Liquid Independence

Liquid is the main editor of the Freedom 35 Blog.

Aug 172017
 

Holding some cash for emergencies or opportunities is a sound idea. But having too much cash sitting around instead of putting the money into investments can be financially unwise.

Like most things in life, there is a cost component to cash – which is that cash usually produces lower returns than other asset classes such as stocks or bonds. One advantage of holding cash is to deflect volatility in a portfolio. But with a longer time horizon investors can manage volatility by using fixed income vehicles instead of cash. Long term corporate bonds from large, stable companies such as Enbridge pay 3.5% or higher annual returns, easily beating the interest earned in a savings account. πŸ™‚

According to investment management company, BlackRock, people who have allocated their money towards cash or cash equivalent assets actually lost purchasing power in the past. The value of their savings slowly whittled away at 0.8% per year on average between 1926 and 2014. This gives a whole new meaning to cash poor.

Holding cash for one or two years isn’t a big deal because the loss is very small. But over time it can build up to significant loss of buying power. The longer the investment time horizon, the less cash investors should consider holding. For a multi-decade horizon and high return objectives, which is the strategy I’m personally using, having excess cash savings would be a liability because it produces negative real returns. Sometimes the risk is not being aggressive enough with our investment plan and losing out on easy gains.

According to a survey by State Street’s Center for Applied Research, globally retail investors are holding 40% of their assets in cash. Uh oh. If someone has 60% of their portfolio in bonds, and the rest in cash then they could be making zero progress with their portfolio after inflation and tax.

If I’m sure I won’t touch my money until I retire, then I should take advantage of my long time horizon. This is why I don’t keep more than 1% of my net worth in cash, unless I’ve earmarked savings for a large, specific purchase. πŸ™‚

 

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Random Useless Fact

Aug 102017
 

It seems like every month the stock market is reaching new highs. Stock investors like myself have benefited greatly from theΒ second longest bull run in history. πŸ™‚ But it’s becoming very difficult to find value in traditional asset classes such as stocks, bonds, and real estate. So I’ve been looking at cryptocurrencies recently. As with any potential asset class my goal is to measure the future potential benefits of an investment and compare it with the risks.

Anyone can create a cryptocurrency as long as there’s a community backing it. That’s why there are over 1,000 digital currencies in the world today. According to Coin Market Cap, the 3 most popular ones are Bitcoin, Ethereum, and Ripple, in order of market capitalization. There are many smart people supporting these digital currencies built on blockchains, which is essentially a public record of transactions. For example I’ve been following investor Brock Pierce on Twitter. He used to be a child actor in many Disney movies lol, but what Brock Pierce is doing today is very promising for the cryptocurrency market. According to his crunchbase profile, he’s been in the venture capital space for over a decade now and is trying to make Bitcoins more mainstream. In an interview last month with The Guardian, he predicts that the “underlying technology of blockchain is going to impact our world more than the internet has.” And he’s not alone. Patrick Byrne, the CEO of e-commerce giant overstock.com, firmly believes that Wall Street will be forced to accept Bitcoin technology faster than most people think. Byrne’s company was the first major retailer to accept bitcoin as payment starting in 2014, long before competitors like Microsoft and Dell.

One major barrier to entry with bitcoin has been the lack of acceptance among merchants. From a consumer point of view, there’s not much point in holding an asset that hardly anyone recognizes. But if cryptocurrencies really catch on with mainstream consumers then now may be a good time to buy and hold some digital coins for diversification purposes. The price of bitcoin has risen 500% in the last 12 months, according to coindesk. And the price of Ethereum has gone up over 2500%. Wow! πŸ™‚ I don’t have any digital currencies yet but I’m tempted to put a small amount of money into either Bitcoin or Ethereum and hold it for the long term. One problem is that buying cryptocurrency can be difficult for Canadians. Both the established banking system as well as the government really don’t like blockchain technology because it’s decentralized and not easy to tax or control.

For anyone interested to gain exposure to the price of bitcoin without actually buying any, there’s a fund for that. πŸ™‚ Investor Barry Silbert has been one of the most active angel investors in Bitcoin. He has funded over 40 bitcoin-related startups such as BitGo, BitPay, Coinbase, Gyft, Kraken, and TradeBlock. He also launched the Bitcoin Investment Trust, which is publicly traded under the symbol GBTC in the United States. This trust solely invests in and derives value from the price of bitcoin. This gives investors the chance to benefit from bitcoin price movement through a traditional investment vehicle, without the hassle of buying, storing, and safekeeping bitcoins. But personally I would rather own a digital currency directly so not to pay management fees, especially when I plan to hold for a long time.

When it comes to investing in alternative asset classes, it’s worth looking at digital currencies. I don’t intend on investing in Bitcoins right now. I will continue to do more research on it first. Even if I decide to purchase some in the near future I will keep my cryptocurrency exposure to less than 1% of my net worth. Bitcoin may outperform stocks over the next 10 years, but it also carries a lot of liquidity and volatility risk.

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Random Useless Fact

Potato chip bags are not full of air, but of nitrogen gas. This is done to prevent the chips from oxidizing and going stale in the bag.

 

Aug 092017
 

It was a slow month in July. But Β at least I’m back in the black. πŸ™‚ Household expenses were pretty normal, but incomes were above average; I received $800 of interest payments from a variety of loans such as P2P lending contracts and mortgage investment corporation funds. Yay!

Liquid’s FinancialΒ Update

*Side Incomes:

  • Part-Time =Β $1100
  • Freelance = $700
  • Dividends =Β $800
  • Interest = $800
*Discretionary Spending:
  • Fun =Β $300
  • Debt Interest = $1100

*Net Worth: (Ξ”MoM)

  • Assets:Β = $1,111,700 totalΒ (-2,000)
  • Cash = $2,500Β (-2800)
  • CanadianΒ stocksΒ = $146,400 (Unch)
  • U.S. stocks = $91,400Β (-200)
  • U.K. stocks = $19,900Β (-200)
  • RRSP = $83,100 (+500)
  • Mortgage Funds = $31,500Β (+500)
  • Peer-to-Peer Lending = $21,100Β (+200)
  • SolarShare Bonds = $9,800
  • Home = $270,000
  • Farms = $436,000
  • Debts: =Β $481,600 totalΒ (-4,400)
  • Mortgage = $182,500Β (-400)
  • Farm Loans = $188,300Β (-500)
  • Margin Loans = $57,900Β (-2400)
  • TD Line of Credit = $12,400 Β (-600)
  • CIBC Line of Credit = $24,500 (-500)
  • HELOC = $16,000 (unch)

*Total Net Worth = $630,100Β (+$2,400 / +0.4%)Β 
All numbers above are inΒ $CDN.Β 

I took some savings in July and paid down some of my higher interest debts. Now that the cost to borrow is 0.25% higher I have to lower my overall debt to not become overwhelmed by interest payments.

 

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Random Useless Fact

Sometimes tough love is the best way to learn.

Jul 312017
 

One of the best thing we can do with our incomes is to deploy it as efficiently as possible. This means spending money on the highest priorities before paying for less important things.Β In 2015 I created aΒ priorities list detailing how to spend one’s income to maximize financial success. The last time I updated that was chart was last year.

I recently came across another flowchart on the internet created by Reddit user u/atlasvoid. It has a lot more information than mine and is worth a read because there might be something in there that we didn’t think of before. Of course since everyone has different values and priorities, there can never be a once-size-fits-all income allocation flowchart. πŸ™‚ They are only a reference point at best, based on people’s average financial situation. Feel free to move around certain nodes in the flowchart to better suit your own individual circumstances.

Here is the Canadian version. Click the flowchart to make bigger.

 

Click here to download the income flowchart for Americans, created by the same Reddit user.

 

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Random Useless Fact

Some bartender added 1 cent to this customer’s bill in order to make the total come to $69.69

Jul 272017
 

A recent poll from Harvard University points out that 51% of young adults between 18 and 29 years of age do not support capitalism. πŸ™ Only 42% said they support it. Of course the results of these kinds of surveys are not easy to interpret. Capitalism doesn’t have the same meaning for everyone. One explanation for the outcome could stem from the fact that not all millennials understand what capitalism is. They may be frustrated with crony capitalism or corporatism, which is rampant in the world today. But those are not the same as capitalism.

The idea of capitalism simply means a free market system where individuals have the rights to personal property and the enforcement of their contracts. πŸ™‚ That’s it. Another survey that included people of all ages found that only respondents who are at least 50 years old supported capitalism for the most part. Older people understand that capitalism works well because government intervention was measurably less in North America before the 70s so there were less lobbyists and public bailouts. The ratio of government employees to the general population in the United States has grown under Obama and Bush.

It’s ironic that the cohort most against capitalism is generation Y. They of all people are most dependent on the advantages offered by the free market system. πŸ™‚ Millennial don’t really care about government pensions or public health insurance all that much. But they will be become very upset if you take away private services like Facebook, Amazon.com, Netflix, or any of Google’s services (Google Search, Gmail, etc.)

Popular TV personality Jim Cramer once created the acronym FANG. It represents 4 of the most popular and best-performing technology companies on the stock market. FANG stands for Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG) (GOOGL), which has now become Alphabet.

Last week I purchased 8 shares of Facebook at $164 each. πŸ™‚ It’s a U.S. stock and doesn’t pay a dividend, so for tax purposes I bought it inside my TFSA at TD. Year to date all the FANG stocks have returned at least 25% to investors. Yay! I already had the other 3 stocks so by picking up FB I now have a full FANG portfolio. πŸ˜€ Amazon has grown to a market capitalization worth half a trillion dollars as of writing this post!

Millennials in general may say they don’t support capitalism. But they sure spend a lot of money, time, and attention helping some of the most capitalist entities in the world become even more profitable. As the saying goes; actions speak louder than words. And the trend is clear. For the sake of my financial goals I will continue to invest in large tech stocks and trust the free-market will provide growth over the long run. πŸ˜‰

 

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Random Useless Fact:

Carrots were originally white or purple. Then a yellow carrot appeared through mutation and the familiar orange carrot we see today was bred from it.