Converting Human and Erotic Capital into Cash

There is a lot of talk about passive income. Passive income is income that you receive (e.g. from shares or bonds) that require no work. Active income is income that requires you to do something e.g. when you get a job and work. While there is much attention on passive income vs active income, there is little discussion or focus on the capital upon which this income is derived. Passive income comes from what I call passive capital whereas active capital includes capital that requires you to work in order to derive an income from it, and these types of capital can appreciate (e.g. human capital if you build your skills) or depreciate (e.g. erotic capital if you let yourself age).

In spite of what people say about the rise of socialism, I believe that capitalism still rules the world. Government workers simply work for those who own capital. Capital is the “means of production.” It is whatever makes money. We are all born with human capital i.e. our skills and ability to work and earn a salary from it. In addition to human capital there are also those men and women who have “erotic capital” (also known as sexual capital) that allows them to charm others. When we humans enter life, we are faced with the challenge of working so that we can convert human capital and erotic capital into cash.

Human capital and erotic capital is different from other types of capital e.g. financial capital (e.g. stocks, bonds, or ETFs) in that work is required to convert the human or erotic capital into cash. Financial capital is different because e.g. you can own stocks and bonds, do nothing, and receive income from it. However, to derive income from human capital (e.g. skills), you must work. To derive income from erotic capital (your good looks, charm, people skills, etc), you must also work (although it comes naturally to some).

Because passive capital requires no work whereas active capital requires work, I believe that this is where overeducation or oversexualization can become a problem. There are many people who seek to build their human or erotic capital. For example, many people stop working and dedicate large amounts of money and time into degrees and qualifications. Their human capital grows significantly but it is a challenge for them because human capital cannot be spend. You need to work first to convert that human capital into financial capital. The same can be said of erotic capital. Many people are obsessed with networking, looking good, etc, and this may pay off, but like education there is a significant degree of uncertainty, and a lot of work is needed to convert that erotic capital into financial capital.

The old saying that you should “invest in yourself” should then be scrutinized. It makes sense to invest in yourself, but there are downsides.

Getting Lost in Routine and Remote Work Dystopia

The last few weeks have been interesting because I really feel like I am back in my routine (wake up, commute, work, commute back, shower, dinner, Netflix, and sleep). There have been days at work when things became overwhelming, and I felt some pain, but the pain is quickly forgotten later as it is swallowed up by other pain. Memories of the pain get lost in the routine.

The wage slave’s boring routine life is such a cliche, but it seems I am now living that cliche. In a way, I want to escape the routine. Lured by flight discounts, I have booked flights to Bali this December, but now I somewhat regret it because I just feel a reluctance to go beyond my routine. Maybe I am just getting old. I could go out and spend time with friends, but I feel tired of that now, and I’d rather just stay home, but when I am by myself I do feel lonely, and I do crave companionship, but I feel there is no one for me because I am too different to others, and the effort to find suitable people is not worth it because the time or effort to search and filter through people is too high, and the risks are too high. I’d rather just stay at home and comfort myself with electronic entertainment. It is what is most comfortable, but I remember someone at work once told me that comfort and pleasure does not give you happiness.

I spent a lot of time working nowadays. My manager has put a lot of work on me, but I feel I cannot push back because he recently promoted me, and I do feel some loyalty to him, so I have been trying to keep on top of the work by working weekends. Flexible working culture is starting to take off at my workplace, which I think is great, but sometimes I wonder whether it simply encourages people to work beyond their normal hours. Those who work extra remotely have an advantage over those who don’t because they are able to generate more work, and those who don’t work extra will be forced to work weekends in order to catch up and stay competitive against everyone else who works extra, so it creates a race to the bottom where everyone will be working all the time. I can imagine a remote work dystopia in the future where workers are constantly working. To squeeze as much work from them, there are no lunch breaks. Workers drink soylent for energy and nutrition. In fact, when you think about it, the current average lifestyle is not efficient. For example, commuting takes out one or two hours every day when you’re on the train doing nothing, and cooking and preparing food and cleaning up after also takes up large chunks of time. There can probably be some efficiencies there, but there is certainly a dystopian vibe to it.

4% Safe Withdrawal Rate vs Living Off Dividends

There is a rule in the personal finance community called the 4% rule or safe withdrawl rate (SWR). It basically states that once you are retired you live off 4% of your net worth, which is the safe amount to spend to ensure you don’t run out of money.

The 4% rule is based on the Trinity Study which looked at a portfolio of 50% stocks and 50% bonds to see how likely it was to run out of money over 30 years.

The video above shows how complicated the four percent rule can be and why it is better in my opinion to simply live off your investment income (dividends, rent, interest, etc) as there is no calculation involved and no work. Everything is on autopilot. That being said when living off dividends there is a trade off between income and growth (see The Problem with HVST) and this is where I think the four percent rule can be used as a guide. If your dividend income is more than 4% of your net worth, invest more in growth assets whereas if your dividend income is less than 4% of your net worth, invest in income-producing assets.

 

Betashares Legg Mason Income ETFs (EINC and RINC)

I invested a fair chunk of money into the Betashares Dividend Harvestor Fund (HVST), and while this fund pays great monthly dividends (approx 14% now), its price performance is lacking, as the chart below shows. (Read The Problem with HVST.)

Screenshot 2018-03-12 at 12.26.37 PM

HVST price as of 12 March 2018 – Source: Bloomberg

To address this issue, I have simply opted for a 50% dividend reinvestment plan, which will see half the dividends go back into buying units in the ETF in order to maintain value. Assuming HVST continues to pay 14% yield and that 50% DRP is enough to prevent capital loss, HVST still provides 7% monthly distributions, which in my opinion is fairly good. Generating sufficient monthly distributions is very convenient for those who live off dividends as waiting three months for the next dividend payment can seem like a long wait.

However, Betashares have now introduced two new ETFs on the ASX (EINC and RINC) based on existing managed funds from fund manager Legg Mason. Based on the performance of the equivalent Legg Mason unlisted managed funds, these ETFs are very promising for those who live off passive income. These ETFs have high dividend income (around 6 to 7 percent yield) paid quarterly, and based on past performance at least, there doesn’t seem to be any issue with loss of capital.

RINC (Betashares Legg Mason Martin Currie Real Asset Income ETF) derives its income from companies that own real assets such as real estate, utilities, and infrastructure whereas EINC (Betashares Legg Mason Martin Currie Equity Income ETF) derives its income from broad Australian equities.

The expense ratio of 0.85% is on the high side but not unsual for this type of fund (income focussed and actively managed). Another potential risk to consider is the impact that rising interest rates can have on many of these investments, especially “bond proxies,” into which RINC and EINC seem to invest exclusively.

Is Saving Money Depriving Yourself? 

“The best thing money can buy is financial freedom.” ~Rob Berger

One of the biggest problems most people have is that they believe that only spending money makes them happy. As a result, many people are reluctant to save because they reason that, taken to the extreme, if they save up money, they will be rich when they are older, but then they will be too old to enjoy that money.

The problem with this line if reasoning is that it assumes that spending gives happiness and therefore saving up money means you are not spending money and therefore while you are saving you are depriving yourself, making yourself unhappy.

The problem with this reasoning is that it ignores the happiness that comes from holding money rather than spending it.

When you hold money, you give yourself freedom and optimism about the future. You give yourself a sense of security. Holding money and investing that money also allows you draw income in the form of dividends, which gives you security because you don’t need to work for that money.

This is why I have no fear of dying with money saved up. I imagine I will adopt a child when I am very old and he or she will inherit everything or I will just will it to charity.

Many people consider this wasteful but it is not. Money held is not wasted. It serves a useful purpose, which is to give you passive income and security, which gives you happiness.

Vanguard Australia Diversified ETFs – The Only Investments You’ll Need?

Vanguard has always had diversified managed fund. I remember using these many years ago, but I stopped adding money into these funds as I was distracted by other new investments. However, when I look back the performance of my investments, I am blown away by the returns from these Vanguard diversified managed funds, and they pay regular quarterly distributions into my bank account.

Furthermore, at the end of the financial year, Vanguard provides a full tax summary that you can simply give to your accountant (I use H&R Block). For simplicity and effectiveness, investing in Vanguard and getting H&R Block to manage your taxes is, in my opinion, a foolproof strategy.

One of the main issues with Vanguard’s diversified managed fund was that its fees were quite high. However, recently Vanguard has released their suite of four diversified ETFs:

  • Vanguard Conservative Index ETF (VDCO)
  • Vanguard Balanced Index ETF (VDBA)
  • Vanguard Growth Index ETF (VDGR)
  • Vanguard High Growth Index ETF (VDHG).

Investors now only need to determine how much risk they are willing to tolerate and then allocate money appropriately, e.g. if you are willing to take on more risk then invest in VDHG whereas if you want to take less risk you pick VDCO. Everything else is handled by Vanguard, which makes investing simple and easy.

These ETFs can be purchased off the ASX, which can be done with an online broker such as CommSec. I try to purchase ETFs in $25,000 increments on CommSec as the fee is $30, which is the most bang for your buck.

Most financial advice follows the “age in bonds” principle whereby you own your age in government bonds, e.g. if you’re 30 then 30% of your wealth is in government bonds. Whether you strictly follow “age in bonds” or not, the main principle is that as you are nearing retirement you reduce risk in your portfolio. With Vanguard diversified ETFs, you can simply carry this out by buying VDHG when you’re young but as you get older you start to buy more VDCO to reduce risk. Although not exactly conforming to “age in bonds”, “age in VDCO” is a simple alternative rule-of-thumb. For example, if you’re 30, own 30% VDCO and 70% VDHG. As you buy, simply buy whichever ETF you’re underweight in.

I love to dabble in new exotic investments such as ROBO and cryptocurrencies, but I try to follow the core-satellite approach, which states that you limit exotic investments (the “satellite”) to a small portion of your portfolio (e.g. only 30%) while the bulk of your investments (the “core”) are in low-cost passive index funds. Vanguard’s diversified ETFs are perfect investments to take the role of “core” investments.

More information can be found at Vanguard Australia’s official website on its diversified ETFs.

https://www.vanguardinvestments.com.au/diversifiedETFs/

For those who prefer managed funds rather than ETFs, see below Vanguard Australia’s page on its diversified managed funds.

https://www.vanguardinvestments.com.au/diversified

The Use Case of Ethereum and Other Smart Contract Protocols #Podcast

There are many uses for ethereum smart contracts as it provides services that the traditional banking sector does not provide. The banking sector can adapt to create their own smart contract service, but this does not necessarily mean that crypto networks like ethereum or cardano will be affected.