Liquid Independence

Liquid is the main editor of the Freedom 35 Blog.

Jan 192017
 

Meet the World’s Wealthiest

Charity group Oxfam recently reported that the world’s 8 richest people have as much combined wealth as the poorest 50% of the world’s population.

Here is the list of the 8 richest individuals, in order of net worth:

  1. Bill Gates: America founder of Microsoft (net worth: $75 billion)
  2. Amancio Ortega: Spanish founder of Inditex which owns the Zara fashion chain (net worth: $67 billion)
  3. Warren Buffett: American CEO and largest shareholder in Berkshire Hathaway (net worth: $60.8 billion)
  4. Carlos Slim: Mexican owner of Grupo Carso (net worth: $50 billion)
  5. Jeff Bezos: American founder, chairman and chief executive of Amazon (net worth: $45.2 billion)
  6. Mark Zuckerberg: American chairman, chief executive officer, and co-founder of Facebook (net worth: $44.6 billion)
  7. Larry Ellison: American co-founder and CEO of Oracle  (net worth: $43.6 billion)
  8. Michael Bloomberg: American founder, owner and CEO of Bloomberg LP (net worth: $40 billion)

The level of extreme wealth has become more concentrated over time. In the previous year, it took the net worth of 62 individuals to match the poorest 50% in the world. Here’s a look at the trend over time.

The middle class is feeling squeezed in many parts of the world. From 2000 to 2014 the number of households in the U.S. considered to be middle class fell significantly. A study from Pew Research shows that a majority of Americans no longer lives in the middle class. Median income of U.S. households in 2014 was 8% less than in 1999, according to Pew. For context, a 3 people household making $42,000 would be considered middle class.

One similarity shared by most multi-billionaires today is a focus on philanthropy. 🙂 Bill Gates would already be worth 12 figures today if he hadn’t given so much to charity already. He has been estimated to save over 6 million lives with his efforts to eradicate Malaria, end Polio, and help third-world countries grow rice. Warren Buffett wants to donate 99% of his wealth to charitable causes. Hundreds of other billionaires have signed up for the Giving Pledge, a campaign to encourage the rich to give away most of their money.

We all want to make money. But once we reach a certain level of financial success and become independently wealth, we have to think about how to use our excess wealth in the most meaningful manner possible. Helping other people in need is probably one of the best ways to achieve this. 🙂

I would be inclined to donate more money too if I were rich. I have already decided that if I ever win $1 million from the lottery, I will donate a quarter of it to charity because I am so generous. 😉
I still have to decide how I want to spend the remaining $999,999.75 though. 😄 j/k.

Continue reading »

Jan 162017
 

There is a lot of misinformation online about personal finance, especially from all those amateur blogs. This is why you should read everything on the internet like you would drink a shot of tequila – with a pinch of salt. 😀 Today I will try to debunk some of the most common financial myths out there.

Myth #1. Credit cards are bad.

Credit cards can make you a lot of money. Fellow blogger Tawcan generates thousands of dollars in passive income through the use of his credit cards. My no annual fee Tangerine Mastercard gives me 2% cash back on most of my credit card purchases. Promotional credit card rates can be used to pay down higher interest debt. There are so many benefits to using credit cards. 🙂

 

Myth #2. Renting gives you more freedom than owning.

One argument renters use to justify their decision to not buy property is that they can move around more freely. But don’t be fooled by this appeal to popular opinion. Throughout human history, power and financial freedom actually went to those who owned the most resources and assets. Modern day real estate is no different.

Sure, a renter in Vancouver can move to Toronto. But as homeowner, so can I. A renter has to give notice before moving out. But I can move any time I want. I can choose between selling my existing property, or rent it out to make extra income. There are even professional property management services to help me find a suitable tenant. I received this ad in my mailbox the other day.

Everyone has to live somewhere. Being a homeowner simply gives you dominion and veto power over a real piece of land. This gives you more opportunities in life, not less. Anyone who can afford a security deposit can be a renter, including me. So a homeowner has all the same freedoms as a renter. But not vice versa.

Homeowners are generally more financially free. Most can use their properties to secure a low cost loan (HELOC) for major purchases or other liquidity needs. Over 90% of millionaires own their own homes. Meanwhile, not many renters have become millionaires by investing the difference they’ve saved over the years in the financial markets.

 

Myth #3. You need an emergency fund.

An emergency fund is like an insurance policy. It insures against unexpected financial emergencies. But like any other insurance plan, there’s a cost to having one. In this case it’s the opportunity cost of not doing something more productive with your pile of money. Unless you live in a third world country, consider the probability that you don’t actually need an emergency fund (EF.) I have never created an EF for myself, and I have never run into a financial emergency in my entire life. Most western societies already have generous social safety nets. Frankly, I  can’t think of anything that could possibly happen to me right now that would require me to have 3 to 6 months of expenses saved up.

If we already have proper insurance for ourselves, and stress test our finances, then having a rainy day fund is nothing more than holding a redundant insurance policy. Oh, but wait. I actually do have something prepared for a rainy day!

It’s called an umbrella. 😄

 

Continue reading »

Jan 122017
 

What’s 6 inches long and gets Kim Kardashian excited? That’s right. It’s money. 😀 Especially the one with Benjamin’s face on it. There is certainly no shortage of liquidity in the world today thanks to central banks. As investors, our priority is to increase our expected returns while reducing our anticipated risks. A good way to go about doing this is by setting goals. Making smart decisions and taking appropriate action is easier if we have defined a target to aspire to. 🙂 If we don’t take control of our money, then someone else will inevitably try to use money to control us.

Here are my financial goals for 2017.

  • Grow my TFSA to $80,000.
    I currently hold $72,000 across all my tax free savings accounts. I have $3,000 contribution room remaining for the year. All the investments inside my TFSAs have performed well, except Bombardier stocks BBD.B. Overall I’ve been quite lucky with my stock picks. 🙂
  • Grow my RRSP to $100,000.
    I currently hold $86,000 in my RRSP. I have $10,000 contribution room remaining for 2017.
  • Grow my net worth to $750,000.
    I hope to grow my wealth by $180,000 this year. $60,000 of this increase could come from savings and debt reduction. The remaining $120,000 would ideally come from investment returns. 🙂 This isn’t an unreasonable expectation considering last year’s market performance, and I currently have over $1 million worth of assets.
  • Increase my passive income rate by $2,000/year.
    I plan to invest at least $35,000 into a mix of fixed income securities and dividend stocks. The average yield on new investments would be 4% to create $1,400 of new passive income per year. The remaining $600 growth should come from dividend increases from investments that I already have in my current portfolio.

That’s pretty much it. As usual, the likelihood for me to reach my goals will depend on many factors, including how the financial markets perform which is largely out of my control. We’ve had a great Q4 in 2016 to finish the year on a high note. But who knows how this year will turn out. Setting goals is important because it gives us something to focus on and look forward to. It guides our behavior so we feel a sense of purpose when making financial decisions. 🙂

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Random Useless Fact:

There’s a man in east India who has 39 wives, 94 children, and 33 grandchildren so far. They all live in a 100 room mansion. It takes 30 whole chickens, 132lb of potatoes, and 200lb of rice just to make a family dinner.

 

Jan 092017
 

Chaos theory can make the world very unpredictable. Who knows what the markets will do over the next 12 months? Maybe there are some individuals who are really good at predicting the future.

But I’m not one of them. Nevertheless, it doesn’t hurt to make some predictions just for fun. 😀 Below, not in any particular order, is a list of things that I think might happen this year. It’s all pure speculation of course. 😉

  • The Dow Jones Industrial Average will rise to 20,000 points for the first time in history. It will probably happen this week.
  • The S&P 500 will only return 5% due to continuously low earnings yield.
  • The Nasdaq will see a 11% gain thanks to strong earnings from technology companies like Alphabet and eBay.
  • The S&P/TSX Composite index in Canada will gain by 8% for the year thanks to higher commodity prices.
  • The FTSE TMX Canada Universe Bond Index will return 3%. The popular iShares ETF, XBB, tracks this bond index.
  • Canada GDP grows by 0.9%
  • United States GDP grows by 2.0% helped by tax cuts and fiscal stimulus from a Trump administration.
  • The United Kingdom’s GDP grows 1.2%.
  • Germany’s GDP will crawl along at 0.3%.
  • Canada’s population will grow to 36.7 million people by the end of 2017, largely thanks to new immigrants.
  • Bank of Canada leaves the benchmark lending rate at 0.50%
  • The U.S. Federal Reserve will increase its interest rate only once by 0.25% in the last quarter of the year.
  • The Canadian dollar will weaken against the U.S. dollar to end 2017 at $0.74.
  • Conservative candidate Francois Fillon will win the 2017 presidential election in France.
  • Gold will be worth more at US $1260 by the end of the year.
  • CPI inflation in Canada will be 1.3%.
  • Inflation in the U.S. will be 1.8%.
  • Amazon Go will partner with a grocery chain like Whole Foods so customers can skip the checkout.
  • Apple will announce a new hardware product.
  • The first self-driving car model to be sold publicly will be announced, along with the year it will be available.
  • Canadian real estate prices will be 5% higher compared to 2016 thanks to continuously cheap mortgage rates.
  • Someone will try to shoot Donald Trump
  • Bitcoin will drop 15% in value this year, against the $USD.
  • A new form of cryptocurrency will try to replace bitcoin.
  • Higher interest rates in the U.S. will cause its average real estate price to fall 3%.
  • The 3 largest Canadian banks will return at least 10% to their shareholders.
  • Canadian unemployment rate will fall by 0.2% to 6.7% as Vancouver and Toronto lead the country in job creation.
  • U.S. unemployment rate will tick up from 4.7% in December 2016 to 5.2% by the end of this year.
  • Oil will end the year higher at US $56 per barrel.
  • The Netherlands will hold a referendum to leave the European Union similar to Great Britain last year.
  • A large European bank will need a bailout.

Do you have any predictions for this year? It could be anything you want. Whatever flips your pancake! 🙂 Let’s revisit these at the end of 2017.

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Random Useless Fact:

 

Jan 052017
 

Narrowing Down the Choices

Most bond ETFs have pulled back meaningfully over the last few months. Now is probably a good time to consider buying some bonds in your TFSA. There are over 60 bond ETFs on the TSX to choose from. So which is the best one? Rob Carrick wrote an article about bond ETFs for the Globe & Mail back in 2011. I’ve narrowed the list down to the following 5 exchange traded funds which I think are the most appropriate for Canadian retail investors!

  1. Vanguard Canadian Aggregate Bond Index ETF (VAB)
    A favorite fund among couch potato investors. The default go-to bond ETF. Portfolio manager Justin Bender recommends it in his model ETF portfolio.
  2. Vanguard Canadian Short-Term Bond Index ETF (VSB)
    This is similar to VAB, but contains shorter maturing bonds. Very safe and steady. Popular with conservative index investors.
  3. iShares Canadian Universe Bond Index ETF (XBB)
    This one has been around for a long time. It’s the largest bond ETF here by net asset value. Great track record overall.
  4. iShares Canadian Corporate Bond Index ETF (XCB)
    Holds corporate bonds only. Withstood the great recession very well. Relatively high management fees though.
  5. BMO Mid Corporate Bond Index ETF (ZCM)
    Similar to XCB, but more diversified and lower fees.

Honorable mentions: Horizons Active Corp (HAB), iShares Canadian HYBrid Corp (XHB), TD e-Series Bond Mutual Fund (TDB909)

Maybe there’s a bond fund I didn’t include above that is a better fit for you. Check out Rob’s article to see a more complete list of funds. The following table breaks down the five bond ETFs into categories so we can compare them. 🙂 You can read my previous post about what bonds are if you need a refresher. (Bond table below)

Breakdown of the Top Five Bond ETFs

Comparing Bond ETFsVABVSBXBBXCBZCM
Price per unit as of Jan 2016$25$24$31$21$16
Government / Corporate mix %77 / 2371 / 2969 / 310 / 1000 / 100
Net Assets$1.1 billion$0.8 billion$2.1 billion$1.7 billion$1.2 billion
MER (annual fees)0.13%0.11%0.34%0.45%0.34%
Average duration7.6 years2.7 years7.4 years6.1 years6.2 years
Annual yield2.75%2.45%2.80%3.19%3.18%
Avg yield to maturity2.0%1.2%2.1%2.7%2.8%
% Credit rating AAA45%57%41%4%0%
% Credit rating AA37%23%27%26%22%
% Credit rating A9%11%21%33%26%
% Credit rating BBB8%10%11%38%52%
1 year total return1.2%1.3%1.3%3.2%3.6%
5 year average annual return3.0%1.9%2.9%3.7%4.8%
Morningstar ETF Rating4 stars4 stars4 stars5 stars5 stars
Sector breakdownGov’t 77%
Financial 12%
Industrial 8%
Utilities 1%
Gov’t 71%
Financial 19%
Industrial 8%
Utilities 1%
Gov’t 69%
Financial 12%
Infrastructure 4%
Energy 5%
Industrial 2%
Utilities 1%
Others 8%
Financial 42%
Energy 18%
Infrastructure 16%
Communication 10%
Industrial 7%
Real Estate 6%
Energy 28%
Financial 25%
Communication 15%
Real Estate 13%
Industrial 10%
Infrastructure 9%

 

 

How to Decide Which Bond ETF to Buy

Let’s go down the list of categories one at a time, starting with the government/corporate bond mix. Government bonds in Canada are considered very safe investments. Low risk means low reward. The current yield on a 10 year Canadian bond is only 1.7%, which leaves much to be desired.

However, a 10 year corporate bond can go for roughly twice that yield, reaching between 3.0% to 3.6% return. Here are a couple of corporate bonds I’ve found using my broker’s online web interface – Brookfield Asset Management and Bell Canada bonds. 🙂

As we can see, Brookfield and Bell Canada have investment-grade credit ratings of A- and BBB+ respectively. Both companies are very financially sound, and are well known among stock investors as blue-chip, large-cap stocks (BAM.A) and (BCE).

Bell is literally the largest telecommunications company in the country, worth over $50 billion, and is a full fledged dividend aristocrat. So although there’s a chance BCE could go bankrupt in the next 10 years, the risk of that happening is really low. Government bonds are the safer variety. But after adjusting for risk, I still prefer corporate bonds like Bell that yields 3.2%, over Canadian government bonds that only pay a disappointing 1.7%. Seriously – even GICs offer higher yields than 1.7% right now. 😄

Since I’m comfortable with a 100% corporate bond portfolio, my bond ETF choice is between XCB and ZCM. This is not to say all government bonds are bad. I just think there are better alternatives at this time, given my personal risk tolerance. Continue reading »