My Changing Views

One of my favourite financial independence bloggers is Pat the Shuffler who has done very well for himself investing purely in Australian ETFs and LICs. He currently has close to half a million in net worth. From what I know, Pat rents a place with his girlfriend, has a high-paying construction job, and manages to save a huge amount of money into Australian equity ETFs and LICs (e.g. VAS and AFI).

However, recently he wrote a post regarding his changing views. Over time, he has realised the importance of global diversification. He will be transitioning away from Australian equities and diversifying into foreign equities using VGS, which invests mostly in the stocks of the US, Europe, and Japan. In my opinion, this is a great move, and it reminds me of my own evolving views, and it has also inspired me to admit some of my own backflips and mistakes.

My views with regards to investing were very similar to Pat’s in that I believed that financial independence depended on dividends alone. If you generate high dividends, you will have enough to live off the dividends and become financially independent quickly. When I read back on my earlier posts (e.g. Dividends vs Capital Gains and 4% SWR vs Living off Dividends), I now notice that I seem quite cultish and stubborn in my views that dividends from Australian equities with franking credits was the only legitimate route to freedom and that anyone who does anything contrary to this is a slave! When I was in my twenties, I would dream of a life in my thirties, forties, and beyond flying around the world, relaxing on beaches, and living off dividends drinking coconut by the beach as I read books.

Perhaps I am becoming more mature as I head into my mid-thirties. I have since relaxed my views on a pure Australian dividend focus. Even though I did invest in some foreign equities, I had the bulk of my investments in Australian equities, and one of the consequences of that as that capital gains were not as high. Had I invested in foreign equities, my net worth today would be much higher. Things may change in the future. I will not tinker too much with my portfolio. For all I know, the Australian stock market may perform very well, but what this illustrates is the importance of global diversification. Australia only makes up 2% of global equities, which is almost nothing, and you never know what policies may be implemented within a country that impacts on every single company in that country.

Another area where my views are changing is in regards to debt and property. I am not a fan of debt, but I do have debt in a margin loan, and if you read my old posts, you’ll notice many posts that are anti-property. Property, in my opinion, is neither better or worse than shares. It is different but also somewhat similar, and there are some benefits of investing in property instead of shares. The key benefit of property is that interest rates on property are typically lower than interest rates for borrowing to invest in shares. Property is easy to leverage and great for capital gains and growth as opposed to Australian shares, which are great for cashflow but historically are lacking in capital gains. Whether now is the right time to be buying property is uncertain. Property prices have been going down for the past two years but the rate of decline has been slowing recently, leading many to believe the market may be bottoming out.

So what do I believe? If I have moderated on everything I have believed in, is there anything here of value? In my opinion, Pat the Shuffler explains it best when he says the following:

“Despite my many stumbles, poor decisions, changing of strategies and general non observance to much of the best advice when it comes to investment, I am still here and still kicking goals. So what gives? Thankfully for me…and everyone else…getting things perfect from the beginning isn’t nearly as important as getting things mostly right and just starting.”

Pat the Shuffler

Basically, it is important to not let perfection get in the way of progress. Most people spend so much time trying to get everything perfect that they don’t start at all. You need to start saving and investing right away, and in my opinion there are three fundamental principles: (1) lower expenses, (2) diversify, and (3) minimise obligation.

Saving a lot of money relies on lowering expenses. Rather than focus on small expenses, we should focus on the big expenses e.g. accommodation and transport. Regarding accommodation, if you live with flatmates or with your parents, you will save far more. Regarding transportion, if you ride a bike or take public transport more, you will save far more. Do you need frequent international travel? Perhaps ride your bike around bike trails in your city.

Another key principle is diversification. Every investment or asset class has pros and cons. Property has cheap leverage and potentially high growth, but poor cashflow; dividend stocks may have less capital growth but good cashflow; tech stocks have low dividends but potentially high growth; gold generates no income and questionable capital gains but may perform very well during a market crash or a period of prolonged economic uncertainty. Rather than feel that you must invest in or feel attached to one asset, it is best to simply diversify across everything. Where there is uncertainty, diversify, and where you feel certain in any asset, it is important ot test that certainty by exposing yourself to the opposite viewpoints. Getting into the habit of challenging our views and diversifying accordingly is a check against our natural psychological biases.

Another key principle I feel I have not let go of is the idea that freedom depends ultimately on the absence of obligation. An obligation is something that compels you to do something in the future e.g. debt compels you to work to pay the debt. Obligation can be non-financial e.g. if you feel you must follow a particular social custom. Obligation is everywhere, and many obligations give people meaning and satisfaction in their lives e.g. obligation to their family or children. However, obligation is indeed the enemy of freedom, so if you want more freedom, you need to minimise obligation. I am a big believer in what I call the “no nothing” test, which is the idea that you are truly financially free when you can do nothing and everything is fine. If you must work to pay the bills, you are not free. There must be automated income coming into your bank account to cover all your obligations.

Why I’m Bullish on the American Tech Sector

Now is a great time to invest in the American technology sectors, for example, investing in companies like Apple, Google, and Microsoft.

The internet is the next frontier. It is highly disruptive and will grow strongly in the future at the expense of many traditional industries. For example, the rise of the internet has destroyed traditional print news and media.

Are we in a bubble?

The price earnings ratio of the tech sector is very favourable.

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What if there is a crash?

There is a possibility that we are about to face GFC 2. However, there is quantitative easing available for the government to correct for any downturn.

Convention economic theory states that printing money makes no difference for an economy because it is offset by inflation. However, I believe this is not the case.

As the government prints money, it uses printed money to buy up bonds and effectively lower interest rates. As interest rates go down, businesses borrow more, expand, and produce more. This higher output should push prices down.

Even if there is inflation as a result of money printing, this is not necessarily harmful for the economy. Inflation will push up the price of shares, bonds, and property, which will increase wealth.

Higher inflation will also encourage hard work. If the price of food were to double, wouldn’t you work harder just to survive?

How to invest in the American tech sector

Americans can buy shares directly in, say, Apple or Google. There are also ETFs available that invest in the entire sector.

For Australians, buying American shares directly is difficult and costly, so ETFs are the best option. An ETF I use is the Betashares Nasdaq 100 ETF that trades on the ASX under ticker symbol NDX.

Fear of Being Fired and Fear of the Future

Today is Sunday. Last night I stayed up until three in the morning. I woke up today at nine, which means I got six hours of sleep, which is not good. It would explain why I feel so horrible today. I don’t want to sleep in because I know I’ll have trouble waking up early tomorrow for work. I know poor sleep increases cortisol and destroys muscle. I had a lunch catch up with a friend booked in today, but I didn’t feel like going, so I texted him and told him I was busy. I didn’t get into the detail. He seemed cool with it.

It’s all hitting me, I suppose–my girlfriend ignoring me, my career completely stagnating, my lack of sleep, my lack of good friends. I’ve recently been mulling over in my head a new income goal. I currently earn $80k a year in income. About $5k of that is from investments (conservative estimate) and $75k is from my salary. I aim to increase gross income from all sources by $5k per year. This means next year I should be earning $85k and the year after that I’ll be earning $90k and so forth. I can increase my income by getting promotions or progression at work, but if that fails (and it probably will) I can save up more and rely on investment income. I am also going to get serious about starting a side business on the internet so I can earn money online. I need some goal to keep me motivated otherwise I will start to get lazy and depressed.

I’ve heard rumours at work that senior management will fire a few people in the next few weeks. Supposedly they have a few people they want to target. I can only hope I don’t get fired, but even if I do get fired, it’s not like I love my job or anything. I’m not fully certain what I’ll do if I get fired, whether I’ll hunt for another similar job, start over and do something completely different, or fly over to Asia and retire. There are always options, I suppose, so I don’t have too much fear, and I do have savings. I’ve always been paranoid about the future. I avoided marriage, mortgage, and children for this reason alone. This is the thing about the future: it is always uncertain and scary. You want to give yourself the best opportunity as possible to tackle the future. That means you need good health, no debt, and no massive obligations or commitments.

Love and Frugality

Last night I watched a romantic movie called Before Sunrise. It is about a young boy and girl who meet on a train, get off at Vienna, and spend the night in the city before they need to separate from each other the next day. I thought the movie was absolutely beautiful and I suppose by watching it I feel great loss that I never really fell in love with anyone. I’ve been on quite a few dates (most of which are first dates) and had one relationship that lasted for a year, but otherwise I’ve lead quite a simple life. I would love to fall in love like they do in the movies.

Of course, the frugal side of me tells me that just because something is glamorized in a movie it doesn’t mean I should follow it. Movies, TV shows, books, and other forms of art have a way of making you desire things more and creating greater expectations. Greater expectations normally lead you into spending more money than you otherwise would.

Saving up money is simple. You simply don’t spend much. Of course, if it were this simple, why are most people living under enormous debt? I think it is because most people have high expectations. An average person may earn $50,000 per year, but if his expectations are such that he needs to spend $50,000 per year in order to afford the things he feels he needs, he will not save anything. However, if his expectations are lowered. If he were to suppress his desires such that he can live on $10,000, he’d be able to save much more.

Where do expectations come from? There are two sources: internal and external. Expectations can come from yourself when you tell yourself that you need something or that you don’t need something. But expectations can come from others: friends, girlfriends, TV, movies, salesmen, etc.

When we talk to ourselves, we can try to convince ourselves that we don’t need something that we may desire. To react to external influences, we can avoid friends who spend more than we do.

To suppress feelings of love or desire, it is probably best if I avoid romance movies or books. If I keep watching these movies, I desire more.

The point I am making is that love is the tool that other people use to make you desire something, and desire leads to greater expectation, and this normally leads to greater spending. Marketers try to make you love a product so that you buy it. Women try to make you love them so that you spend money on them. It is sad then that in order to be successfully frugal that you must suppress your love. They say love is a beautiful thing, and it can be, but when I look at all the examples of love in the real world, I have trouble separating acts of love from acts of greed, envy, or hedonism. From one perspective, love is beautiful, but look at a different perspective and love is also vile or vulgar.

Can I live a life without love or desire? I doubt it. I am willing to spend money to pursue love, but it must be controlled.