I Live Off Dividends

I am a Multimillionaire Again

I use Google Sheets to track my net worth in real time. This means that at any moment I am able to see what my net worth is. Google Sheets has a GOOGLEFINANCE function that allows you to track the prices of certain assets such as ETFs, shares or crypto. The net worth update is not perfectly accurate because I need to manually update my margin loan debt as well as how much I have in certain bank accounts, but I always update it conservatively e.g. in my savings account now I may have $11,782 but I will just put in $10,000. This means that as my savings fluctuate, I will never overestimate how much I have in this account.

According to my spreadsheet, I became a multimillionaire for the fourth time on 4 March 2024 with my net worth on that day reaching A$2,031,267. The next day, on 5 March 2024, my net worth went up to $2,105,590, but as of today on 9 March 2024 my net worth has declined about $50k to $2,047,037.

The net worth surge is mostly driven by crypto price increases, but my stocks, ETFs and super have also been going up gradually as well. The crypto increase may be driven by approval of a bitcoin ETF in the US with the potential for other crypto to be accessible via ETFs e.g. an ether ETF. As for the stock market, this is likely driven by hopes of interest rate declines following easing in the growth of inflation.

This is not the first time I have been a multimillionaire. I was once worth $2.3 million back in 2021, and so my net worth is still below all time highs by about $300k. Regardless, it feels good to be a multimillionaire at age 40. I don’t reveal my net worth to anyone in real life for fear of how others will react. I am also very frugal, having no house and driving an old car. I basically live as I did when I was a broke university student.

There is a popular book now called Die With Zero. I have not read this book but have heard a podcast about it. The message of this book is that we need to live our lives and spend money while we are young because there are many experiences that we can only experience while we are young. While I somewhat agree with this message and will definitely try to travel more, this argument has some assumptions with which I do not agree. The main assumption is that spending money makes you happy. Spending money can make you happy, but very often it doesn’t. Very often we regret spending. Furthermore, those who advocate for spending money do not seem to appreciate the happiness that you get simply from holding money. Not spending money and keeping it gives happiness because it gives you security. It gives you the option to retire if you don’t like your job and find a new job that you enjoy even if it is lower pay. Having money simply gives you more options in life. There are unfortunately very many people in abusive relationships who are afraid to leave because they would end up on the streets if they left their abusive partner. Simply having money allows you to walk away from anything you don’t like whether it be a bad job, bad partner, etc. As such, I would be happy to die a millionaire and actually plan to do so. Having excess money when you die is not a problem, in my opinion. If you have kids, you can give it to them, but another option if you don’t have kids like me is to just give it to charity.

It feels good to be a multimillionaire again. I feel more financially secure, but at the same time I still have my worries. I still work and do not know when I will retire. I am afraid to pull the trigger and retire. There are days I hate my job but sometimes I don’t mind my job. I think this reluctance to retire is because I have been following a routine for so long, and work is part of that routine. To end the routine is a big change, and there is a lot of uncertainty with big changes.

I remember being a multimillionaire for the first time back in 2021, and it felt good. There is a really good feeling of financial security that comes with it, and I daresay there is also a smugness that comes with it. However, I was humbled fast when the markets crashed and my net worth declined by about $1 million all within a few days. Back in May 2021 my net worth declined from $2.3 million to about $1.3 million. I remember feeling very confused because I didn’t know whether I should feel bad about losing $1 million or not. If I measure my net worth today relative to all time highs, I am down and have lost money, but if compare my net worth today to where I was five or ten years ago, I am up, so it all depends on comparison. (This is known among psychologists as the anchoring effect.)

I do not feel secure with the volatility of my net worth, which is a problem that is self-inflicted mostly because of my crypto holdings, but also the stocks and ETFs I hold are volatile. Most property investors don’t seem to worry about price fluctuations because they cannot see the price of their property in real time. Because I mostly invest in the stock market (including superannuation) and crypto, my net worth is very volatile. Add to that my margin loan, which leverages my exposure to the stock market, and it is no wonder my net worth fluctuates so much.

In recent years I have been focusing mainly on buying high dividend ETFs such as IHD and SYI. I have even purchased covered call ETFs such as UMAX. High dividend ETFs are relatively stable, and the dividends also help with cash flow. Dollar cost averaging into high dividend ETFs I think is a great way for me to stabilise my portfolio by dampening the volatility as well as improve cash flow to help prepare myself for early retirement.

As mentioned, I am eager to travel more, and travel in and of itself is enjoyable, but another reason why I want to travel is because I want to explore potential early retirement destinations. There are many places around the world where the cost of living is low. At these places, you get very good value for money. However, I believe in experimentation over dogma, so it is best for me to actually visit these places and actually live there to see what it is like. I will need to get used to the different language, and will need to think about basics such as how to use a different currency as well as what are the different healthcare options in a new place. This is something I plan to write about more in future blog posts.

My New Year’s Resolutions for 2024

It’s almost the end of 2023 and I am thinking about the year that has passed and what awaits for 2024. Financially, 2023 has been a good year thanks to a rebound in the stock and crypto markets.

My net worth (including superannuation) at the start of 2023 was $1.47 million and today it is $1.73 million, which is a net worth increase of $260k for the year 2023. Note that at the start of 2022 my net worth was $1.81 million, so in 2022 I lost $340k. This means that looking back two years, I am down $80k.

Regardless, I would be comfortable retiring right now. I am still single and have no children or any social obligations. One of the biggest problems with my assets is that it is quite volatile thanks to exposure to not just crypto but also volatile ETFs (e.g. tech ETFs). My focus going forward will be on dollar cost averaging into high dividend ETFs (including covered call ETFs) and when I retire I will use reverse dollar cost averaging to sell off all my crypto and volatile ETFs, pay off my margin loan, and then put any remaining money into high dividend ETFs (e.g. IHD, SYI, YMAX, and UMAX), and then I will live off dividends during retirement.

I am still working now and haven’t retired yet mainly because I do not feel like I am ready to pull the trigger. I have what is known in the FIRE community as “one more year” syndrome.

I have been thinking about my new year’s resolutions for 2024 and there are three that I have identified:

Travel more.
Don’t walk into bad neighbourhoods.
Don’t be addicted to background music. Embrace the noise of life.

Travel more

The first one is self explanatory. Everyone has something that gives them joy and I think mine is travel. Now that I approach the middle of my life, I would love to see more of the world. You only have a limited amount of time on this planet, so you may as well do something you love. Of course, it will be hard for me to shake my frugal habits. I will try not to spend more than my dividend income and I will still fly economy. When I travel, I will not be trying to pack plenty of experiences into one. I believe in the concept of slow travel, which means spending more time in one place and doing less rather than trying to do everything in one trip. In fact, when I retire, my plan is to slowly travel to many different places around the world.

Everyone is different, but I am certainly someone who values experiences over things, so I will happily spend money on a holiday rather than a new car or even a house. When I think back over my life, I realise that the memories I can most vividly recall are either moments I had with my ex-girlfriends or moments when I travelled. Everything else blurs into one and is forgotten.

Don’t walk into bad neighbourhoods

Wherever you go, it makes sense not to go into bad neighbourhoods. A bad neighbourhood is a place you can recognise instinctively. When you travel, it’s not a good idea to walk alone in what seems like a bad neighbourhood. The place just doesn’t look right, there are bad people around, and you may get hurt. Using your gut to recognise bad places and staying away from them helps you stay safe.

The same concept applies on the internet. There are many websites or apps or certain clickbait news articles that, if you walk down that rabbit hole, you’re going to get hurt. While we instinctively stay away from bad neighbourhoods in real life, on the internet there is something alluring about walking into bad neighbourhoods. It is like driving by a train wreck and looking at this train wreck from the safety of your own car. Thanks to the anonymity of the internet, we feel compelled to walk into bad neighbourhoods. Such activities, including so-called doomscrolling, can take a toll on our mental health. We need to recognise what a bad neighbourhood looks like online and train ourselves to stay away.

Don’t be addicted to background music. Embrace the noise of life.

In my opinion, one of the reasons why we doom-scroll or go on social media is because we have an aversion to silence. We don’t want to think too much. We seek distraction. Peter Wessel Zapffe, a Norwegian philosopher, discussed distraction as one of the defence mechanisms that we use against existential suffering. A study at the University of Virginia found that people would rather stick their finger in an electric socket than sit quietly and think. However, in my opinion, there is something very rewarding about isolating yourself and being alone with your thoughts. When you’re disconnected from everything and let your mind wander without intervention from outside thoughts, you tend to come up with very insightful ideas about yourself and your future.

I even find that background music (such as ambient music) can be distracting as well, and I think I listen to background music because of an aversion to the natural noises of life. Urban and suburban living can be noisy, but generally speaking if you are alone in a room, all you hear is a muffled distant hum of traffic. I will try to get comfortable with the natural noises of my surroundings.

How to Resist Black Friday

I am starting to get many e-mails about Black Friday. There are many discounts on products on offer. Many people have been asking me if I have gone shopping to get discounts and generally I haven’t purchased anything because of Black Friday.

I have written about this many times before but I believe that someone is much more likely to spend less if, instead of focusing on discounts, they instead are just deliberately ignorant of all the discounts out there. Very many of the things we buy are not actually essential, but discounting creates a sense of urgency that we need to buy it now otherwise we will miss out, and we often end up buying something we don’t need. A much better approach, in my opinion, is to be ignorant of advertising and not buy the product in the first place.

Saving money and being frugal is mostly psychological, so in this post I will talk about some of the psychological tricks that I use on myself to try to stop myself from spending too much.

Putting up barriers to spending

Something else that I like to do is put up “barriers to spending” or in other words make it hard for myself to spend money. For example, I often do not buy things online, and I am not sure exactly why this is the case but one of the benefits of not buying online is that I need to put more effort into buying something. It is very easy to buy online, and this ease and convenience makes it more likely you will overspend. If you make it harder for yourself to buy, you will naturally spend less. Buying things in a physical store rather than online is one way that I put barriers on myself to spend.

When you put barriers on yourself to spend, if you are willing to go through all these barriers to spend, it suggests that what you are spending on is likely to be a need rather than a want. For example, one day I was at work and noticed on the weather forecast that there was a storm coming in the afternoon, and I didn’t have an umbrella, so I felt I needed to buy an umbrella. During my lunch break I went into K-Mart and spent maybe thirty minutes looking around the store for an umbrella but could not find one. I then went to a nearby Daiso store and got an umbrella for $8. The fact that I would put so much effort into finding an umbrella suggests that the umbrella was necessary.

Lipstick effect

There is a term called the lipstick effect which Wikipedia defines as follows: “The lipstick effect is the theory that when facing an economic crisis consumers will be more willing to buy less costly luxury goods. Instead of buying expensive purses and fur coats, for example, people will buy expensive cosmetics, such as high-end brands of lipstick. The underlying assumption is that a certain portion of consumers will still buy luxury goods even during a bad economy. When consumer trust in the economy is dwindling, consumers will buy goods that have less impact on their available funds. Outside the cosmetics market, consumers might be tempted to purchase other high-end goods such as expensive beers, or smaller, less costly electronic gadgets.”

The lipstick effect is an interesting phenomenon and something that I embrace as well. In order to be frugal, I often spend money on small things that give me joy. This is why I am not against buying coffee and eating out. Overall the costs are quite low and the enjoyment is high. Many people when they are trying to save money often focus on small things but end up wasting a lot of money on large purchases e.g. cars, house, etc. If you can be super frugal on big ticket items e.g. car and house then you can be more loose with small ticket items such as coffee or even avocado toast. Focusing on small spending to give you joy is similar to the concept of putting up barriers to spending money. By spending a small amount, you are limited by how much money you end up spending. For example, if you are obsessed with luxury cars, you can easily waste $500k in one transaction if you buying different types of Porsches whereas if you are obsessed with coffee then you are wasting $6 per transaction trying different types of coffee beans. You are much less likely to lose a large sum of money being obsessed with coffee vs luxury cars.

Razor and blades model

Wikipedia defines the razor and blades model as follows: “The razor and blades business model is a business model in which one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as consumable supplies…. Common examples of the razor and blades model include inkjet printers whose ink cartridges are significantly marked up in price, coffee machines that use single-use coffee pods, electric toothbrushes, and video game consoles which require additional purchases to obtain accessories and software not included in the original package.”

We need to be very careful of future ongoing costs if we want to be frugal. It is easy to see the razor and blades model being applied for razors, printers, etc but there are many ongoing costs with purchases such as a house or a car, which needs constant maintenance. By contrast, buying a coffee when you are at work or avocado toast during the weekend has no ongoing cost. Once you consume your $6 almost latte, it is gone. There is no asset to maintain, no depreciation on an asset, no upkeep or ongoing costs.

This is why I like to avoid subscriptions. It is very common nowadays for subscriptions to be offered for everything. For example, I have noticed that for Uber there is a subscription option. This applies for just about every app or software e.g. ChatGPT, various shopping apps, Netflix, Spotify etc. These subscriptions take advantage of the convenience of just letting the payment automatically go out of your credit card. It is much harder to actually buy products. This is why, for example, I no longer have a subscription to Spotify and instead rely on Bandcamp for music. Spotify requires ongoing payment whereas with Bandcamp you have to actually purchase music. With Bandcamp there is no ongoing costs whereas with Spotify there is. Although I have praised Netflix in the past, after recent price hikes I have now cancelled my Netflix subscription and instead actually buy any TV shows or movies on Google Play if I want to watch something. Having to actually pay for a movie means that I only buy what I really want to watch and there is no ongoing payment. When I had Netflix I would often just watch as much as possible in order to get my money’s worth, but now demand dictates supply rather than supply dictating demand.

As mentioned before, this is another example of creating barriers to spend. Having subscriptions or ongoing future costs reduces barriers to spending. Money just gets taken from you.

I should mention that this is another reason why I like investing in ETFs rather than property. Many of my friends who invest in property talk about having various costs and taxes being applied to them. There are many ongoing costs associated with owning a property. However, with an ETF, generally you just buy it and there are no ongoing costs.

Being deliberately disorganised and ignorance when shopping

I know of someone who maintains a shopping list, which is in the form of a spreadsheet. They compare prices of goods in different places. They are always online checking prices. When there is a sale on, they go and hurriedly bulk buy the product. This person ends up buying a lot and therefore ends up spending a lot.

For me, I never maintain a shopping list. If I need to buy something, I just rely on my memory. I also often let myself wait till the last minute to buy something. I am deliberately disorganised and ignorant when shopping, which makes it harder for me to spend and put up barriers to spending. It is also good for my mental health to try not to think too much about shopping, discounts etc.

Further reading: Are Discounts and Sales Worth It?

Covered Call ETFs on the ASX

Global X has recently issued three covered call ETFs on the ASX:

S&P/ASX 200 Covered Call ETF (AYLD)
S&P 500 Covered Call ETF (UYLD)
Nasdaq 100 Covered Call ETF (QYLD)

The US has for a long time been spoilt with choice when it comes to ETFs and especially income-focused ETFs. To appreciate how much choice Americans have on covered call ETFs, you only need to look at the Global X US website to see they provide 12 different covered call ETFs to Americans:

What is a covered call ETF?

A covered call ETF uses a “covered call” strategy which involves the fund manager not only holding stocks and collecting dividends but also making additional income by selling call options against those stocks. The catch is that the call option gives the buyer the right to buy the stock from the fund manager if it goes up in value. This effectively means that the upside growth of a covered call ETF is curtailed because stock price increases allow the buyer of the call option to take the stock away from the fund manager. On the other hand, the covered call ETFs in theory provide downside protection because, if the stock prices goes down, the buyer of the call option cannot buy the stock and the fund manager pockets the income from selling the call option.

Betashares already provides covered call ETFs

Although Global X has recently issued AYLD, UYLD, and QYLD on the ASX, Australia’s own Betashares has already had covered call ETFs listed on the ASX. YMAX, which is a covered call ETF that invests in the top 20 Australian companies, has been around since 2012 whereas UMAX, which is an S&P500 covered call ETF, has been around since 2014. Betashares recently issued QMAX, which is a Nasdaq 100 covered call ETF, was recently issued in October 2022.

Something that definitely jumps out about covered call ETFs from Betashares is their high management fees. YMAX as a MER of 0.69%, UMAX’s MER is 0.79%, and QMAX’s MER is 0.68%. However, all of Global X’s ETFs have a MER of 0.60% making them slightly cheaper.

	Betashares ETF, MER	Global X ETF, MER
Australian equity covered call ETF	YMAX, 0.69%	AYLD, 0.60%
S&P 500 covered call ETF	UMAX, 0.79%	UYLD, 0.60%
Nasdaq 100 covered call ETF	QMAX, 0.68%	QYLD, 0.60%

Given that YMAX and UMAX has had such a long track record, we can look at their performance over time.

As the chart above shows, YMAX (in blue) has been on a steady decline since it was issued in 2012 whereas UMAX has been increasing. In fact, one seems to be a mirror image of the other, with UMAX rising about 30% since inception whereas YMAX has declined about 30% which means that if you invested half in YMAX and half in YMAX, you’d effectively be holding cash.

Of course, investors do not invest in covered call ETFs for price alone. They are focused on dividends. According to Market Index, YMAX has a dividend yield of 8.92% so far whereas UMAX has a dividend yield of 7.18% which means if you invest half in YMAX and half in UMAX, you’d effectively be invested in cash but in a high interest savings account that pays about 8% with franking credits.

It is curious why YMAX has underperformed UMAX so substantially, but I suspect the explanation comes from the volatility of investing in the top 20 ASX stocks. Because investing in only 20 stocks on the ASX means much of the money is concentrated in Australia’s miners and big bankers, this increases volatility compared to the broader, more diversified and more stable S&P500. As such, to compensate for the higher volatility, the buyer of the call option will pay less, which results in a lower options premium for the fund manager who is the issuer of the call option.

This volatility explanation for why YMAX underperforms UMAX can also be seen in covered call ETFs on the US markets. For example, QYLD, Global X’s Nasdaq 100 covered call ETF QYLD (of which there is a Reddit community called r/qyldgang), has underperformed XYLD, which is Global X’s S&P 500 covered call ETF.

In the chart above, QYLD (in blue) has underperformed XYLD (in orange) over a long period of time. Whereas the top companies in Australia are dominated by bankers and miners, in the US the top companies are dominated by tech firms such as Google, Apple, Microsoft, and Amazon. Given that the Nasdaq 100 index is concentrated mostly in tech and internet companies, there is more volatility, which may mean lower options premiums for the fund manager, which results in under-performance.

However, a quick Google search shows that the dividend yield of QYLD is about 11% compared to 7% for XYLD. This is also analogous to YMAX vs UMAX where YMAX underperformed YMAX on price but made up for it with higher dividend yield.

Buying multiple covered call ETFs to balance income and price

What this suggests is that blending different covered call ETFs can be used as a strategy during early retirement to draw down income but also preserving capital so that you do not run out of money. For example, if you retire at 50 with $2 million in net worth, you may wish to put it all in an Australian equity or Nasdaq 100 covered call ETF because you don’t have long to live but you have a lot of net worth, so you can afford some capital depletion. However, if you retire at 35 with $750k and want to live overseas in developing countries, you may wish to put it all into S&P500 covered call ETFs which hopefully will provide more capital preservation at the expense of lower dividend yield. If you retire at 45 with $1 million, it may be a blend of all S&P500, Nasdaq 100, or ASX covered call ETFs e.g. half in YMAX and half in UMAX. You can mix and blend to balance capital preservation and dividend yield.

Selling off high growth investments (such as crypto or property) during retirement and putting it into covered call ETFs is an alternative approach rather than selling off 3% or 4% at a time. When selling off assets, for many people there is psychological stress that they may run out of money. Putting everything in high dividend ETFs (including covered call ETFs) is a much simpler way to generate income for retirement.

Disclosure: Image made using Stable Diffusion. I hold YMAX and UMAX.

Is Now the Time to Buy Crypto?

To be fully transparent, my crypto portfolio is down 83% from all time highs. My overall net worth is down 40% from all time highs. However, I started seriously investing in crypto in 2018 and my crypto portfolio is up about 700% from then.

Now that 2022 is coming to an end, I have found that this year is the first year when my net worth has declined. In fact, from the start of this year to today, my net worth has declined by 23%, but the peak of my net worth was back in November 2021 and from then my net worth, as mentioned, has declined by 40%.

Focusing on how much your net worth has declined against the all time high is an example of the achoring bias. There are many ways to measure how much you have made or lost from an investment. For example, if you purchased dogecoin for $0.007 back in 2018 and held it until today when it is $0.07, it seems like you have made 10x off your investment. However, dogecoin reached a peak of around $0.70 back in November 2021. If you had sold all the dogecoin back when it was $0.70, you would have made 100x, but because you waited, you only made 10x. Or did you lose 10x because you could have sold back in November 2021 but did not? Did you make 10x or lose 10x? I have thought about this and my view now, after listening to Dave Ramsey, is that it doesn’t matter. According to Dave Ramsey, when you have purchased an asset in the past is a sunk cost. What matters is when you sell it and if you’re comfortable with the volatility when you sell the asset.

Although 2022 has been a hard year, it is important to remember that downturns happen, especially in the stock and crypto markets. In fact, looking at history, none of this is new. The crypto market especially has seen a spectacular decline, especially with the collapse of crypto exchange FTX. However, in my opinion, the collapse of FTX is not as bad as many make it out to be. FTX is merely an exchange, and staff in this exchange stole funds. It doesn’t necessarily mean that there is anything wrong with the actual crypto. To use an analogy, if a bank is corrupt and the staff siphon off money for themselves, it doesn’t mean that there is anything wrong with the currency they stole. If a robber breaks into a vault and steals gold, it doesn’t mean there is anything wrong with gold as an investment.

I have recently started allocated more of my salary into to dollar cost averaging into various cryptos. In my view, there is a real use case for crypto. It is not just imaginary money. The use case for crypto is much clearer in developing countries. For example, if I were an expat or migrant working in Zimbabwe, I would convert my pay into crypto rather than deal with having to send it back to Australia or convert it into Australian Dollars. Look at the recent war in Ukraine. Crypto has been used by many Ukrainians and even Russian who have had to use crypto because their banking system does not work as well during war. Crypto has been used to send money to help the Ukrainian war effort. Crypto is useful when there are problems with the banking system in your country. According to Bitcoin Cash (BCH) user Roger Ver, there is a Russian man who now lives in Saint Kitts and Nevis and spends in Bitcoin Cash because his bank accounts have been frozen.

Although the use case of crypto is clear in developing countries, what about developed countries? Quite simply, there is no telling when a developed country may become a developing country due to a collapse of civilisation. In fact, due to political polarisation and extremism, I think it is becoming more and more likely that developing countries could collapse. And although I currently support the sanctions and asset seizures of Russian oligarchs currently, who is to say that another political party may get into power later and rather than target Russian oligarchs they come after me? Or you?

As such, I view crypto as a safe haven similar to gold. Some people argue that if there is a collapse of civilisation then the internet will not work and therefore crypto will not work. However, just because there is a collapse of civilisation it doesn’t mean that the internet everywhere will stop working. Crypto is useful when there is a situation where there is a collapse where you are but not in other areas. A good example, as I mentioned, is Ukraine.

Which cryptos are best?

After the recent crypto downturn, I have learned again that it is best to diversify across multiple cryptos and to stick to the ones that have been around for a long time. In my opinion, bitcoin, ethereum, and dogecoin are all good cryptos and make up the majority of my crypto portfolio. If you invest in some of the newer cryptos, I recommend investing only a small amount (e.g. PancakeSwap has not done well). If in doubt, diversify. Also I do not recommend staking or investing in stablecoins. If you want exposure to USD, just get actual USD.

As I said, if in doubt, diversify. All good investors are humble enough to understand they don’t know everything, and diversification is the antidote to ignorance. With that being said, I don’t recommend going all in crypto. It is important to not only diversify your crypto but also to diversify into other asset classes such as equities or bonds using ETFs.

How do you hold crypto in a safe way?

As the FTX collapse has shown us (and the Mt Gox collapse before that), holding crypto on any exchange is dangerous. It is much better to hold crypto yourself (self-custody) rather than let an exchange hold it for you. This is one of the reasons why I do not recommend staking crypto anymore because you typically give up self-custody when you stake crypto.

Of course, when you say “self-custody” to the average person, it is very difficult to explain the concept to them, and self-custody is very hard to do correctly. This I think is one of the main barriers to mass crypto adoption. To make self-custody easier, many in the crypto community recommend buying a Ledger hardware wallet directly from the official Ledger website (do not buy a Ledger via eBay).

An alternative to buying a Ledger, in my opinion, is to buy an ETF that invests in crypto companies. An example of one on the ASX is the CRYP ETF from Betashares. For those who are familiar with ETFs but unfamilar with crypto and self-custody, CRYP is a good way to gain exposure to crypto without any of the issues with self-custody. Many people who look at the CRYP price will be stocked to see that has been trending down since inception. However, CRYP was introduced right at the peak of the crypto market, so it makes sense that it will go down with the market. In fact, if we compare CRYP to the prices of bitcoin and ether then we notice that CRYP roughly tracks these major crypto (see below).

CRYP ETF (blue) vs BTC (orange) vs ETH (cyan) throughout 2022

It s worth noting that although CRYP gives you exposure to crypto, it doesn’t actually invest in crypto. Rather, it invests in companies that work in crypto such as exchanges like Coinbase or bitcoin miners. This is analogous to holding a gold mining ETF such as GDX or MNRS rather than a physical gold ETF itself such as PMGOLD. It is like buying Woodside Energy (WDS) rather than storing coal and natural gas in your garage. Exposure to companies rather than commodities means that there is risk associated with company scandals, corruption etc but the advantage is that you don’t need to worry about self-custody of gas, coal, gold, or crypto.

Which crypto am I most bullish about?

Of all the cryptos I invest in, I believe ethereum is the most promising. I would not be surprised if, in the future, companies and even governments are run on the ethereum blockchain. Below is a recent video I watched that captures the many achievements of ethereum in 2022 including the monumental transition from proof of work to proof of stake. Of all the cryptos, ethereum seems to be the most open to innovation.

Are Discounts and Sales Worth It?

During the Christmas and New Year holiday period, there would be many retailers offering discounts, and on the surface it makes sense to buy something when it is discounted. However, there are many times when I go into the shop with the intention to buy something and end up buying something else as well because it is discounted. Discounts create a sense of urgency and exploit FOMO.

This is purely anecdotal, but based on my observation, those who tend to buy products on discount also tend to end up buying a lot, which makes sense because sales are used as a marketing tool to attract customers and boost sales.

Avoiding FOMO using deliberate ignorance

At the train station, there is a display that provides the times when certain trains would come. This display details which train comes at what time, when the next train comes, and which platform to go to. I have seen many people look at this display, notice that their train is coming in a few minutes, and then proceed to run to the platform because they feel stressed that they may miss their train. Even if they miss their train, the next one will likely come in ten minutes, so is it even that harmful if they miss the train? Clearly FOMO is impacting them and creating a sense of stress and anxiety.

After realising this phenomenon, my technique now when I go to the train station is to never look at the display. I’d rather not know when the next train is coming. I’ll go to the train and catch whichever train comes next. If I end up at the train station and miss a train that came a few minutes beforehand, because I never knew that train came, I don’t feel any worse off, and even if I am ten minutes late, it doesn’t really matter.

The same anti-FOMO concept can be applied to discounts and sales. Rather than shop around for the best discounts and sales, it is better to just ignore everything and only buy when you really need to buy.

Buy discount and stock up vs buy only when necessary

I have a friend who is obsessive about sales and discounts. He would collect petrol coupons and bulk buy goods when they are discounted. He has two children and needs to cook for them. Once when I went over to his house, he showed me his stash of vegetable oil. When vegetable oil was on sale, he bought an enormous amount and stockpiled it in the garage.

From experience, I know that when you have a huge amount of a certain product at home, you tend to use it up more. For example, if you see food on sale and buy it and leave it at home, the food is likely to be eaten very quickly. So stocking up on more will just make you consume more. It is like keeping cash in your wallet. The cash will just end up being spent because it is so easy to access. Money that is harder to access, e.g. because it is locked up in an illiquid asset such as your home or your retirement account, is harder to spend. The same concept applies to consumer goods. If you need to get dressed and go to the grocery store in order to buy something, it adds layers of friction, which means you are less likely to consume it. Food in the supermarket is less likely to be consumed than food in your refrigerator.

As such, rather than hunt for discounts on food, bulk buy them, and then leave them at home where you overeat them, I believe it is better to leave as little food as possible at home and just consume what you have. Once you run out, then you buy a small amount and do a quick search to see where it is cheapest.

In other words, frugality is about reducing quantity by suppressing desire rather than bulk buying in order to get a discount only to encourage overconsumption.

Avoiding commitment

When you think about it, buying something on discount is a form of commitment. You are committed to consuming that product. For example, if you purchase ten bottles of vegetable oil, you have committed yourself to consuming all that vegetable oil before the expiry date. However, over time you may get sick of the vegetable oil. The problem with commitment is that you cannot reduce consumption once your desire wanes. If you purchased vegetable oil as you need it, if you suddenly get sick of vegetable oil, you can just stop buying it.

The Formula for Working Out if You Should Buy an Electric Car

I have created what I think is a formula for working out if it makes economic sense to buy an electric vehicle. You can find it below:

$r_E = \dfrac{k}{100p} \left( f_I e_I - f_E e_E - \tau - \beta \right)$

$r_E = return \; on \; EV \\ k= kilometres \; travelled \; per \; year\; (km) \\ p= EV \;premium \; (\$) \\ f_I= ICE \;fuel \;cost \;(\$ \;per \;L) \\ e_I = ICE \;fuel \;efficiency\; (L \;per\; 100km) \\ f_E = EV \;energy \;cost \;(\$\; per\; KWh) \\ e_E = EV \;energy \;efficiency \;(KWh \;per \;100km) \\ \tau = EV \;tax \;(\$ \;per \;100km) \\ \beta= \;battery \;depreciation \;(\$ \;per \;100km)$

Explanation of the formula

The way to think about whether an EV is worth it or not is to consider the EV premium, which is the difference between the higher cost of the EV and the cheaper internal combustion engine (ICE) car. So for example, as of December 2023, the MG ZS EV costs $42,990 whereas the petrol version MG ZS is $21,990, so there is an EV premium of p = $21,000. When you pay for this EV premium, you are effectively putting this $21k into an investment that has a return ( $r_E$ ) which needs to be compared to the return of other investments. For example, suppose you buy an EV and spend and extra $21k and from the fuel savings etc you make 3% per annum returns ( $r_E = 0.03$ ). If you believe that an alternative investment such as DHHF or VDHG has an after-tax return of over 3% then you would be better off buying the petrol MG ZS and putting the EV premium of $21k into DHHF or VDHG.

Another key consideration is battery depreciation. The EV premium is mostly a battery premium. The investment you are making is mostly in the battery. This battery has a return that you get from having access to energy in the form of electricity. Energy in the form of electricity is much cheaper than from petroleum. However, the EV tax and battery depreciation needs to be considered as well.

Looking at the MG ZS vs the MG ZS EV, the fuel economy of the MG ZS is 7.1 L per 100km and the petrol price is assumed to be $1.75 per litre. This means that every 100km you drive you are spending $12.43 in petrol.

However, for the MG ZS EV, the energy efficiency is 17.1 KWh per 100km and the cost of electricity under the Powershop EV Plan is $0.18 per KWh, which means that every 100km you only pay $3.11 in electricity costs. However, add in the EV tax of $2.50 per 100km (only applies in Victoria, Australia) and battery depreciation of $4.29 per 100km assuming battery life of 350,000 km and battery replacement cost of $15,000 and the EV cost is $9.89 per 100km, which is still cheaper than the $12.43 per 100km from the petrol car.

Because costs depend on the distance you drive, whether it makes sense economically to drive an EV strongly depends on how much you drive. The more you drive (especially over 25,000 km per year) the more it makes sense to get an EV whereas if you drive under 25,000 per year, it starts to make more sense to drive a petrol car.

Something else to consider is that when you pay for petrol, you pay for it using after-tax money whereas if you put the EV premium into getting an electric car, the lower cost per 100km you get is tax free. You need to compare the return from paying the EV premium against the after-tax returns from an alternative investment e.g. the after-tax returns of DHHF or VDHG.

If we assume that you drive 25,000 km per year then the MG ZS EV costs $2,473 per year whereas the MG ZS costs $3,106 per year. Given the EV premium of $21k this means the return on the EV premium $r_E = 0.0301 \; or \; 3.01 \%$ .

A major uncertainty is the battery depreciation as it is difficult to know the battery life and battery replacement cost. In fact, most of the costs of driving an electric car seems to come from battery depreciation alone.

Reddit comments

I shared this formula on Reddit and received mixed reviews. Some people raised very good points that I have missed in the formula, but I think overall the formula above is useful to know whether it makes sense financially to purchase an EV or not. Below are some other considerations:

EVs have lower servicing costs.
EVs are heavier and so tire costs are higher.
Charging from solar energy is ignored as this would add extra complication due to the capital costs of installing solar panels and/or home batteries. Charging using solar energy is not necessarily free as some claim as there is opportunity cost associated with locking capital up and not earning returns elsewhere such as DHHF or VDHG.
The EV tax in Australia currently only applies to Victorians. Laws may change in the future amending the EV tax.
A recent FBT exemption provides an incentive to get an EV using salary packaging.
Battery depreciation is considered but the depreciation of the ICE vehicles is not considered because it is assumed that depreciation for the EV and ICE vehicles are the same except for the additional EV battery depreciation. The assumption here is that when you buy an EV, you are buying something similar to an ICE car with a battery, so basically it is assumed that EV = ICE + Battery. However, the EV may depreciate more or less than the ICE vehicle depending on e.g. if governments increase or decrease EV taxes or subsidies. Some suggest that EVs depreciate faster than ICE vehicles, but this may change e.g. if the government introduces an additional carbon tax that applies to petroleum. If government is very aggressive in providing tax benefits for EV use, there is a risk that an ICE vehicle could become a stranded asset.
The formula above ignores power or acceleration differences between cars. The MG ZS EV is supposedly more powerful than the MG ZS. It is claimed that EVs are very quick to accelerate. However, this is ignored in the formula as we only want to focus on cost minimisation.
The formula ignores the environmental benefits of owning an EV as well as national security considerations (e.g. energy supply and price not being at the mercy of Russian or Saudi leaders).
Batteries stored at the bottom of an EV lower the centre of gravity thereby making them safer. Furthermore, because EVs are heavier, they fare better in vehicle collisions.

Other thoughts and considerations

The decision to get an EV or an ICE vehicle is very similar to whether you buy or rent a home. When you buy a home, you lock up a considerable amount of capital into the home. The benefit you get from living in your own home is that you don’t need to pay rent. If you buy your own home and then rent goes up significantly, you are better off. Similarly, when you buy an EV, you lock up capital because of the added cost of the batteries. However, the benefit you get from EV ownership is that you pay significantly lower energy costs. If you buy an EV and petrol prices go up, you are better off.

We also need to think about the future. Currently the break-even point is about 25,000 km. If you drive more than 25,000 km per year, it is highly likely you should buy an EV. However, if battery technology improves, petrol prices go up, and electricity prices go down, the break-even point will go down. There is also huge risk that an ICE vehicle you own may become a stranded asset if government policy aggressively addresses climate change. In my opinion, it is more likely that electricity prices will go down and petrol prices go up rather than the other way around. Electricity comes from multiple sources e.g. solar, wind, nuclear, and even gas, oil and coal. However, petrol only comes from oil. As such the supply of energy sources that can create electricity is much higher than the supply of energy sources than can create petrol, so higher supply should result in lower prices for electricity as an energy source.

Based on these considerations, in my view, even if you only drive 15,000 km to 20,000 km per year, if you’re in the market for a new car, it is better to buy an EV. It is better to drive an ICE vehicle if that is what you currently own and if you don’t drive too much (less than 25,000 km per year).

Living Through Inflation and Rising Rates: Leveraged Real Estate vs Living Off Dividends

Now that interest rates are rising, there are many people who are wondering if they should fix or not. However, they are faced with a very difficult decision as fixed interest rates are higher than the variable rates. What we are seeing now is that rising interest rates are making many people realise that buying a house is not without risk. House prices now are indeed going down. Furthermore, many people are under significant stress due to rising interest rates.

Meanwhile, those who live off dividends seem to be doing fine. Assuming that you own enough dividend stocks or ETFs and do not have any debt, living off dividends is a stress-free alternative to leveraging into real estate. It is true that dividends can be cut (e.g. during COVID), but you should structure your lifestyle such that you are able to reduce your spending when dividend payments decrease.

The way human psychology works is that risk is not perceived until a disaster happens. For example, if you drive a car without wearing a seat belt and have never crashed, you are unlikely to truly appreciate how risky it is to drive without a seat belt on. However, if you crash your car and slam your head into the windshield and almost die, you are likely to always wear a seat belt from then on. In psychology this is called recency bias: “Recency bias is a cognitive bias that [favours] recent events over historic ones; a memory bias. Recency bias gives ‘greater importance to the most recent event.'”

As I mentioned earlier, the current economic conditions highlight just how risky real estate can be. All that is necessary to create a perfect storm that results in rising interest rates and declining house prices is inflation, and although inflation may have been rare in the last few decades, it is certainly a phenomenon that I think will be more pronounced as the world deals with emerging challenges such as overpopulation and dwindling natural resources.

The benefit of owning an ETF is that you have a more diversified portfolio. For example, if we look at the dividend payments from owning one unit of the high-dividend IHD ETF, you’ll notice that dividend payments are still high and have been slightly trending upward over time (in the chart below, the more recent dividend payments are at the left of the chart, not the right). Even though companies are struggling with inflation and rising interest rates, the benefit of a diversified ETF is that you have exposure to multiple sectors, so while during the recent downturn you would have sustain losses from sectors such as tech, you gain from other sectors such as energy. When you buy real estate, you are leveraged into one asset, which significantly increases risk.

Dividend payments from the IHD ETF have been trending upwards over time.

Of course, just as it is unfair to compare leveraged property to unleveraged ETFs during good times, it is also unfair to compare leveraged property to unleveraged ETFs during bad times. If you are able to buy a home to live in without any debt (i.e. paying cash) then this can give you safety during the recent economic crisis by shielding you not only from rising interest rates but also rising rents. Furthermore, having an investment property (as opposed to a home you live in) insulates you more from rising interest rates because the rising interest costs are offset by rental income. Another consideration is that Australian equities are naturally low in tech stocks and high in energy stocks relative to other countries e.g. in the US there is a much higher percentage of tech stocks.

The Recent Economic Downturn Highlights the Importance of Reducing Risk as You Approach Early Retirement

It’s been a while since I last posted on this blog, so I feel I should give an update especially as there has been a lot happening in the economy, and it has mostly been bad news.

Inflation seems to be the main concern, and central banks are increasing interest rates in an attempt to control inflation. This seems to be associated with large falls in the stock, crypto, and possibly the property markets.

With a high exposure to the stock market and crypto markets, overall my net worth has declined by about 40% from the peak, which is quite a lot, but I am mostly calm as I believe this is just the price I need to pay if I invest in volatile assets. That being said, the overall volatility of my net worth right now I think is too high for comfort, so my plan going forward is to dollar cost average into broad market ETFs in order to gradually reduce volatility. My focus will be on high-dividend ETFs.

What has surprised me most during the recent decline is how well Australian equities are doing compared to other assets. Looking at 2022 YTD results, Australian equities are beating not just crypto, US equities, and US tech, but it also seems to be safer than bonds.

Investment	2022 YTD Returns
Ether (ETHAUD)	-55.04%
Dogecoin (DOGEAUD)	-54.49%
Bitcoin (BTCAUD)	-35.07%
US Tech (NDQ)	-24.44%
US Equities (IVV)	-14.93%
Government Bonds (BOND)	-10.32%
Australian Equities (XJO)	-8.67%
Gold (PMGOLD)	3.48%
Oil (OOO)	48.56%

Returns of various assets from 1 Jan 2022 to 12 June 2022

The weakness of bonds has been surprising. Government bonds have usually been considered safe havens, but during the recent downturn they have under-performed oil, gold, and Australian equities. The safe haven status of Australian equities seems to be related to exposure to mining and energy, a sector that would clearly do well with high inflation.

Net worth, annual expenses, and volatility

Something that I have been thinking about is how important it is to reduce the volatility of your investments as you get older and closer to retirement. Vanguard founder Jack Bogle recommended the “age in bonds” rule where you own a percentage of your net worth in bonds equal to your age e.g. if you are 40 then you own 40% of your net worth in government bonds.

Even though I own no property, I can now appreciate one of the benefits of owning your own home outright, which is that there is no or little volatility in relation to the cost of shelter. The two main necessities for humans are food and shelter. If you have a fully paid home, you cover the cost of shelter (ignoring council rates, maintenance, etc) and only need to worry about the cost of food. If you own a $500k home that is fully paid off, you have a place you can live and not worry about this cost, but if that $500k is in ETFs and you rent a place to live, you need to match the returns of the ETF to the rent.

The Australian federal election, climate change, and solar power

Recently there has been a federal election in Australia where the conservative party was defeated after nine years in power. One of the main issues in this election campaign was climate change. One way of reducing carbon emissions involves installing solar panels on your home. Not only can this reduce carbon emissions but it can also reduce electricity bills. In fact, when I think about it, installing solar panels on your home vs paying electricity bills every month is very similar to the buy vs rent dilemma in relation to housing. If you own a fully paid house, you lock in the cost of shelter whereas if you rent you are exposed to market rent. Rent can go up or down but usually it goes up. The same applies with energy. If you own fully paid off solar panels, you lock in the cost of energy for as long as the solar panels are operational, and you are not exposed to the cost of energy. Right now when energy prices are going up, having solar panels seems smart.

Nevertheless, even though you can go into debt and buy a home and install solar panels and batteries on your house, and this can cover your shelter and energy costs when the debt is fully paid off, another option is to simply invest and live off the investment earnings, which is the option to which I have committed myself.

The ASFA Retirement Standard

For a long time now I have been wondering how much do I need to retire, and thankfully there has been many studies on this.

According to the Association of Superannuation Funds of Australia’s Retirement Standard, a single person will need $27,582 per year to live a “modest lifestyle” and $43,638 per year to live a “comfortable lifestyle.”

One important detail about the ASFA Retirement Standard is that it assumes that you own your own home outright. However, if I assume that, when I retire early, I will live in a one-bedroom apartment in Melbourne, Australia, then according to Numbeo, this will cost $1,687.42 per month or $20249.04 per year. Therefore, the adjusted ASFA numbers are $47831.04 per year for a simple lifestyle and $63887.04 per year for a comfortable lifestyle. Assuming a 3% safe withdrawal rate, this means you will need $1.6 million for a simple lifestyle or $2.1 million for a comfortable lifestyle.

To give myself some wriggle room, I should aim for a comfortable lifestyle i.e., have a net worth over $2.1 million, and by the time I retire early, my net worth should not be too volatile.

I am using a 3% safe withdrawal rate because withdrawing 4% per year is only tested for 30 years, so if I am retiring at age 60, I would withdraw 4% per year, but if I retired before that, I would want to withdraw 3% per year to be sure that my money does not run out. I remember reading somewhere that for every decade earlier you retire, you should subtract 0.5 percentage points e.g. if you plan to withdraw 4% per year retiring at 60 but end up retiring at age 50 instead, you’d withdraw 3.5% per year, and if you retire at age 40 you’d withdraw 3% per year, 2.5% per year if you retire at age 30, and so on.

How to Live off Crypto by Staking

Update December 2022: I no longer recommend staking crypto. See this post for my more recent views on crypto.

I primarily invest in the stock market and aim to live off dividends mostly from ETFs. However, the cryptocurrency market is hard to ignore. When you compare the total crypto market to the S&P500 (see chart below) you will notice that crypto makes holding stocks feel like holding cash. In the last five years, the S&P500 has gone up by 109 percent which is almost double. However, the total crypto market cap has gone up 18,942 percent.

Total crypto market cap (blue) vs VOO ETF, which tracks S&P500 (orange) over the past five years.

Institutions are starting to look into crypto. For example, Tesla invests in bitcoin, and the Commonwealth Bank has announced it will soon allow crypto to be used within its app. All this shows that crypto is going mainstream.

Recently ETF provider Betashares has released its Crypto Innovators ETF (CRYP). For those who are interested in exposure to crypto, I highly recommend this ETF, which doesn’t invest in crypto itself but in crypto companies (e.g. crypto miners, crypto exchanges, and companies that hold a lot of crypto). It is analogous to investing in a gold mining ETF rather than holding physical gold itself. What is reassuring about this ETF is that it roughly tracks the price of bitcoin and ether, the two largest cryptos.

The CRYP ETF (blue) is roughly correlated to bitcoin (orange) and ether (aqua) prices.

The benefit of buying CRYP rather than holding the actual cryptos itself is safety and security. ETFs are regulated by government, which is reassuring. The alternative way to securely hold crypto is via a paper wallet, which I do not recommend to beginners as it is complex. If you do not know what you are doing, one small error can cause all your crypto to be lost.

When buying and holding crypto investments such as bitcoin, ether or CRYP, you mainly profit from capital gains made when prices go up. Usually there is little income to be made from crypto. The CRYP ETF pays dividends, but it is likely to be very low. However, a recent innovation in the crypto market that has changed all that is staking, which allows you to earn income on crypto.

What is staking?

According to Binance, the term “staking” is defined as “holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. Simply put, staking is the act of locking cryptocurrencies to receive rewards.”

To put it simply, when you stake crypto, you are locking it up and allowing it to be used to earn more. The passive income earned via staking is termed “staking rewards.”

Why stake?

What is the purpose of staking? Why not just buy and hold the crypto or invest in dividend-paying stocks? Quite simply, the returns via staking are huge. My favourite place to stake crypto is the PancakeSwap Syrup Pools, and as of November 2021, the average APR from staking is about 60 to 70 percent. Earning 70% from crypto staking is far higher than what you’d earn from dividends. Furthermore, if you buy and hold crypto or CRYP, you are earning either zero or very little passive income.

The huge risks of staking crypto

Of course, if returns from staking are 70% or more, why not just go all in? The answer is that staking is very risky, so I do not recommend putting in too much, and any amount you put in should be an amount you are prepared to lose. When staking crypto, you are giving up control of your crypto and handing it to a protocol. Protocols are merely code, and code can have flaws that hackers can attack. There have been many hacks recently e.g. billionaire Mark Cuban lost a lot of money following the hack of Iron Finance. Other examples of major hacks of decentralised finance networks include PancakeHunny and Poly Network.

So then if crypto staking is so risky, what is the point of staking? Basically you will need to consider whether the high gains are greater than the risks. Everyone has different risk tolerance. Thankfully there are many ways you can reduce the risk of crypto staking. The first is to stake on more reputable networks e.g. PancakeSwap and ApeSwap are examples. Research whether these networks have been audited by reputable crypto audit organisations (e.g. Certik). Furthermore, it is always a good idea to spread your money across different networks just in case one gets hacked. I currently stake crypto on PancakeSwap, ApeSwap and BiSwap.

How exactly do you stake?

In terms of the nuts and bolts of how to stake, more detail can be found on YouTube. In terms of how I stake crypto on PancakeSwap, I deposit Australian dollars into Binance and then convert it into BNB (Binance Coin). Then I withdraw the BNB into a crypto address generated using the Trust Wallet app. Using the Trust Wallet browser, I go to PancakeSwap and convert the BNB into CAKE. I then go to the syrup pool and stake the CAKE. When the staking pool generates a reasonable amount of staking rewards, I harvest the staking rewards, convert it back to BNB, send it to Binance, and then convert it back to Australian dollars before withdrawing it into my bank account.

Conclusion

As mentioned, staking is very risky, so I am relying on both staking rewards from crypto and dividends from ETFs to fund my living expenses. The staking rewards provide high returns whereas the ETFs provide safety and lower risk. Indeed the staking rewards are taxed in full. There are no franking credits on staking rewards. Regardless, for argument’s sake, even if you pay 50% in tax, staking reward of 70% means you have 35% after tax. Dividend yields are about 5% and assuming franking credits completely offset income tax, 35% is higher than 5%, so it is better to simply pay the tax. Often investors are focused too much on tax or other aspects of an investment (such as how much leverage you can achieve). What matters is total return.