Liquid Independence

Liquid is the main editor of the Freedom 35 Blog.

May 062019
 

Another Strong Month for Stocks

The age of monetary tightening is on pause, at least for now. Central banks have pumped the brakes on increasing interest rates. This has been great for the U.S. and Canadian stock markets, which have both hit new highs in April. But does that mean it’s time to sell and take profits?

Probably not. It’s really hard to predict market movements, and record high stock prices can continue to climb higher before starting to fall. So I’ve opted to go for another strategy; Park some savings in bonds and wait for a better opportunity to jump into stocks again. 🙂

So at the end of last month I used about $25K of my cash savings in my RRSP to purchase 1500 units of BMO Mid Corporate Bond Index ETF (ZCM.)

It has a 3.2% yield, so I shall be earning an additional $67/month of investment income going forward. Not a big change, but better than nothing. 😀 The cash in my RRSP to make this investment came from my old work pension. I transferred the money to my personal retirement account after I was let go.

Liquid’s Financial Update

*Side Incomes: = $2,800

  • Part time job =$700
  • Freelance = $500
  • Dividends =$800
  • Interest = $800

*Discretionary Spending: = $2,300

  • Food = $400
  • Miscellaneous = $500
  • Interest expense = $1400

*Net Worth: (ΔMoM)

  • Total Assets: = $1,353,200 (+13,100)
  • Cash = $11,400 (-800)
  • Canadian stocks = $175,000 (+3600)
  • U.S. stocks = $131,800 (+7200)
  • U.K. stocks = $22,500 (+800)
  • Retirement = $130,300 (+1500)
  • Mortgage Funds = $35,400 (+500)
  • P2P Lending = $34,800 (+300)
  • Home = $367,000 (assessed land value)
  • Farms = $445,000
  • Total Debts: = $410,300 (-700)
  • Mortgage = $188,400 (-400)
  • Farm Loans = $178,200 (-400)
  • Margin Loans = $43,700 (+100)

*Total Net Worth = $942,900 (+$13,800 / +1.5%)
All numbers are in $CDN at 0.75/USD

 

I’m not selling any stocks because despite the uncertain direction in the relatively volatile equity market I’m still earning nearly $1,000 in dividends every month, and I don’t want to sacrifice real dividend income for a hypothetical crash that may not happen in the near future. So it makes sense to buy some fixed income assets such as the corporate bond fund, ZCM. My intent is to hold ZCM for the 3.2% annual interest income. Then sell this fund, and replace it with stocks once the stock market goes into a correction. 🙂

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Apr 292019
 

Earlier this year hedge fund manager Ray Dalio gave 3 financial recommendations for millennials in an interview.

His first recommendation is to focus on savings, and to think about how many months of living expenses your savings can get you through. Savings, explains Dalio, is “freedom and security.” Savings can also provide you with opportunities. If you need to further your education, start a new business, or invest in a discounted asset, it’s easier if you have extra money. If you can accumulate enough savings to last you for the next 300 months then you can be considered financially independent. 🙂

Dalio’s next advice is about what to do with your savings. He says “it’s important to realize that the least risky investment that you can make, which is cash, is also the worst investment you can make over time. You can judge that by comparing the rate of inflation to the after tax rate of return you will earn.” So if inflation is 2%, and you’re only making 1% on your cash investment then you are actually losing purchasing power and getting poorer. “So you have to move into other assets that will do better over a longer period of time.” This is why some people like myself don’t have a cash emergency fund.

The last advice Dalio gives is a bit of surprise to me. Instead of going with the mainstream and buying an index fund, he suggests that millennials should do the opposite of what their instinct tells them to do. This can be emotionally difficult to pull off. The market reflects the crowd and your instincts will usually lead you to do the same thing the crowd is doing. But herd mentality won’t get you any further than the rest of the herd. So you want to buy when no one else wants to buy. Famous investor Warren Buffett has a similar saying: “Be fearful when others are greedy and greedy when others are fearful.” The best way to approach this last advice for me is to apply original research and critical thinking to your investment strategies if you want to outperform the market. But then again, a lot of people are perfectly happy earning market returns and I think indexing is an acceptable way to invest as well.

Ray Dalio created a 30 min YouTube video about his famous work, Principles for Success. He believes that dreams, reality, and determination can all help to create a successful life. And that pain plus proper reflection will give us the tools to progress. It’s an interesting watch if you’re into mental models and self development.

 

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Random Useless Fact:

An actress posted a photo of a man’s rear because she was tired of being harassed online by people leaving lewd comments on her Instagram account.

Apr 152019
 

Actionable Advice – From Rags to Riches

I recently came across Quora contributor Kevin Yue’s response about the best financial advice he had ever received. The surprising answer comes from his dad, who escaped to the U.S. as a broke, war refugee. Over time Kevin’s dad turned his life around and eventually became part of the top 1% richest in the country. So here are some of his financial rules.

1. When making a purchase ask questions from an investment point of view instead of one based on consumption

There are financial ramifications to every spending decision. If you buy that new laptop, will you also need a case for it? What about extended warranty? If you buy that car, will you need to buy premium gasoline every time you fuel up? Will the vehicle hold its value well over the next 5 years? If you buy a house, how will that impact your taxes or gas bill? Will your maintenance and repair costs go up over time?

What is the potential for land appreciation in that neighborhood? The point is just because you buy something once doesn’t mean it will only cost you once.

Kevin warns that people usually ask all the wrong questions when they shop. For example, “when buying a new pair of shoes, do not ask how good they look or what brand they are. Instead, ask how long will they last, and in what kind of weather, and what the warranty is. If you get a good pair of warm waterproof boots with a lifetime warranty, they could literally be the last pair of boots you’ll ever buy. It is much better to buy a $400 winter jacket which will last you 20 years than a $200 one which will last you 6.” And both of those options will be better than the $800 jacket that will be out of fashion in 2 years.

2. A dollar saved is $20 earned

$1 invested will become $20 in 40 years.  “This is the magic of compound interest,” Kevin explains. “In practical terms, it means that your go-to option should always be to tighten your belt. Put away some money every week, and it will eventually pay itself back 20 times over.”

3. Never lose money for free

“Paying extra tax is losing money for free. Never pay your credit card late. Late fees are losing money for free. Paying interest is losing money for free. Always comparison shop. Why pay more for the same product? That’s losing money for free. Turn off your heat when you leave the house. Leaving the heat running is losing money for free.” Kevin’s dad used to turn off the heat entirely, but left his apartment door wide open to steal heat from the hallway.

Although going into debt is generally not advised, “there are some occasions when borrowing money is not losing it for free.” For instance, investment loans, HELOCs, and mortgages in the U.S. can be tax-deductible. “In these cases, sit down with a calculator. Doing the math wrong (or worse, not doing it at all) is losing money for free.” Another thought is to not leave any money on the table when negotiating.

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Apr 022019
 

Getting out of 21st Century Fox 

Five years ago I wrote about purchasing 26 FOXA shares for $34 USD each. At that time the stock was trading at 20 times earnings, so it wasn’t exactly cheap. However I saw great potential in this company because it had a lot of popular brands and intellectual properties. I had planned to hold this stock for decades. But I didn’t have to.

Fox shareholders approved the acquisition by Disney, and last month I was forced to sell all my FOXA stocks for $1,843 CAD. That’s a tidy 83% return on investment, before even adding on the dividend income I received over the years. 🙂 Plus, there’s no capital gains tax because it was held in my RRSP. Yay!

Overall March has been a really positive month for my finances. All my liquid assets went up in price.

Liquid’s Financial Update

*Side Incomes: = $3,300

  • Part time job =$700
  • Freelance = $600
  • Dividends =$1200
  • Interest = $800

*Discretionary Spending: = $2,400

  • Food = $300
  • Miscellaneous = $700
  • Interest expense = $1400

*Net Worth: (ΔMoM)

  • Total Assets: = $1,340,100 (+8,200)
  • Cash = $12,200 (+1000)
  • Canadian stocks = $171,400 (+800)
  • U.S. stocks = $124,600 (+4000)
  • U.K. stocks = $21,700 (+900)
  • Retirement = $128,800 (+1000)
  • Mortgage Funds = $34,900 (+200)
  • P2P Lending = $34,500 (+300)
  • Home = $367,000 (assessed land value)
  • Farms = $445,000
  • Total Debts: = $411,000 (-900)
  • Mortgage = $188,800 (-300)
  • Farm Loans = $178,600 (-500)
  • Margin Loans = $43,600 (-100)

*Total Net Worth = $929,100 (+$9,100 / +1.0%)
All numbers are in $CDN at 0.75/USD

 

Preparing for Interest Rates to Drop

It’s been several years since the Bank of Canada lowered interest rates. The last cut was in 2015. Central banks around the world dropped rates near zero as a reaction to the global finance crisis in 2008 and rates have been low since. Policy makers expected the economy and rates to rebound back to normal in short order. But they discovered an inconvenient truth to the markets; low interest rates are addictive. Once consumers get a taste of easy credit, it’s very difficult for them to pull back.

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Mar 122019
 

Lending Loop Update

I’ve been investing with Lending Loop for over 2 years now. My first year in 2017 was better than expected, ending with a 10% return net of expenses. I was only expecting an 8% return. In today’s post I’ll dive into my 2018 performance with Lending Loop and also explain how the site has changed over the last year.

 

Liquid’s 2018 Portfolio Performance (11% return)

My 2018 average loan interest rate after fees was 12.7%. A loan write-off shaved away 0.7%. And a bunch of delayed payments costed me another 1%. Which means my actual net return came out to be 11%, or $3,369. Score! 😀 I started 2018 with $30,400 in my account, and the end of year balance grew to $33,700.

Here is my 2018 earnings statement.

Income

  • Interest earned   $3,968
  • Servicing fees       -$421
  • Bonuses                    $25
  • —————————-
  • Total earnings    $3,572

Loan Losses

  • Principal defaulted    $204
  • Principal recovered       -$1
  • —————————
  • Total charged-off       $203

Unfortunately I did have one loan write-off in 2018. But it was a relatively small loss of $203. The borrower, a street sweeping business, owed significantly more taxes to the CRA than the value of its assets. The CRA would naturally have priority over other creditors in any bankruptcy or insolvency proceedings. This was the first loan write off in my portfolio, but it likely won’t be the last.

 

Portfolio at a Glance

Here are some quick stats about my Lending Loop portfolio.

  • I have made 87 loans in total over 25 months.
    • 18 of those loans have been paid off in full. Hurray!
    • 1 has defaulted, and I lost 81% or ($203) of my principal on this loan.
    • 68 loans remain ongoing for now. 60 of these have no major problems, but 8 are either delinquent or in default.

As of this week in March 2019, I’ve made a lifetime earnings of $6,300 from Lending Loop. 🙂

As with dividend or real estate investing, having patience is a key element to the fixed income game. Due to compound interest, my total lifetime earnings should hit $10,000 by this time next year, assuming portfolio performance remains consistent. 🙂

In terms of what types of loan I hold, they’re mainly B and C+ grades, which has an expected yield range of 10% to 13% after fees. This mixture hasn’t changed much for me over time. Most of the loans I participate in have a 3 to 4 year term.

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