Liquid Independence

Liquid is the main editor of the Freedom 35 Blog.

Sep 262016

When Average Isn’t Enough

Everyone knows that exotic dancers are bad at investing. After all, they always end up losing their shirts. 😆 But they are not alone. Most people in general are simply not very successful at investing.

According to BlackRock, the largest financial management company in the world with nearly $5 trillion of AUM, the average American investor managed to make only 2.11% return per year over the past 2 decades. 😱


The saddest part is how this number is even lower than inflation, lol. So in terms of real returns people actually lost money. 🙁 There are many reasons for this low performance. Investors’ sentiments, emotions, and personal goals are all factors. But the reason I want to discuss today is the improper use of investment tools.

Why People Are Generally Bad at Investing

Reason 1 – Not using tax sheltered vehicles

The Roth IRA is a great example of a tax savings vehicle that many American investors have overlooked. In Canada we have the Tax Free Savings Account (TFSA) which has similar benefits; Any investment gains realized within this account is tax free. 🙂

The first problem is that most people don’t use it. According to the CRA, in 2013 only 38% of eligible Canadians have opened TFSAs. The second issue is those who do have this account aren’t making the most of the tax savings. Data from RBC Royal Bank suggests that its clients tend to play it safe when it comes to their TFSA with 44% of holdings in high interest savings accounts. *Yawn* Another 21% is invested in GICs which are also producing rock bottom returns right now. This means only the remaining 35% of the money in TFSAs are actually used for proper investments that hold stocks, bonds, and other asset classes that have a decent chance at beating inflation.

This essentially means that only about 13% of TFSA eligible Canadians are using the investment vehicle correctly. But even less have taken maximum advantage of it because only 7% have fully maxed out their contributions. Of course everyone has different financials goals, which alludes to my post about the debt spectrum. So it may be perfectly suitable for a retiree to put all of his savings into a GIC if it suits his investment objectives. But in general 2.11% should not be the target most investors should aim for. 😉

Taxation is one of the costliest expense on investment returns. If more investors make better use of tax advantaged accounts they can leave more money in their own pockets. 🙂

Random Useless Fact:

33% of Harvard University students get the following question wrong.


Sep 222016

Lower Cost with Interactive Brokers

Everyone likes a discount, especially personal finance enthusiasts. We tend to get hyped over even marginal deals. 😀


Speaking of margin-al discounts. I recently lowered my stock margin rate from 4.45% to just 1.95%. Hot damn! It’s even lower than my mortgage now, haha. 😁

One of the best things investors can do to increase our net returns is to reduce the cost of investing. When it comes to leverage, or borrowing money to invest, the best way to reduce our cost is to find a broker which charges the lowest interest rates. 🙂

In the past I have held my margin account with TD Direct Investing. The current interest rate they offer is 4.25% or 4.75% per year, depending on which currency investors borrow in.


Although TD’s rates are already competitive relative to the other large banks in Canada, it is not the lowest. After doing some research online I’ve discovered that a U.S. based brokerage firm called Interactive Brokers offers the lowest margin rates, and has cheap trading commissions. So I recently transferred my entire margin portfolio from TD to IB to reap the benefits of lower cost borrowing. 🙂

Interactive Brokers Advantages

Here are 4 reasons why I switched to IB.

  1. Reduced margin rates for more cost-effective leverage. I currently have about $54,000 of margin debt. I was paying on average 4.45% a year for this massive loan with TD. But with Interactive Brokers I’m now paying only 1.95% on average because I have both US and Canadian dollars. This represents a difference of 2.50% between the two brokers, which translates into $1,350 of interest rate savings every year! 😀 “BM” in the table below refers to the benchmark rate set by Central Banks.16-09-interactive-brokers-margin-rates
  2. Cheaper trading commissions. TD and many other brokers charge a flat fee of $9.99 per trade when buying stocks. But IB charges 0.5 cent per share for U.S. accounts, and 1 cent per share for Canadian stocks. The minimum cost per transaction is $1. For example if I buy 200 Shares of BMO (Bank of Montreal) shares, then my total commission would be $2.00 CDN. My trades are typically worth between $1,000 to $3,000. This means I rarely buy more than a few hundred shares of anything because most companies I prefer to own are dividend growth stocks, which tends to be priced at $20 per share or higher.
  3. Access to global markets. This isn’t a big deal for most people, but for more advanced investors Interactive Brokers allows trading in foreign currencies outside of North America. This means we can buy European stocks in Euros, or Australian stocks directly from the ASX using Aussie money. 🙂 TD used to have a platform that lets Canadians like myself trade internationally, but they cancelled that service last year. 🙁 I’ve mentioned in a previous post, that I want to diversify into other countries and there could be some good opportunities in the U.K. after the Brexit event earlier this year. So having access to a global trading platform is important for my financial goals. 😉
  4. Great for options trading. $0.70 per contract; $1 minimum order; volume discount available. And in the unlikely chance that our open options are exercised or assigned, there is $0 assignment fee, unlike $43 for TD or BMO.

Disadvantages of IB

Here are a couple drawbacks with IB.

  1. Penalty for not being an active trader. If investors do not spend at least $10 in commissions per month, we will be charged the difference. Furthermore, there’s a $10 fee for real-time quotes each month which is waived if at least $30 in commissions is spent. I typically trade once or twice a month so I will be paying these fees.
  2. $10,000 USD minimum balance to open up an account. This isn’t an issue for me, but some investors might have trouble coming up with $10K.

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Sep 192016

The Effects of Debt on Your Health

According to a Globe and Mail article I recently read, people have gotten sick and depressed thinking about their debts. “Researchers and health professionals are making the case for treating personal debt as a public health problem.” Oh no. 🙁 Dr. Donna Ferguson, a psychologist in Toronto says, “I think that it’s a major crisis. It’s an issue that needs to be addressed.”

The average consumer debt in Canada is only about $21,000. Personally I don’t think that’s a whole lot. Yet psychologists are calling this a “major crisis.” 😠 People are blaming debt for making them feel physically ill. But I have much more debt than they ever will. So if having a healthy relationship with debt is their primary goal, then they should do something to keep their stress under control. 🙂

Luckily I have a solution to help those consumers. If we want them to get better we have to address the root of the issue. The problem is with individual psychology, not with debt. Instead of creating more health problems for borrowers and increase the burden on our public healthcare system, like what Dr. Ferguson suggests, let’s try to educate people about the truth so we can prevent people from feeling ill in the first place.

So here’s my simple yet effective tip to help anyone who may have debt anxiety:

If you don’t think you can handle the debt, then don’t borrow the money. 😀

Sometimes the negative consequences of debt are blown out of proportion. The ASA, a financial support organization, has even made a horror video to show the trepidation and paranoia that comes with having student loan debt, which further supports the common narrative.


Some people have this irrational fear that if we have debt then somehow it will come to get us like the boogeyman. 😆 But the reality is nothing bad will happen as long as we make the payments on our debt.

Missing a Debt Payment is No Big Deal

The consequences for delinquent debt are very lenient towards borrowers. The bank can’t just take our house away as soon as we stop making mortgage payments. In my neck of the woods for example, the bank has to first draft up a foreclosure petition if a mortgage payment is 3 months late. Then the court hearing will be a month later. And then the property goes into a redemption period for up to 6 more months. So we have plenty of time throughout this entire process to get our payments back on track. We can even sell our house if it’s worth more than the mortgage balance.

For other types of debt, if money becomes tight we can enter into consumer proposal or apply for other debt relief options. We’re usually given at least 3 months to catch up on our payments before it goes to a collections agency. Despite the scary rumors, consumer debt cannot physically harm us. We won’t be assaulted or locked up if we’re late on our credit card payments. Nobody will drag us to jail because we failed to make a car payment, lol. The worst they can do to us is take the car away and tarnish our credit score. But I think that’s only fair. Our vehicle is being repossessed only because we broke the debtor/creditor agreement first.

So there’s no reason to get all worried and stressed out over a reasonable amount of debt. 🙂 We just have to be smart and not borrow too much.

Random Useless Fact:

If the original Power Rangers series were made today in 2016, it would probably offend too many people and be banned from airing in most countries.


The yellow ranger was Asian. The red ranger was Native American. The pink ranger was portrayed as a ditsy white girl. The black ranger was black. And in later episodes they introduced the white power ranger who was the strongest.

Sep 152016

Staying in Debt Forever

Sometimes I get asked if I will ever be debt free. Unfortunately I don’t have a good answer for this question. In my previous post earlier this week I discussed the debt spectrum, which describes debt as a financial state along a sempiternal line. This line stretches out in both directions and has no ends in sight because it’s hard to put a limit on the amount of debt we can lend or borrow. For example, it’s common today for regular folks in Zimbabwe to hold literally quadrillions of dollars of debt in their outdated, but still existing currency. 1 quadrillion looks like this: 1,000,000,000,000,000.😁

Compared to a huge number like that, it would appear most Canadians have a much more reasonable amount of debt. 🙂


Of course that’s not a fair comparison, but the point is almost everyone has some form of debt or another. Since I believe in the debt spectrum concept, I don’t view debt as something that I can ever remove from my life completely.

To me debt is a continuous road that I’m constantly on. There’s no beginning and no end. I’m either a net debtor or a net creditor. I’m either buying debt or I’m selling debt. I use leverage when interest rates are low. I lend money to people who need it when interest rates are high. I might do both at the same time. Debt will always be a part of my life just as it is a part of the broader economy. My position on the debt spectrum will constantly shift from left to right depending on changing circumstances. But I will never not be on the spectrum.

Even in a high interest rate environment where I’m a net creditor, there could still be unique opportunities where I would borrow money. For example, I could use promotional credit card rates where I can borrow money at 2% and invest in a safe bond that yields 4%.

So it’s hard to answer the question if I’ll ever be debt free, because the idea of being “debt free” is kind of irrelevant within the context of the debt spectrum.

Being “debt free” on its own doesn’t mean a whole lot anyway. A barista could be debt free with a net worth of $0. But a stock broker could have $5 million worth of index funds in his portfolio with the help of a $50,000 margin loan. The first person is broke while the second person is a financially independent millionaire. But it’s impossible to tell by simply looking at their debts. This is why the debt spectrum is much more useful.

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Sep 122016

A Philosophy on Debt

Many people have this oversimplified, binary view on debt which suggests you either have debt, or you don’t. But the world of debt isn’t black and white. Much like women’s erotic fantasies, debt tends to operate in many Shades of Grey. 😀 However instead of only 50 shades, the debt spectrum covers an infinite span of possibilities! But don’t get too excited yet, ladies. Let me first explain how debt really works. 😉

What is the Debt Spectrum?

A blog reader recently asked if I will always carry a certain level of debt. It’s hard for me to answer this question without first explaining what debt means to me. So today’s post will cover a slightly more advanced topic of personal finance; the Debt Spectrum.

I will discuss this important concept and how I use it to make decisions about whether to borrow money or pay down debt. 🙂 Let’s get started.

Whenever I think about debt I imagine a spectrum.

The debt spectrum can be thought of as a horizontal line that stretches forever in both directions. Along this line are numbers representing how much debt we owe. For example if we have a $100,000 mortgage and $20,000 student loan debt, then we would be situated at the +$120,000 mark on the spectrum.


It’s important to remember that this continuum measures net debt owed. So for example in my case, I owe about $470,000 of debt. But I also own about $40,000 of other people’s debts. So my net debt owed is the difference between the two, which is +$430,000. I’ve marked this on the image above.

Why is this Important to Know?

The way to make money is to improve our investment returns. The way we do that is by maximizing profit while minimizing risk. The debt spectrum is an essential tool to gauge our investment risk. It can give us an overall indication of our debt profile so we know if we’re under-leveraged, over leveraged, or positioned just right. 🙂

How to Make Use of the Debt Spectrum

There is no specific formula for calculating where we should be along the debt spectrum. But here are 6 important variables that should factor into our decision.

The 6 Debt Spectrum Variables

  1. The cost to borrow (AKA: interest rates)
  2. Personal health condition
  3. Risk tolerance
  4. Investment objectives
  5. The state of the economy
  6. Future goals 

We’ll use myself as a case study to work through each of these variables.

  1. The average borrowing cost across all my debt outstanding is about 2.9%.
  2. No health problems.
  3. I have a good income, and no spouse or kids yet to take care of so my risk tolerance is quite high.
  4. Main objective is growth. Secondary objective is hedging.
  5. Slow economic growth with loose fiscal and monetary policies.
  6. Become financially free

So based on these factors which are true about my particular situation, I am sitting at $430,000 of net debt owed. This feels about right to me as I don’t find it hard to keep up with my debt repayment. But I’m also in a good position to capture any future market gains.

If none of the 6 variables change then my position on the debt spectrum shouldn’t change either.

If I come back a year from now, I can use my position on the debt spectrum today as a reference point to compare my financial progress. This will help me make better decisions over time as I keep track of my benchmarks. Let’s play around with the first variable (borrowing cost) to demonstrate how this works.

The Effects of Changing Interest Rates

Let’s say next year my average borrowing cost increases from 2.9% to 3.5%. Assuming all other factors remain the same, this means I have to lower my overall debt and move left on the debt spectrum.


This is because I can’t afford to service 3.5% on my debt as it stands today. So I may lower my net debt by $30,000 in order to keep my minimum debt payments the same amount every month. This way, I’m preventing any additional risk or financial burden to my cash flow.

On the other hand if my interest rate falls from 2.9% to 2.3% then I would go out and borrow more money which means moving right on the debt spectrum by accumulating more debt.


In this scenario, I can afford to borrow more money because the cost to service debt has gone down while nothing else in my life has changed. So I may increase my debt by $30,000 in this situation, and invest the money in an asset which has an annual expected return higher than 2.3%. For example, Enbridge Inc (ENB), a relatively stable blue-chip stock, currently pays a 3.6% annual dividend and has been gradually increasing its dividends for the past 60+ years! 😀

Enbridge recently agreed to acquire Houston-based Spectra to create an energy infrastructure empire. 95% of all cash flow in the combined company will come from long term contracts that are unaffected by oil and gas prices. The newly formed energy giant is basically guaranteeing continued annual dividend growth in the 10% to 12% range all the way through 2024.

I would simply ask myself which of the 2 scenarios below would MOST LIKELY lead to a better financial outcome for me 10+ years from now?

Option 1: Borrow money at 2.3% today to invest in Enbridge that pays 3.6%.
Option 2: Don’t take any action.

After doing the proper due diligence, I’ll probably conclude that option 1 would have a greater probability of making me more money in the long run. So that is most likely what I would do if my average cost to borrow went down to 2.3%.

At the end of the day if borrowing becomes cheaper, I increase my debt. And if borrowing becomes more costly, I reduce my debt.

The principle behind this strategy of moving back and forth on the debt spectrum is to maximize returns for the future without compromising security in the present.

The debt spectrum helps me track and evaluate how my overall debt should move when circumstances such as interest rates change. It’s also important to use the debt spectrum in conjunction with my stress tests to help me understand where my limitations are so I don’t lose my shirt in the next market correction.

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