The Impact of Coronavirus on Financial Independence

The stock market crash caused by the Coronavirus (COVID-19) has hit hard. Top to bottom, the ASX 200 has fallen about 30% and we don’t know if it will continue to fall. What I found incredible about this downturn is how fast it was. The GFC back in 2008 was a much more staggered downturn whereas the COVID-19 crash looks like a straight line down.

The only way to prevent the spread of this virus is to restrict movement. However, restricting movement hurts the economy. If people cannot commute to work, travel to another country to do a business deal, go to a shop to buy something, etc then trade doesn’t happen. If trade doesn’t happen, businesses collapse. This may lead to businesses firing staff, which reduces spending, which leads to more business collapse.

Diversification

This whole incident demonstrates the importance of diversification. Even though I am heavily invested in high-dividend Australian equities, the risk with focusing on a narrow asset class is a lack of diversification, so my focus on high-dividend Australian equities has definitely not helped me during this market crash.

The video above (with overly dramatic music) demonstrates how widely different countries’ stock markets have performed during the virus outbreak and illustrates the importance of diversification. Chinese equities have held up very well compared to the stock indices of other countries. Other assets that have held up well are gold, government bonds, and the US dollar.

All this demonstrates the importance of diversifying across a range of different assets. Because a significant amount of my wealth is in high-dividend paying Australian equities (e.g. IHD), I have made significant six-digit losses. Investing with leverage doesn’t help either. Nevertheless, I am relatively young and feel hopeful that there will be a recovery. As I get older, I will definitely reduce risk by diversifying into a variety of safe haven assets, but while I am young I do feel an obligation to invest in riskier and more volatile assets.

Mass job losses as a result of COVID-19

Something else that the COVID-19 crash demonstrates is the importance of financial independence. Being able to live off your investments forever is important because your job is not certain. Many people have an optimism bias and think they will be employed forever, and they structure their life around the assumption that they will always be employed. However, even what is perceived to be a safe job can be unsafe. For example, a pilot may think their job is bulletproof. They may think that air travel will always happen, so their job is safe. Black swan events do happen.

In my opinion, you should aim to be financially independent as fast as possible, as soon as you leave school or university. This involves a combination of high savings as well as cutting costs of living. If you are able to live off $10k per year, you only need to save $250k in order to retire (according to the four percent rule). If, when you are young, you inflate your lifestyle to $40k per year in expenses, you will need to save $1 million. The better you are at being content with living on little, the quicker it will be for you to be financially independent.

Surviving self-isolation

As a result of Covid-19, I am now working at home. I find there are pros and cons to working from home, but I am getting used to it. The biggest pro is being able to wake up about one to two hours later because I no longer need to get dressed or take the train into the city. Although not essential, I feel it is good to start the day by having a shower, wearing reasonably nice clothes (so you look okay when video-conferencing), and having a coffee. Not only is being clean, neat, and caffeinated important in itself, but the ritual of these activities helps to put your mind into “work mode.”

I have been to the supermarket in these new times, but it is not a pleasant experience. Everyone seems nervous and anxious. They stare at you as if you are going to grab the last pack of toilet paper. There are many stories of shoppers fighting over toilet paper, which I think is disappointing. To avoid crazy people and to avoid being infected, as much as possible, I am trying to avoid going to the supermarkets by buying essentials online. Many essentials can be purchased online, from food to toilet paper. Hoarding toilet paper, in my opinion, is not a good idea because toilet paper prices are high now, so you should only buy what you need and put any excess cash into the stock market.

The key to surviving Covid-19 is to have good respiratory health and a strong immune system, which is why exercise is important. Even though the government has imposed restrictions, exercise is still allowed where I live, so I make sure I ride my bike around the neighbourhood regularly. Riding a bike is not just a form of exercise but is also a cheap way to commute. Surprisingly, the park trails are filled with people walking their dogs, so I find that it is safer to ride on the roads where there are almost no cars.

While the global community deals with Covid-19, what is becoming clear is that many of those who contract the virus have no symptoms or mild symptoms and are able to make a strong recovery thanks to a strong immune system. As such, I have been trying to eat as much fruit and vegetables as possible.

Now is the time to dollar cost average into the stock market

I have heard of many people selling shares or converting their superannuation into 100% cash. The Australian government will soon allow those who are affected by Covid-19 to access $10k from their superannuation. This is a bad idea. Now is the time to be buying stocks, not selling.

“The best time to buy is when there is blood on the streets, even if the blood is your own.” Baron Rothschild

Will Australian property prices go down?

It makes sense that property prices are not immune from Covid-19. If enough people are unemployed from Covid-19, they will not be able to meet their mortgage obligations nor will they be able to save for a deposit on a property. Property investors typically rely on tenants to pay them rent so they can meet their own mortgage obligations, so if tenants lose their jobs, landlords may be required to sell their properties. Falling demand and rising supply push prices down.

However, there are a number of policies put in place that can prop up property prices e.g. lower interest rates and six-month mortgage holidays. These measures put in place to stimulate the property market, in my opinion, are good reasons why you should not buy a property now. Because the stock market has fallen so violently, the prices for these assets are very attractive relative to historical earnings (and dividends) whereas if property prices are propped up, you are not getting any discount on your purchases relative to rental income. The cheaper you buy your investments relative to income, the more they will go up when there is a recovery.

The silver lining

Although the Covid-19 outbreak has caused considerable wealth destuction and job losses, there is a silver lining. One benefit is that carbon emissions are falling sharply across the world, but unfortunately when the recovery happens, all this may be reversed. Another benefit of Covid-19 is that remote working systems across the world will be strengthened, which means over time more and more workers can work either fully remote or partially remote. This means I may be able to pursue my dream of becoming a “digital nomad” while still doing the 9-5 job I am familiar with. Usually those who work remotely are people with families, tech workers, graphic designers, etc, but the Covid-19 outbreak will normalise remote work for everyone because it has forced everyone to work from home (unless the job cannot be done at home). This is good not just because it means you don’t need to commute but it also means you can potentially travel while you work or work from low-cost-of-living countries. A world of remote work could look very different to the sort of world we live in today which is build upon the idea that you live in the suburbs, commute into the city every day, and take an overseas holiday two weeks per year. If more and more work is remote, we may see permanent digital nomads i.e. rather than commute for hours each day on the freeway or a train and get two weeks per year of travel, you can travel permanently, be on “permanent vacation,” hopping from one country to another and living and working in co-living spaces. This is all very utopian but it may be a reality, and even if it is not a lifestyle most people embrace in the future, it is certainly a lifestyle you can design for yourself once you are financially independent.

Why I Use ETFs

I am not the only dividend investor on the internet. It turns out there are plenty more. Through Twitter alone I have found many other bloggers who blog about dividend investing, which I think is great because it allows us all to learn from each other.

What I have noticed from reading the blogs of other dividend investors is that most of them seem to invest in individual stocks, and lots of them. They may hold shares in thousands of different companies.

Most of these bloggers give monthly updates where they break down how much they receive from each share. Most even go further and report on how much they spend. They divide their spending into categories such as groceries, mortgage payment, repairs on the house, gas bills, etc.

I thought for a second maybe I should do the same, but honestly I don’t really know how much I spend, and I don’t really know how I spend it.

I also personally don’t think it’s necessary to record everything you spend down to such a minute detail. It may be great to know that for one month you spent $500 on groceries but more important than knowing what you’re spending money on is knowing how much you’re spending overall.

I believe in keeping things simple, and for saving money I recommend the David Bach recommendation, which is “pay yourself first.”

In other words, talk to HR and have them send, say, 20% of your salary into your normal bank account and then set up another bank account where 80% of your salary goes. For the bank account that gets 80% of your salary, leave it alone. Let the cash accumulate. Meanwhile, try to simply live off the money in the bank account with 20% of your salary coming into it.

By doing this, you don’t need to worry about calculating whether you have spent $x on entertainment or $y on groceries. You just know that you’re spending 20% (or whatever percentage suits you). At the end of the day, it’s how much you spend that matters, not what you spend it on.

Every once in a while, access the money in the bank account where 80% of your salary is going and then use that money to buy ETFs.

Why ETFs? Why not research and buy stocks in companies that pay high dividends?

Personally, I believe it’s much easier to invest in ETFs. There are many ETFs in the market dedicated to paying high income. These are the ETFs I recommend for dividend investors. You could do your own work, but it’s much easier to let a fund manager do the work for you and let him or her take a small fee.

In Australia, there are actively managed ETFs that use options and futures to generate more income and to manage risk by lowering volatility.

Many people believe that low cost index funds are best, and I used to believe the same, but I have noticed over time that low cost passive index funds simply don’t produce much income.

It is certainly more risky to invest in an actively managed ETF because you are relying on the skills of the fund manager, but this problem is easily fixed by simply diversifying across different income-focused actively managed ETFs.

Most importantly, I believe in keeping things simple. We don’t need to make things complicated. Having your savings automated and then simply investing your savings in high-yield ETFs is a very simple plan that allow you to build passive income from dividends without much effort. All you need to do is stay employed and maintain your 80% savings rate.

This is exactly what I did. I aimed for an 80% savings rate. However, when I started working I invested in normal Vanguard low cost index funds but was disappointed in the sporadic and low income I got, so I slowly started to put money into funds that were more tailored for income investors.

Over time, I noticed that I had enough money coming in from my investments to cover my living costs, so I instructed HR to send 100% of my salary to the bank account earmarked for savings. All my investment income is send to my normal transaction account for spending. I am therefore literally living off dividends. Hence the name of this blog. All my salary is invested and all the income from investments is spent.

Why live like this? Simply, if you learn to live off dividends, you condition your mind to live a standard of living that can be maintained even of you lose your job. This means that regardless of whether you work or not, your standard of living is exactly the same. Your life is unaffected by work, which means you don’t need to worry too much about sucking up to the manager. This takes away a lot of stress.

Most people, if they start earning more, automatically start spending more. They’ll let the money get to their head, think they deserve to spend more because they earn more, and then they become addicted to the spending and must therefore keep working, even if their enthusiasm for the job wanes over time.

If you live off dividends, you have the freedom to quit or move jobs, or take time off work to pursue other opportunities, knowing that you are capable of simply living off your investments because that’s what you’ve even doing for many years.