - 40, for example.
Condition B.47 basically tells us that what the fund grows each year is equal to or greater than
what we extract to live.
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8.3. Combined savings and spending

We now calculate how many years you have to work to be able to live off your income. We don't
need the fund to last forever, just enough large enough to live off the profits for a long enough
period. ciently long time (50 years?). We expect that at age 20 we start working, then we spend M
years saving until the fund reaches its maximum, and finally we are N years living off the income.
We impose the condition that M + N = T , because we assume that the more years we work, the
less we will be living off of income. T is the number of years working and retired. As an approximation
we estimate T = 80 years, which implies that we will live to be 100 years old (20 years of age).
student, M years working and N years retired), a reasonable approximation taking into account that
life expectancy will not stop growing.
We start with equations B.20 and B.38 :
g r (1+ i ) M - 1 (B.48)
0=
1 - ri
0= P 0 g (1+ i ) N - (1+ i ) (1+ i ) - 1
N
0i
We solve for P 0 g , combining equations B.48 and B.49 in B.50 .
1 (1+ i ) (1+ i ) N - 1 = r (1+ i ) M - 1

(1 + i ) N Yo 1 - ri
(1 - r )(1+ i )[(1+ i ) N - 1]= r [(1+ i ) M - 1](1+ i ) N (B.51)

(B.50)
(1+ i ) M - 1 (1 + i 1-r
(1+ i ) N (1+ i ) (B.52)
)N-1 r
Now we want to eliminate the dependence on N , and we do so because we have imposed that
the sum of N and M adds up to T (and in principle, T = 80 years).
N=T-M (B.53)
So:
(1 + i ) M - 1 1-r
(1 + i ) T - M - 1 (1 + i ) T - M (1+ i ) (B.54)
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Sep 2021
(1 + i ) M - 1 1-r
(1+ i ) T - (1+ i ) M (1+ i ) T (1+ i ) (B.55)
^
(1 + i ) M − 1 ^ (1+ i ) T = 1 − r r (1+ i ) ^ (1 + i ) T − (1 + i ) M ^ (B.56) (1+ i ) M
(1+ i ) T - (1+ i ) T = 1 - r r (1+ i )(1+ i ) T - 1 - r r (1+ i ) (1+ i ) M (B.57)
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(1 + i ) T + − r (1 + i ) 1+ 1 - r (1+ i )
(1 + i ) M r =(1+ i ) T r (B.58)
(1+ i ) T 1+ (1- r ) r (1+ i )

(1+ i ) M (B.59)
(1+ i ) T + (1- r ) r (1+ i )
And finally we are left:
1
M ln(1+ i ) =ln (1 ( + 1 + i ) T i ) T ^ 1 + + 1 - r
- r
rr(
(
1
1
+
+
i
i
)
) ^
(B.60)
Years to Work Depending on the Savings Fraction
1+ 1- r r (1+ i )
ln
1+ 1- r r (1+ i ) (1+ 1 i ) T
M= (B.61)
ln(1 + i )
For example, suppose we save half of our income ( r = 0.5 ) and that we are going to work and
live off the income for 80 years ( T = 80 years). Depending on the results of the stock market, in the
case that i = 0.03 , we will have to save for M = 21 years, and if i = 0.04 we will have to save for M =
17 years.
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Alphabetical index
IBEX 35 ETF share, 261 Brief History of Time (Book), 59

Alpha, 196 Broke (Documentary), 47
ALFI, see Association of the Luxembourg Browne, Harry, 196, 239
Fund Industry Brownhead, 208
All Country World Index, 183 Buffet, Warren, 167
AMC, see Annual Management Charge Buffett, Warren, 93, 118, 121, 125, 139, 154, 235
American National Bank, 136 Buy and Hold, 136, 182, 212, 213
Amundi, 95, 142
Android, 26 CalPERS, 105
Annual Management Charge, 72 Camino de Santiago, 23
Dividend Aristocrats, 125 Gauss bell, 112
Ashish, Dev, 119 Floating capitalization, 170
Association of the Luxembourg Fund Industry, 97 Rat Race, 37
Permanent Portfolio, 196, 239
Bankruptcy, 106 CD, 200
European Central Bank, 198 Certificate of Deposit, 200
Barclays, 256 CFD, see Contract For Difference
Euro Aggregate Bond Index, 205 Chile (Capitalization Pensions), 54
Euro Treasury Bond Index, 206, 207, Cinco Días (Newspaper), 190
209, 210 Black Swan, 238
BBVA, 138, 259 Civismo (Foundation), 50
BBVAI, 261 Closet Indexing, 165
ECB, see European Central Bank CNMV, 95, see National Mer Commission stock market
Berkshire Hathaway, 154 Collins, J.L., 26, 81
Bernstein, William, 209 Management Commission, see TER
Beta, 196 National Securities Market Commission, 248
Bitcoin, 239 Confidencial, El (Newspaper), 190
Black Monday, 236 Contract For Difference, 249
BME, see Spanish Stock Exchanges and Markets Corben, Billy, 47
Bogle, John C., 136, 195 Core and Explore, 196
Bogleheads, 17, 178, 201, 213, 227, 229 Correlations, 192
Official State Gazette, 53 Short (go short), 150
London Stock Exchange, 255, 261 Cost Averaging, 239
Madrid Stock Exchange, 86, 87 Coursera, 42
Spanish Stock Exchanges and Markets, 115, 190, 248, Crowlending, 241
253, 256, 258, 268 CSI300, 154
State Bonds, 108 S curve, 41
Municipal Bonds, 108 Custodian, 147
28
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Tax Freedom Day, 49 FireCalc (Web), 71

db x–trackers, 138, 142, 256, 259 –261 Fisker, Jacob Lund, 17, 32, 70, 243
FIWE, see Financial Independence Week
Tax declaration, 50
Europe
Default, 106 Promotion of Constructions and Contracts, 154
Fixed term deposit, 200 International Monetary Fund, 181
Designated Sponsor, 148 Free Software Foundation, 243
Friedman, Milton, 60
Deutsche Bank, 259, 266
Front–running Arbitrage, 151, 152, 164
Deutsche Boerse, 148, 190, 191, 252, 267, 268 Efficient Frontier, 131, 192, 220
DINK, see Double Income No Kids FTSE, 147, 256
Diversification, 117 250, 147
All-World, 205
Dividend optimization, 187
EPRA/NAREIT Eurozone, 207
Dominguez, Joe, 200 Global All Cap, 206, 207, 209
Don Dividend (Web), 187 MTS Eonia, 208
Double Income No Kids, 47 FTSE EPRA/NAREIT Eurozone Index, 207
FTSE4Good, 179
Dow Jones, 256
Euro STOXX 50, 136 Geoarbitrage, 32
Euro STOXX Select Dividend 30, 138 Passive Management (blog), 17
Industrial Average, 172 Fund Manager, 147, 262, 266
STOXX 50 LDRS, 136 GFierro (User), 213
Google, 192
STOXX Select Dividend 30 ETF, 138 Graham, Benjamin, 93, 121, 125
Transportation Average, 172 Growth, 176
Draper, Dan, 186
DXIBD, 261 Haghani, Victor, 134
Harry Browne, 208
DXIBX, 261 Hawking, Stephen, 59
Hedge Funds, 102, 104, 150, 177
Early Retirement Extreme, 43, 59 High Yield, 177
EasyETF, 138, 142 High-Frequency Trading, 121
Efficient Markets Hypothesis, 122,
EasyETF Global Titans 50, 138 123
Economist, The (Newspaper), 190 Homo Investor, 17, 74
Econowiser (Blog), 17, 32, 43 Huete, Martín, 102, 134, 243
USA, 47, 53
IBAN, 247
El Mundo (Newspaper), 190 IBEX 35, 91, 98 –101, 115, 145, 188, 190, 210,
El País (Newspaper), 190 240, 257–260, 262, 266
EMEA, 176
IBI, see Real Estate Tax, 83
EMU, see European Monetary Union
Idealist (Web), 84
Environmental, Social and Governance, 20
IIC, see Colec investment institutions tive, 103
EONIA, see Euro OverNight Index Avera gee
IMI, 152
ERE, see Early Retirement Extreme
Real Estate Tax, 84
Austrian School (of Economics), 208
iNAV, 267
Euro OverNight Index Average, 177
Index Fund Advisors Inc., 134
Euronext, 139, 190, 252, 261
European Monetary Union, 209 Spending Inflation, 46, 61
European Public Real estate Association, 181 ING Direct, 191
Collective investment institutions, 91
Ferri, Richard A., 205, 207 Official Credit Institute, 99
FIFO, 246
Financial Independence Week Europe, 17 Juan de Mariana Institute, 56
Financial Times (Newspaper), 190, 203 Socially Responsible Investment, 20
Financial Times Stock Exchange, 203, 256 Investable Market Index, 182
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Investment grade, 177 Munis, 108

Personal income tax, 51, 88
iShares, 142, 191, 256 Core/satellite, 196
ISIN, 190, 260 NASDAQ, 252
National Association of Real Estate Invest ment Trusts,
Juan de Mariana (Institute), 243 181
JustETF (Web), 182, 183, 192, 203 NAV, 113, 168
NBA, 47
Key Investor Information Document, 191
NFL, 47
Keynes, John Maynard, 48, 197
Nikkei 225, 153, 163, 172
KIID, see Key Investor Information Do cument
No More Waffles (blog), 17
Kiyosaki, Robert, 37
KPMG, 188 Obligations of the State, 108
Krugman, Paul, 48 OECD, 51
OGC, see On-Going Charges
Limits of Action, 149
OMX (Stock Exchange), 254
LaTeX, 243
On-Going Charges, 72
Lehman Brothers, 154
NGO, 46
Treasury Bills, 107
Open University, 42
Linux, 243
OTC, 106
Liquidity, 115
Luque, Marcos, 205 Authorized Participant, 147
LYXIB, 261 Paul Terhorst, 200
Lyxor, 138, 142, 147, 261 Capitalization pensions, 52, 54
UCITS ETF IBEX 35, 261 Pay-as-you-go pensions, 52, 54
PER, 183
MAB, see Alternative Stock Market
PIAS, see Sis Individual Savings Plan thematic
Market Maker, 146, 148, 262
GDP, 181
Market Timing, 118
Individual Systematic Savings Plan, 86
Markit, 203, 257
Political Calculations (Blog), 198
iBoxx € Eurozone 25, 208
Portfolio Charts (Web), 193, 229
Markowitz, Harry, 131, 205, 220
Portfolio Solutions LLC, 198
Alternative Stock Market, 103
Portfolio Visualizer (Web), 192
Stock Market, 146, 147
Index Provider, 147
Primary Market, 148
Secondary Market, 148 Quantitative Easing, 106
MiFID, 249
Mike and Lauren, 236 Rankia (Web), 213
Moody's (Rating Agency), 101 Rule of 25, 74
Morgan Stanley Capital International, 203, 256 Rule of 300, 31, 73
Morningstar (Web), 89, 92, 99, 203, 212, 264, 266 5/10/40 rule, 97
Mr. Money Mustache, 32, 43, 243 Rule of 72, 78
MSCI, 147, 182, 256 United Kingdom, 53
Emerging Markets, 161, 182, 183 REITs, 181, 196, 198
EMU Small Caps, 209 Rent 4, 266
Europe, 206, 218 Fixed Income, 106
World, 71, 151, 182, 210, 216, 223, 225, 238, 258 Reuters, 192
Municipal Bonds, 108 Rico, Antonio R., 210
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Robin, Vicki, 200 Tracking Difference, 152, 159

Roth, Allan (Portfolio), 206 Tracking Efficiency, 159
Tracking Error, 161
S&P 500, 114, 125, 130, 136, 177, 184, 190, 196, 198, Treasury Inflation Protected Securities, 108, 177
199 , 204, 209, 256 –258
Safe Withdrawal Rate, 62, 71 U.S. Treasury
Samuelson, Paul, 133 Department, 108
Holy Grail, 235 Securities, 108, 130
Saxo Bank, 191, 266 UCITS, 96, 134, 157, 168, 249
Social Security, 50 UNED, 42
Survivor bias, 94 European Union, 14, 133, 139, 140, 142, 249, 252, 255,
Sharia, 179 262, 264
SIBE, see Bur Interconnection System satile Spanish
SICAV, 91, 102, 103 Net Asset Value, 145
Spanish Stock Market Interconnection System, 268 Value, 93, 123, 176
SIX Swiss Exchange, 261 Value Investing, 122
Smart beta, 177 van Ness, Rick, 134
Listed Public Limited Investment Company in the Real Vanguard, 136, 142, 256
Estate Market, 91, 176
W–8BEN, 185
Owners Association, 55, 80
Wells Fargo, 136
SOCIMI, see Listed Public Limited Investment Company
What Life Could Be blog, 17
in the Real Estate Market biliary, 181
Withholding Tax, 74, 175, 261
Soros, George, 121
World Federation of Exchanges, 253
SPDR, 142
S&P 500, 136, 142, 267 Xetra, 139, 252, 254
Spectrum, 23 Liquidity Measurement, 252, 267
Sponsor, see Fund Manager Xunta de Galicia, 99, 100
SPY, 136
Stamp Duty, 255 Yahoo (Web), 192
Standard & Poor's Dow Jones, 256 Yuste, Sergio, 17
State Street Global Advisors, 136
Stop-loss, 268
STOXX, 147, 175, 256
Euro STOXX 50, 94, 151, 184, 185, 190, 198, 209,
216, 254, 256, 259, 268
Europe 600, 196, 207, 208, 216, 218, 256 –258
Swap, 154
Swedroe, Larry, 167
SWR, see Safe Withdrawal Rate, 202
Tobin Tax, 255

Tax Harvesting, 246
Tax Leakage, 184
TER, 72, 74, 89, 94, 115, 150, 182, 187, 213, 259, 264
The ETF Book, 205
TIPS, 136, see Treasury Inflation Protec Ted Securities
Tobin, James, 255
Total Expense Ratio, see TER
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Sep 2021
Contact the Authors
If you find errors in this book, things to improve, or you simply found it interesting and want to
comment on it; You can contact the authors through the following email address:
willyfog@tutanota.com
Or also on the following Twitter account:
@willyfogLF
If you want to know more about what goes through the authors' minds, you can visit the following
blog where we write from time to time:
https://losrevisionistas.wordpress.com
And finally, if you really liked the book, the best thing you can do is let us know. Leave a
comment on the website where you bought it or through the social networks you use.
29
3
Sep 2021
Figure B.1: QR code containing link to this book on Amazon .
29
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Financial Freedom with ETFs

Will and Fog

February 17, 2021

2.7.3. Financial Companies 41

5.6. Have ETFs Grown Too Much? 151

A.4. How to Choose which Stock Market to Trade? 246

1.1.2. Classification according to Dividend Treatment . . . 175

1.9. Our history...........................................................................18

4.2.6. Economic Cycles........................................................121

5.12.7. Specific web pages.................................................175

7.2. Ideas to Protect Us from Crises.........................................237

Dear reader, thank you for reading this book.

The following QR code will take you directly there:

1.1. What is this book about?

• Chapter 1 (introduction) is this same one.

can take better advantage of them.

1.2. What is Financial Freedom?

1.3. Why Write this Book?

1.4. Who has Written this Book?

1.5. Who should read this book?

1.6. Are there other people doing the same thing?

XXVII See his excellent book Fisker, Early Retirement Extreme

1.7. Why is what this book discusses so unusual?

1.8. But Is This Morally Acceptable?

XXVIIIWilson, “Islamic Finance and Ethical Investment”

1.9. Our history

XXIX MSCI, Setting the standard in ESG Indexing

What to do if you had extra income?

XXXCollins, The Simple Path to Wealth

2.2. Importance of Savings

XXXIKiyosaki's book, Rich Dad Poor Dad

2.3. Some Ideas to Save

XXXIV For example Wittwer, How to make a budget .

• Nowadays everyone has traveled by plane. For example, to go on vacation to beaches

Methods to Repay Loans

2.4. Saving, for what?

It is the achievement of this last point that this book is about.

2.5. Personal Economy Diagrams

Figure 2.1: Salaried worker.

XXXVThis section is a reworking of section 7.1 of Fisker, Early Retirement Extreme .

many hours, then your gross salary will be double.

Figure 2.2: Wasteful.

Figure 2.3: Person in debt.

Figure 2.4: Highly indebted person.

XXXVISee his book Kiyosaki, Rich Dad Poor Dad .

Figure 2.5: Usefulness of an emergency fund.

Figure 2.6: Saving person.

Figure 2.7: Relationship between saver and debtor.

Figure 2.8: Financial freedom.

Save while working

2.6. Have a plan

About personal finances, economics, ETFs; see bibliography in appendix B.3.

Read a couple of books on the topic XXXVII

introduction to investing in the stock market or similar XXXVIII

XXXVIITable 2.1: Planning how to achieve Financial Freedom with trans

Our Savings Capacity

Our Own Fears