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Fiscal Update March 2020 – Worst Month Ever

Apr 062020

Monitoring the Outbreak

Over a million confirmed people have been infected by the virus. Many countries are starting to see the curve flatten so maybe the worst is behind us. Even so, we should continue to practice physical distancing and regular hand washing. Make sure to stock up on food that won’t spoil quickly. Lately I’ve been telling my friends about the health benefits of eating dried grapes. It’s all about raisin awareness. 😎

Investment Performance

The TSX dropped 18% in March. In the U.S. the Dow Jones fell by 14%. It has been the worst Q1 ever in U.S. stock market history. Ouch. But that’s why we diversify. 🙂 On March 1st only 40% of my assets were tied up in the stock market. I’ve also been buying companies at their recently reduced prices which lowers my overall entry cost. Furthermore, a higher U.S. dollar has resulted in certain parts of my portfolio making gains this month. As a result, my net worth only fell by 5.3% in March. I’m disappointed to see my net worth decline three months in a row. But it could have been a lot worse.

I’m expecting more volatility ahead. Just three trading days into April and the stock market is already down 4%. Oof.

On the bright side I am able to work from home so my job income isn’t at risk. And since interest rates have been slashed 1.5% I’m saving thousands of dollars annually on my mortgage and margin debt compared to last year.

Liquid’s Financial Update March 2020

*Side Incomes: = $4,800

Part time job =$600
Freelance = $200
Dividends =$1200
Interest = $1000
Rent = $1,800

*Discretionary Spending: = $1,600

Food = $300
Miscellaneous = $400
Interest expense = $900

*Net Worth: (ΔMoM)

Total Assets: = $1,455,700 (-$55,400)
Cash = $42,500 (-111,000)
Canadian stocks = $266,000 (+56,700)
U.S. stocks = $128,300 (-5,200)
U.K. stocks = $17,800 (-2900)
Retirement = $150,100 (+10,500)
Mortgage Funds = $33,900 (-3800)
P2P Lending = $36,100 (+300)
Home = $331,000 (assessed land value)
Rental Unit = $450,000 (2020 purchase price)

Total Debts: = $529,400 (-3,800)
Home Mortgage = $182,900 (-1500)
Rental Property Mortgage = $314,300 (-700)
Margin Loans = $32,200 (-1600)

*Total Net Worth = $926,300 (-$51,600 / -5.3%)
All numbers are in $CDN at 0.71/USD

Rebalancing

I’m happy overall with my diversification strategy. But due to the recent correction I only have 34% of my assets in the stock market. I would like to increase this back up to 40% of my asset allocation. So for the near future I will be looking at investing my savings into equities, primarily blue chip Canadian companies that pay dividends. 🙂 Here’s a pie chart showing the breakdown of my assets today.

Some people might be concerned to discover that Vancouver real estate makes up half of my total asset’s value. Doesn’t that seem a little risky? I have heard that real estate here is overpriced and we are due for a major correction any day now. But then I crunched the numbers for myself. Compared to alternatives, I realized that Vancouver home prices were actually justified which I discussed in detail last month. That’s why in December last year I bought real estate instead of stocks.

But of course these days the equity market is down 25% from the peak. So that’s why recently I’ve been loading up on high quality stocks at discounted prices, increasing my forward dividend income by over $7,000 a year.

And I’m not the only one shopping around these days. Other personal finance bloggers such as genymoney.ca have been loading up on dividend stocks as well. She increased her annual dividend income by 75% year over year. When assets go on sale, you buy more. 🙂 It’s about finding bargains in a financial world that’s constantly changing. When the stock market’s P/E ratio eventually expands again, those who bought into the downturn will be glad they did. 😉

Buy low, sell high and hold

A reliable path to reach financial independence is to build a stream of passive income to pay for all living expenses. No matter if it’s real estate, dividend stocks, or bonds – the basic premise is to buy income generating assets. Then simply hold them for their investment income. Re-invest the proceeds over time and investors will be greatly rewarded for being patient. You don’t need a lot to get started. But you have to start to end up with a lot. 😉

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Random Useless Fact:

No one was safe from the 1918 flu pandemic. No one.

How Rich Should You Be? – A Simple Wealth Formula

Economics 11 Responses »

Feb 172020

What should your net worth be?

Author Thomas J. Stanley, first published his Wealth Equation in the book, Marketing to the Affluent. He states that your household’s net worth should equal 10% of the age of the primary breadwinner times your household’s annual realized income.
So your expected net worth = (Age)x(0.1)x(Income)

If you are in the Balance Sheet Affluent category, also known as “prodigious accumulators of wealth”, then your net worth should be twice the expected value.

In short, you will be considered affluent if your net worth is 2x the expected result based on this equation. 🙂 This is not a perfect indicator of affluence as it usually becomes easier to accumulate wealth as people progress further in their careers. But it’s a good place to start looking at how you measure up to others in similar situations. Give the Stanley Wealth Equation a try for yourself and see where you land. 🙂

When it comes to reaching a net worth of a million dollars by age 60, a good rule of thumb is to save and invest 5% of your income in your 20s, 10% in your 30s, 15% in your 40s, and 20% or more during your 50s.

A passive way to increase your wealth

Wouldn’t it be awesome to grow your net worth without having to think about it? Well there’s a practical way to do this. 😀

According to Stanley, to build up a large amount of wealth you can simply live in a neighbourhood where your income is among the highest. For example, if your household income is $120,000 then you should live in an area where the median value of a home is less than $400,000. By doing so there’s a good chance that your income will be in the top 20% in that neighbourhood. Then you can live and consume as though your income was 20% or 30% lower than it actually is. Save the difference. Accumulate your wealth. And you will not feel like you’re missing out on anything in the meantime. 🙂

Living on less than you earn is pretty easy in this situation because people who live in the same area tend to have comparable fixed costs anyway. For example, many families who on the same block will pay similar rent. Property tax rates are also similar. Many residents will drive similarly priced cars, and shop at the same local grocery stores. Do you want to be the only household on the street with a $240,000 McLaren GT parked in the driveway while everyone else drives $30,000 sedans or $50,000 SUVs? Probably not. You’ll stand out like a sore thumb. Your neighbors will be jealous and think you’re a total snob. And you’ll be the designated target for any neighbourhood crimes such as vandalism, theft, property damage, or burglary.

So living in an area where your income is in the top quintile almost forces you to live within your means and save more. The average savings rate in Canada is only 3%. It’s higher in the U.S. at roughly 8%, but still on the low side. Where you live matters a lot to your wealth building potential. If you live in a modest neighbourhood compared to your income you can easily keep up with your neighbours, while still maintain a large savings rate. 🙂

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Random Useless Fact:

Pesticides can threaten biodiversity and are harmful to the environment.

Fiscal Update Nov 2019 – Millionaire Status Achieved

Economics 42 Responses »

Dec 022019

Best Bull Market Ever

Stock markets are at record highs. The year to date return of the S&P 500 is 25% – a staggering performance! But of course making money from companies isn’t just about percentages. Otherwise everyone would simply invest in hard liquor. Because where else can you get 40%? 😎

In 2008 my net worth was $0. But thanks to the strong market performance over the last 11 years I’m finally a legit millionaire! Hurray! 😀

I’m currently worth $1,024,500 😀. Apparently only 1% of self-made millionaires become wealthy before the age of 40. So I feel very fortunate to have this experience now. But my journey is far from over. In about 3 years I will be 35 yrs old. By then I hope to realize my ultimate goal of becoming financially free – hence this blog’s name. 😀

Every few years I update my financial freedom progress. The last time I fully inspected my finances was in 2017. During that update I calculated my net worth to be $610,000. I guess I should post another update soon to see if I’m still on track.

In terms of which investments got me to where I am, the biggest heavy hitters I have in my portfolio are stocks and real estate. 🙂 Both asset classes have performed tremendously over the last decade. That’s the wonderful thing about investing. You don’t have to be highly educated or technically skilled. You can simply buy something and wait for it to go up. Then you automatically go along for the ride and watch your money grow. 😉 As a buy-and-hold investor of dividend stocks and real properties I’m able to keep my trading and management fees to a minimum. Here is my current asset allocation breakdown.

Why have investments gone up so much in value since the great recession? It’s primarily thanks to the central banks. Around the world they have quadrupled the money supply in the financial markets from $5 trillion, to over $19 trillion. Apple cannot issue shares via a new IPO, and nobody is making new land out there. So nearly all the newly printed money is chasing after existing, finite resources. The result? Investors win. Investors who use other people’s money to invest win more. And savers lose.

Although my wealth hasn’t changed much month over month, there’s something visceral about that $1 million figure that makes me feel like a proper Bourgeoisie. 🙂 Maybe it’s all in my head. But it feels pretty amazing to have this level of financial security.

However I have to be careful. With great wealth comes great temptations. The average millionaire goes bankrupt at least 3 times, haha. Both Henry Ford and Walt Disney lost all their money and filed for bankruptcy before achieving a more permanent level of success. I hope I can keep the moment going and continue to build up my portfolio. 😀 It would be nice to eventually earn a six-figure passive income from my investments.

Liquid’s Financial Update November 2019

*Side Incomes: = $3,200

Part time job =$800
Freelance = $500
Dividends =$1200
Interest = $700

*Discretionary Spending: = $2,400

Food = $400
Miscellaneous = $700
Interest expense = $1300

*Net Worth: (ΔMoM)

Total Assets: = $1,406,600 (+22,100)
Cash = $13,200 (+4100)
Canadian stocks = $200,500 (+5400)
U.S. stocks = $140,500 (+5600)
U.K. stocks = $22,700 (+800)
Retirement = $143,000 (+5300)
Mortgage Funds = $37,700 (+600)
P2P Lending = $37,000 (+300)
Home = $367,000 (assessed land value)
Farms = $445,000

Total Debts: = $382,100 (-3,000)
Mortgage = $185,600 (-500)
Farm Loans = $161,900 (-500)
Margin Loans = $34,600 (-200)
Line of Credit = 0 (-1800)

*Total Net Worth = $1,024,500 (+$25,100 / +2.5%)
All numbers are in $CDN at 0.75/USD

Watch for these investment opportunities in 2020

Economics 5 Responses »

Nov 252019

Looking Ahead – What to Expect in the new year

The last decade has been one of the best times for investors of any generation. 🙂 It didn’t matter if you had money in stock, bonds, or real estate. Almost every major asset class delivered terrific returns on average. But I think 2020 will be a very pivotal year.

The U.S. will hold a presidential election. Stock markets are about to head into the new year at record highs. And there’s a greater than 50% chance Canada will fall into a recession according to Oxford Economics.

The U.S. is even more likely at 64% probability to hit a recession in 2020 according to the New York Fed.

Data seems to indicate consumer spending in North America will almost certainly slow down next year. The U.S. government will spend a buttload of money to desperately prop up the economy. Deficit spending will go through the roof. But the market demand for U.S. bonds won’t be there unless interest rates rise. But rather than let natural market forces drive up interest rates, the Federal Reserve will step in and buy up the newly issued bonds at lower rates. This will likely create some inflation which will be felt in Canada as well.

Protecting Your Net Worth

No matter how we look at the financial markets it’s not hard to see how overvalued most asset classes are. A straightforward way to reduce our exposure to the markets right now is to become more conservative with our investment strategy. If you’re worried about a financial crisis here are some ideas to consider…

Emphasize investing new savings into value stocks and dividend stocks rather than growth stocks.
Sell some equities and hold onto short term bonds or cash.
Stay away from IPOs and ICOs.
Find value in alternative investments such as peer to peer lending.
Write covered calls or buy some put options.

Any of those methods should help reduce portfolio losses in the event of a stock market correction.

My Strategy for 2020

We can’t predict the future. But there are events we can anticipate ahead of time and be ready to make the correct decision when the time comes. Given what we know so far, I think one of two scenarios will happen next year.

1st scenario: The current course of expanding asset bubbles will accelerate – widening the wealth gap between the haves and have-nots even more. Private and public debts will grow.

2nd scenario: We see a dramatic economic slowdown followed by a recession in the U.S. first, and then probably in Canada. Central banks inject over $100 billion a month of new liquidity into the markets. Public debt grows. Private debt shrinks through paydowns and defaults.

Right now it’s impossible to know which scenario will play out. But I don’t see an in-between scenario happening. This isn’t financial advice or anything, but if I’m right about next year, then here are some investment opportunities to watch out for.

Real estate.
Silver stocks.
Telecom stocks.
Investment grade corporate bonds.

If either of the 2 scenarios play out then there will be a lot more debt owed by governments. This will cause inflation, especially if the money makes it into financial markets and trickles down to the consumer level. Inflation is also good for precious metals, and silver appears to be undervalued compared to gold right now. Phone and cable companies should also perform well next year as telecommunications tends to be an inelastic service. Canadian real estate prices have been cooling off since 2018. Meanwhile the TSX/S&P composite index climbed to an all time high last week. Compared to the stock market, the real estate sector seems like a bargain. Personally I will be looking at buying an investment property around the Greater Vancouver area. The expected return on investment for real estate about 7% under current conditions. If I see something I like and the price is reasonable then I will buy it. 🙂

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Random Useless Fact:

Facebook’s content moderators make about $29,000 per year.

10 recession signals you cannot ignore

Economics 12 Responses »

Oct 072019

How to spot the warning signs of a looming recession

Last year I wrote a blog post explaining that a recession may not be far away. A recession is 2 consecutive quarters of negative economic growth. The indicators at that time were still questionable. But fast forward to today and wow, the signals have become much clearer! Here are 10 economic indicators that strongly suggest a U.S. recession could be imminent.

recession indicators to keep an eye on

Inverted yield curve
Unemployment rate reaching an inflection point
The long term unemployment is flattening out
Declining GDP growth
Lower expectations for corporate earnings
Manufacturing index PMI falls to 10 year low
Global uncertainty index at all time high
Declining Cass Freight Index
The Fed Bank of New York drastically raised the likelihood of a recession
Rising auto loan delinquencies

Additional breakdown of each of the 10 indicators below.

The yield curve has inverted

The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion cycle. The vertical gray bars on the graph represent periods of recession. How reliable is this indicator? Over the last 50 years, every recession was preceded by a yield curve inversion. 😮 The graph dropped to below 0% earlier this year in March, officially inverting the yield curve. According to Credit Suisse, a recession occurs about 22 months on average after a yield curve inversion.

US 10 year treasury against 2 year treasury yields from FRED

The unemployment rate is bottoming out

A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. When we last looked at this graph in 2018 the unemployment rate was at 4% and heading down. Today it is lower at 3.7%, a 50 year low in fact. Practically speaking it cannot drop much more than this. Historically we can see in the chart that after the lowest point in each employment cycle, the unemployment rate shoots up abruptly, usually coinciding with a recession.

Unemployment rate cycle against past recessions. The correlation is very clear.

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