2019 will be THE year of opportunities

With all the drama all around the world, I firmly believe that 2019 will be still a great year with plenty of opportunities ahead and some really interesting developments. For FIRE aspirants such as myself, this could be a crucial year to move a big step forward towards the aim of financial independence. But before we get to that, let me point out a few interesting developments:

  1. Plenty of undervalued stocks – yes, 2018 was not great for investors, but many high-quality stocks suffered dramatic losses that were not really justified or simply exaggerated. In Europe, we have the car industry with such amazing brands like Daimler and BMW which trade on lowest valuations and have the potential for great turn-around stories. Look at the chemistry sector, with BASF being down to levels which we didn’t see for 5 years. Of course, you can be more careful and go for a diversified DAX ETF product to invest in all of these companies, but in my humble opinion, now is the time for cherry picking. Many of the most recognized brands are now at seriously low valuations and up for a grab.
  2. Dividend season is coming soon – while US investors enjoy quarterly or even monthly dividend payments, most European companies pay out dividends only once or twice a year. For European investors, the dividend season is usually between April – July which starts only 3 months from now, and chances are that 2019 will be another record year in dividend payouts. Also, with the currently low valuations, dividend yields look great!
  3. A recovery might come sooner and quicker than we expect – Because, despite all the uncertainties and drama, companies still make money. There is currently no serious threat of a financial crisis, political risks are mostly priced in the market and in general, I would say that most investors are by now pretty used to calculate risks and price them into their investments. This would indicate that as soon as things start looking more stable, everybody will jump back on the train and market valuations will move up swiftly. You saw a glimpse of that just yesterday when there was a rumor about a potential new trade deal between China and the US.

So knowing all these points, it might be not a bad time to put some cash back into stocks. Personally, I have put most of my cash reserves in stocks during December, when things were dropping down. This way I was able to lower my average costs per share for some of my stocks, which were hit the strongest by the downturn, and I hope this will pay off over the next few months ahead.

If you did the same, kudos! I believe it was. a great move. If not, watch out for undervalued stocks in the market. High dividend yields, low price/earnings ratios with solid brand names, large cash-flows and proven business models are on sales now. For the US market, take a look at AT&T, Oracle, Coca Cola, Apple.

Every stock downturn is a time of chances and opportunities. While inexperienced investors are biting nails, FIRE aspirants are scrambling all the cash they can find to put it into the market. Because, as we know, every downturn is an opportunity. Every crash is followed by a recovery. And every high yield that we can secure now, will ultimately help us to reach our goal of early retirement faster.

Disclosure: I am long invested in Daimler, AT&T, and Apple. 

Drama is all around

For anyone who was thinking that 2019 would offer some political stability and economic recovery, the year started pretty awful. Let’s take a look:

  1. Brexit – everything hints at a total disaster with the UKs decision to leave the EU. We can expect high market volatility and a lot of insecurity on how an unorganised Brexit will actually effect everyone.
    My take on this matter: The Brexit will be cancelled. I think everyone already understood, that the British government is not capable of managing something on such a huge scale. For investors, there may be some great opportunities to watch out for: Vodafone offers an all-time high dividend yield of 8,8%, GlaxoSmithKline is at 4,9%, and Royal Dutch Shell (B) is at 6,1%. It might be a good time to take a closer look and risk-oriented investors might consider building-up some first positions.
  2. Trump Impeachment – Another huge topic to look at. The investigation into a Russian collusion is proceeding very quickly and Trumps own people start turning on each other and on Trump. American news outlets don’t give us really any clear picture on what is happening. You can watch CNN or FOX discussing the same issue and you will get completely different interpretations and results depending on the channel you prefer to watch. However, in the end, something big will happen and this end might happen very soon. I am almost certain that we will see things clearing up in 2019.
    My take on this: Politics in the US are seriously messed up and Trump may survive this. If he does, the future is truly unpredictable and even more, I would then expect Trump to even win a re-election. If he doesn’t survive this drama, then we may see markets rise together with democrats regaining power. We would probably see stabilising tariffs, politicians focusing on trade and reducing international disputes and a generally speaking more positive sentiment. I would love to see that happen, but for now I remain sceptical.
  3. Chinas expansion – If you watched Mr. Xi’s New Years speech, you might actually get scared. Telling on television to his own troops to get ready for conflicts, and to emphasise his position about reserving the right to take Taiwan by any means including force is not a small thing. At the same time, we have the South China Sea boiling up, China’s investments in infrastructure and technology projects and companies across the globe, and a stronger than ever buildup of military power, intelligence and provocations with even the mightiest nations in the world.
    My take on this: China got some serious issues to tackle and apparently more and more challenges to control its economy and its population. A dangerous mix that has, historically speaking, often led governments who try everything to prevail in power to do stupid things. What worries me the most is that China seems absolutely not concerned about challenging not only the USA, but also Canada, Japan, all South East Asian nations and even Europe. All at the same time. Their tricky rhetoric and massive cash deployments across the globe are being met with more and more scepticism and might turn into a very negative sentiment by the end of this decade. I have only 1 Chinese company in my portfolio (Baozun) and will probably refrain from any further investments in the Chinese market, until it becomes more clear where this country is actually heading.
  4. European Dramas – with all the Brexit talks, the only other topic in the EU that is still coming up frequently, is Mr. Macron and his failure to find a proper communication channel to the French. The yellow-vest-movement shrank, but turned more violent and could gain new traction at any time. All this happens for one main reason: France is in trouble as its economic numbers don’t match up. But to be fair, it’s not only France. Spain, Greece, Italy… there are tons of problems to tackle and any of these countries could cause a major drama in 2019.
    My take on this: If the Brexit will be cancelled, then Europe will be just fine. On the other hand, if the UK really leaves the EU, the results will be unpredictable. We might see other countries willing to follow suit which could eventually destroy the EU as we know it. In terms of investments however, Europe is a paradise at the moment. So many great and undervalued stocks out there, that it’s hard to list them all.

I will keep it at this 4 points for this post, but there are actually so many other things and dramas to worry about, that there is only 1 conclusion that we can be truly sure off for 2019: It will be an exciting year.

Disclosure: I own all stocks mentioned in this article.

2019 – Drop the resolutions!

Yes, you read right. The new year started but we don’t do the resolution stuff. We start the year with serious targets.

Today is the 6th of January, so the 1st week is almost gone. This means that we have roughly another 51 weeks to meet our own, ambitious but still realistic expectations on 2019. What can be done in 51 weeks? Here are my targets:

  1. Improve on time management. As you all know, and as the sub-headline of this blog indicates it: It’s all not about money, it’s about time. Time is our most precious resource and it needs to be managed well. A day has 24 hours. After deducting those 6-7 hours that are necessary to re-charge our batteries, plenty of things can be achieved each and every single day, if we allocate the remaining time efficiently. I would rate myself rather poor on this skill so far, as I still spend way too much time with my phone, while I could allocate more time to this blog, to my side hustle, to stock analysis, and to my workout routine. I will start slowly by:
    • trying to leave work on time,
    • delete useless apps from my phone and
    • to schedule my workout routine a little earlier throughout the day (so far I was always exercising after 10 pm)
  2. Increase side hustle earning by 50%. Right now I am writing about 1 article a week on average. I will try to increase this to 6 articles a month to curb my side-hustle income and to have more cash available for investments.
  3. Increase my dividend income by at least 10%. That’s right. While this should be not a problem, I put it on my target list. Most of my stocks will increase the dividend throughout this year anywhere between 2% up to 25%. However, I can also increase my dividend output by buying more stocks of companies which I already owe and which had been dragged down throughout 2018. This will cost-average down the stock-price in my portfolio and thus increase my average yield on cost per stock.
  4. Prepare for a larger market crash by saving up enough cash to be equivalent of 50% of my current stock portfolio volume. That’s the biggest and most difficult one, because this would require me to really try to achieve my savings target of 40% of my total annual income. Not impossible, but a tough one.
  5. Find a new job and re-negotiate my base salary by at least +20%. As mentioned in the last post, it should be possible due to my current situation, but I will aim even significantly higher. With perks and benefits, the total value increase should be at around 35%.
  6. Take a break for 1 month in between jobs. Yes, I put this in my target list also. I need time to recover and re-charge after my current assignment. I have now worked almost 2 years with a 6-day workweek, spending on average roughly 65 hours a week in my hotel. This does not include my side-hustle activities, my family time and my exercise routines (which takes 1,5 hours per day). So yes, to ensure I get no heart-attack before time, taking a break for a month will be commendable.
  7. Visit Japan and/or Korea this year. Indeed, it is about time. I haven’t gone to Korea and Japan since 2012 which is a real shame. I know my parents want to see my daughter and want us to go to Europe, but Japan and Korea is the reason why I moved to Asia in the first place and I seriously need to visit this beautiful places once again. On top, I have promised my wife this trip for a very long time.
  8. Exercise routine annual target:
    • 36,500 push-ups (100 per day),
    • 18,250 burpees (50 per day or 150 every 3 days),
    • 18,250 squats (50 per day or 150 every 3 days),
    • 3,650 pull-ups (10 per day),
    • Fresh-up of all my martial arts / kata routines
  9. Actively teaching German and English to my 3 year old daughter for 30 min a day
  10. Actively involve my daughter in my exercise routine to practice with me. She already started to sit on my head when I do squats or push-ups and loves to hang on to me when I try to do pull-ups, but this can be fostered more

So yeah, many things to do and 51 weeks is actually a short time. The older we get, the more we realise how precious time is. Let’s make the most of it.

And no, you really don’t need 8 hours sleep. The day is just too short to spend 1/3 of it with doing nothing.

This year, I also intend to write more about individual stocks and my investments. So just to give a brief heads-up, here a list of stocks which will be discussed and possibly purchased sometime in 2019:

Monthly dividend paying stocks:

  • Gladstone Investment
  • Main Street Capital
  • Realty Income
  • Apple Hospitality

Regular Stocks:

  • Ares Capital
  • Cisco Systems
  • Starbucks
  • Microsoft
  • McDonalds
  • Coca Cola
  • Merck
  • Pfizer
  • Iron Mountain
  • Tesla
  • Bayer
  • BASF
  • Aumann
  • DÜRR
  • GlaxoSmithKline
  • Royal Dutch Shell (B)
  • Baozun
  • Alibaba
  • QQQ

ETF:

  • iShares MDAX UCITS ETF

Disclosure: Some of those stocks I already owe, some I had in my portfolio in the past but sold them with a profit and plan to buy again when prices drop.

So get ready for a furious, active and hopefully rewarding 2019!

Make yourself a great Christmas gift! Invest!

Christmas is just a few days away, and while over the years in the past this time was blessed with rising stock markets, 2018 doesn’t look much promising. The almost traditional year-end-rally is very unlikely this year. And that’s not bad news.

A lot of stocks have suffered in 2018. Some, deserved a correction. Some are just cursed by uncertainty about their future. And others have just been dragged down with the rest. I believe, it’s a great time to take a closer look at some of these “others” and to spill a few Euros into your investment account.

I usually don’t recommend any specific stock and the following stocks are not meant to be a recommendation in any way. Every investor needs to do his own due diligence and invest according to his or her own sound judgment. Having said that, here are my favourite stocks to take a closer look at. They all have the potential not only to help you create an additional income through great dividends, but also have in my humble opinion, the potential to find back to earlier glory in the next months and years to come.

Apple

There is no need to explain much about this company. It’s one of the richest, most profitable and most innovative companies on earth. You might think that Samsung, Huawei or LG got great products, but just consider this: While Apple certainly doesn’t have the largest market share on mobile phones, it’s cashing over 90% of worldwide mobile phone profits. This is considering ALL mobile phone brands combined. Sounds ridiculous? Well, it is. But they charge you 1000$ a phone and they get them sold. On top of that, their phone revenues are still a major factor, but revenues from the App store, cloud business, computing, wearables and equipment are becoming stronger every year. The stock went down significantly over the last weeks on worries from analysts that iPhone sales might end up below expectations. I am pretty confident though, that in a few weeks from now, Apple will release its Q4 earnings and will once again crush all estimates. The dividend yield is not very high for now at only 1,71%. But please consider that Apple is increasing its yield every year by double digits and while the stock price keeps rising, the yield will probably always look low. Therefore, buying the stock now is probably not a bad move, and while profits and dividends will keep rising, so will the price per share. In 10-15 years from now, I believe that chances are great to have double-digit dividend yield on cost. There is also no need to go all-in. The market might drag Apple further down, so initiating a smaller position and adding more shares later might be not a wrong tactic as well.

AT&T

Communications might be super risky, but AT&T is now at a point that is hard to ignore. This stock is one of the most reliable dividend payers out there and it offers currently 6,6% yield. Just yesterday the company announced another dividend increase, as it does every single year, like clock-work. Investors willing to ignore market fluctuations and seasonal challenges might be happy about getting on board now and start cashing in this juicy and sweet dividend being paid out every quarter. Also, since the share lost lot’s of value over the recent years, there is a good chance for a turn-around story in 2019 or 2020. Management finally acknowledged that it’s time to stop using their credit cards and time to pay-back debt. Once this starts, more trust should return to the company and I do expect it to recover.

GlaxoSmithKline

Follow smart people who do smart investments. GlaxoSmithKline is one of the major players in the medical industry and as Bill Gates put it: They can do things that no one else can do. This stock is very stable passing currently through market fluctuations like an ice-breaker in the arctic sea. Reliable, quarterly payments, a great yield of 5,29% and showing no signs of weakness whatsoever. On top, no matter where you are located, consider this: The company is headquartered in the UK and doesn’t charge any withholding tax on dividends.

Royal Dutch Shell

Normally I stay away from oil. I don’t like oil and I don’t really want to support them in any way. But we have to be frank: Without oil, the world as we know it wouldn’t exist. Sure, the by-products are destroying our world, but we all know that we wouldn’t be where we are without having reaped the benefits of it. So, while I am still not a fan of oil, I appreciate companies that are steadily transitioning into the new energy era, and Shell is one of those companies. Their investments into renewables are remarkable and I believe that this company will transition just in time, to weather any future storm that will start shaking big oil sooner or later. On top of that, they still do make amazing profits and pay a dividend with 6,27% yield. Paid out quarterly and without any withholding tax, Shell is in my opinion a great investment.

If you want to stay away from individual stocks, it might be not a bad idea to take a look at an index-ETF. Here, my preference right now is on the German mid-cap sector, the MDAX. It’s one of the most successful index in the world and while it may be volatile, over time it always not only recovered, but also produced great returns for patient investors.

So here you go.

Don’t waste your money on some shiny boxes with sweatshirts that no one wants to wear or toys that will start collecting dust after a month. You most probably don’t need a new phone or a new laptop and there is also a high chance that your car or motorbike can take you on for another year. Grab that cash and invest. Chances are, this might turn out to be a much more valuable and rewarding gift for yourself and for your family, for many more years to come.

DISCLOSURE: I owe all the stocks mentioned in this article.

What FIRE really means

Retiring Early and being financially independent may be a dream for many. But before you put too much romance into that thought, let me tell you something: It becomes a dream once it happens. But before that, it can get really tough.

Savings target

My plan is to retire with 45. That’s 6,5 years from now. A long time? Not at all. Let’s do some basic math:

6,5 years => 52 x 6,5 => 338 weeks.

IF you would look at your current situation right now, how much money could you save up every week? 20 Euros? 30? 50? 100? Even if you would save 100 Euros a week, after 338 weeks this would equal only 33,800 Euros. Hardly enough to retire on.

So my target is actually significantly higher, with a goal of saving approx. 500-700 Euros a week. For most people this may sound hard to manage or even to be complete madness. But yes, it CAN be pulled off. It’s just really, really hard.

Focus on your career

I work as a hotel manager and have a decent salary which contributes mainly to reach my target. However, becoming a hotel manager at the age of 36 while having started in the industry only when I was 29, was a pretty tough call. In order to get quick promotions and collect the necessary knowledge and experience, I managed during this short time-frame to work in Korea, Japan, China, Scotland, Germany and Thailand. When I took on a role, I learned as much as I could, and as soon as I noticed that there is something in my way of moving up the career ladder, I simply moved on. I didn’t care about where I go, what my initial salaries were and I had almost no personal life whatsoever.

To be exact, the hotel was my life. I didn’t celebrate my birthday with any of my friends back home for several years. I didn’t celebrate Christmas or New Years back at home, because this is mostly a super busy time in any hotel around the world and you just don’t get off for that. I had no time for a family and even regular relationships were mostly annoying because they would just slow me down and require me to compromise on my career choices. My luggage was (and mostly still is) a 7 kg carry-on plus my laptop bag and a couple of suits. I hate to check-in luggage. My point here is: You got to really push yourself to get this career that will help you in building up your savings and investments.

Save a lot and use your savings to invest – aggressively

In the last 3 years I started to invest in stocks on a larger scale. Basically, when I got salary, I would send 50-60% of it to my stock account right away, and leave just enough on my cash account to get through the month. While I have a high position and a high salary by now, I really hate spending money for things that simply don’t matter. And believe me, from my point of view, there are not many things that would matter.

I don’t collect stuff, I don’t believe in buying presents or gifts. I get headaches when I enter a shopping mall and stay there for longer than 20 minutes and most of my clothes are being worn until they literally fall apart. I upgrade my phone and my laptop once every 5 years (yes, it should be Apple products, other brands just won’t survive long enough), I don’t sign any contracts that would involve monthly payments. Netflix is currently the only exception.

Don’t compromise your savings, get a side-hustle if you need more cash

But most and of all, I focus on work. When I get short on cash, I don’t withdraw any money from my stock account. I go to http://www.upwork.com and find a quick side-hustle to earn a few quick Euros to cover the expenses that suddenly came up. If I can’t collect the money quickly enough, I will put it on my credit card, collect the points and pay it off immediately as soon as I can collect my side-hustle reward.

Credit cards can be tricky but also useful. Living now in Thailand for a while, I can honestly say that during the last 3 years I never paid for a movie ticket. I got enough credit card points to go in every week (if I wanted to) without spending a dime. This is mainly, because I put almost any of the necessary expenses that I have on my card – and pay it back as soon as my points come in. Avoid delays, because credit card interest can seriously jeopardise your finances, but collecting credit card points is a great way to improve the value of your spendings.

For the last 6 months, I have filled my weekends (and some nights) with writing articles for The Motley Fool GmbH (German subsidiary). Regular writing on the side helps me a lot to keep up with my goal and additionally, it helps me to stay up to date on financial topics and stock research for any future investments.

It can get really tough

Sure, my wife complains sometimes about not having enough time for the family. My hotel job covers me for 6 days a week (yes, only 1 day off per week) and I usually spend roughly 60 hours in the hotel – every week. Researching stocks and writing about them adds at least another 20 hours on top of it. So I am now at roughly 80 hours per week. Hell, that’s a lot. Seriously, it is.

BUT the way I see it, in 6,5 years from now I will have plenty of time for everything – until I die. That may be shorter than I think. Or significantly longer. Who knows. But I don’t buy the “living for the moment” mantra when it comes to finance. Yes, I may die a year after reaching my goal, but the much higher probability is that I will be around for another 40-50 years after that.

Isn’t it a better choice to be optimistic about your life expectation and to look forward to it, with the confidence of being financially independent? I think so. I believe so. And that’s why FIRE is for me.

If you can’t motivate yourself to INVEST your time, and to dedicate your attitude and career approach to this goal, then FIRE will be seriously hard to pull off. And probably remain just a dream.

Overcoming the emotion of fear

Following up on my last post, I would like to write today about fear.

Just as a reminder, in my last post I introduced 3 important topics, that are necessary to understand and successfully turn towards an investor mindset. These 3 points are the following:

  • Understanding and accepting the principles of the so-called “financial triangle” (part 1)
  • Overcoming the emotion of fear when it comes to investments (part 2 – this one!)
  • Investing time to make informed decisions on investments (part 3 – next week)

The fear of investment

This topic came up partially a few times in some of my previous posts in the past. However, I would like to dedicate one article specifically to this topic with a few more details. The reason is, that once you understand the principle of the financial triangle, which I introduced just last week, you will realise that taking risks is an unavoidable part of any type of investments.

This is a serious and very important realisation, because it makes it crystal clear: If you can’t accept taking risks, you can’t invest successfully. And this happens to be not only true for many people, it is also one of the main issues that is holding people back from starting to invest in the first place.

The idea of the potential for losing even a tiny fraction of ones savings, frightens so many people in such a strong way, that instead of evaluating their options, potential risks and corresponding opportunities, they immediately dismiss the entire idea and stick to keep doing what they were doing so far: Nothing.

Now let me tell you something about doing nothing. There is a great quote that fits very well on several topics, including this one:

“Standing still is the fastest way of moving backwards in a rapidly changing world.”
– Lauren Bacall

The same goes for your hard earned money. Doing nothing is not a safe thing to do. Just the opposite. Doing nothing is a guarantee for losing money.

Inflation

The no.1 reason for this phenomena is called inflation. You surely heard this word very often before, but truly understanding it, should make you worried. Because if you truly understand it, you will know that the value of this 500 USD under your pillow will have a much lower value next year. And the year after. And the next year also. It doesn’t end.

This may be not a perfect example because there are obviously more things connected to it, but take a look at prices for mobile phones. Let’s take specifically the iPhone. On June 29, in the year 2007, the iPhone was released with an introductory price of 499 USD. It was a top product with the latest and most modern technology on the market (if not compared to SoftBank phones in Japan, those were lightyears ahead).

10 years later, the iPhone X came with the lowest price-tag at 999 USD.

So while your 500 USD would have been enough in 2007, to buy the newest iPhone, in 2017 those 500 USD would be only sufficient for a 50% down-payment, again for the newest available model in that year.

The macro-economics behind that are of course highly complicated, but at the end of the day, Apple is not just raising prices to make even higher profits, but to ensure stable and increasing profit margins and to pass on their own costs for research, development, suppliers, etc. back to their customers.

So good or bad example, you get the point. Prices go up and the value that this 500 USD offered to you in 2007, came down by half in only 10 years. And you can see similar examples in many other areas. Whether it’s diary products, vegetables, fruits, gasoline and whatever else comes to your mind. Prices go up, thus the value of those saved USDs is constantly going down.

Saving accounts & Government Bonds

Inflation is covered pretty well in the press, thus most people are aware of it and understand, that putting money under a pillow (or certainly better: in a safe) is not a smart long-term solution. Therefore, those who seek security, tend to put their money into saving accounts. With the current interest rate it’s not a money maker either, but the argument is, that saving accounts are offering at least a little protection from inflation. Same is being said about government bonds.

But let me ask you a thing: Are you sure, your money is safe there?

First, let’s talk about saving accounts. The financial crisis of 2007 and 2008 is dating not that long back. But its effects did last far longer, and, according to Wikipedia, between 2008 to 2012, the amount of banks which failed and had to either declare bankruptcy or a restructuring, mounted up to 465 bank in the US alone. Now what happened with all those savings accounts in these banks?

When you check the details of your savings account with your bank about the protective systems that are in place to ensure that you get your money back, even if a bank fails, you might discover a surprise. Some banks cover as little as 20.000 EUR and most banks in Europe have changed their policies and regulations to a point that they now protect not more than 200.000 EUR. This goes for your savings accounts, but not necessarily for your current account.

How things can turn out with your current account can be even more dramatic. Just ask the people in Italy, Greece or Cyprus about their experience with banks in the last 10 years. When your country gets in financial distress, which can very well be caused by a financial crisis, you may experience going to an ATM to withdraw some cash only to find, that it’s not working. You go to the next bank and the next ATM, and you find that they all are not working. You turn on the news and suddenly you see, that all banks in the country have shut or limited operations – and you have no more access to your account.

What you’re gonna do?

I got no answer to this question, but my point is that, if there will be another financial crisis, its effects can have a profound impact on investments that most people consider to be safe. They are not, at least not to that degree as one would love to believe.

So, if you have no way to fully protect your assets from a financial crisis, you might, rightfully, be scared about savings and investments in general.

What is the right strategy in this kind of a situation? Well, it’s not an easy one. We have to face our fears. We have to understand, that risk is just part of how our world works and we have to learn to manage it.

There are a few easy, understandable strategies and techniques, that can help anyone who puts a little time and effort to understand them, to minimise risks and to increase the potential for higher returns on your assets.

The Financial Triangle

When it comes to investments, one must realize a few things and learn to learn to deal with them. In my humble opinion, this is the main thing that makes the difference, between a successful investor, and anyone else who is hoping for the government to support him or her, once they get old enough to retire. I don’t put an age number here on purpose, as nobody knows how much further the retirement age will be pushed out in which region.

So what are those essential things? Let me pull it together into 3 major points.

  1. Understanding and accepting the principles of the so-called “financial triangle”
  2. Overcoming the emotion of fear when it comes to investments
  3. Investing time to make informed decisions on investments

In this post, I will discuss only the first point, the financial triangle.

The financial triangle is a basic model that connects 3 keywords with each other. The keywords are:

  • Security
  • Yield on investment
  • Liquidity

Imagine a triangle, with those 3 keywords split for 1 to be in each corner. Now, when you look at an investment opportunity and try to classify it by putting a dot in this triangle, you will notice that it’s actually a tough exercise.

  • If you put the dot close to security, it will be further away from yield and liquidity
  • If you put the dot close to yield, it will be further away from security and liquidity
  • If you put the dot close to liquidity, it will be further away from security and yield

No matter how you try to position the dot, you will never be able to maximize any point without sacrificing on the other two. While modern financial instruments can get truly complicated, this very basic rule applies in almost any case.

The Important Lesson

The important lesson from the financial triangle is, that every opportunity requires sacrifice. You can’t expect high returns on your investments without taking risks. You can’t expect a high security of your investment, without accepting limitations on access to it (liquidity) and reduced potential returns.

No matter what you are reading online about any possible, get-fast-rich-investment scheme. Any company or product that is promising you to be safe, anytime accessible and offering a high yield, needs to be thoroughly researched – if not ignored right away. Chances are high, that it’s not real. Possibly a scam.

The other important lesson, especially for younger potential investors and all those who want to reach financial independence as soon as possible, is the one that without accepting a large amount of risk, early retirement and financial independence will be nothing but a dream.

I seldom quote rappers but let me put it to the extreme and quote Curtis Jackson, a.k.a. 50 Cent here: “Get rich or die tryin’.”

Luckily, the investment world is actually not that cruel, and even better, with the internet on our side, it is easier than ever to reduce risks and make informed decisions. Nevertheless, risk and losses are part of the game and without accepting it, FIRE is difficult to reach.

How much risk is enough?

As I am writing these lines, I am watching the TV Show “Billions”. The 3rd season just came up on Netflix and I am bound to my bed due to an unfortunate dengue fever infection, thus the perfect opportunity for some entertainment.

Watching “Billions” I can’t help but wonder about the life-style of the top 1%. These super rich individuals don’t impress me by their expensive cars, big houses or the fancy restaurants or the cigar clubs they visit. What is rather impressive, however, is their determination, competitive spirit and extreme risk tolerance to stay ahead in the game of money.

Sure, it’s just a movie, but from my own past working in a bank AND from what we know about the last financial crisis, we do know that there are indeed such people – cheating their ways to riches in unscrupulous ways, always with one leg in a prison and the other chasing for the next opportunity…

Which brings me to the point: How do we estimate our own risk tolerance?

Low risk offers low opportunities. But higher risk & higher stakes can produce significantly higher returns.

So what is your risk level? Understanding your own psyche is so important, because after understanding your risk tolerance, the next step is to align your expectations on returns, your investment methodology and your required contributions to your risk tolerance.

I.e., if you prefer to be cautious with your money, then stocks might be not immediately the right investment vehicle for you. Stocks go up and down every day, sometimes more, sometimes less. It takes time and experience to learn to be able to deal with this emotionally. Let’s say you put 10.000€ in a stock account, put it all in into a few selected companies – and when you wake up the next morning, the value might have slipped down to 9.500€. Will this make you sweat? Will you worry and start checking your account every hour or so to see whether these losses are going to turn back into profits? What if the market drops and your stock value goes down another 500€? Can you still sleep well at night?

Say you prefer to work with bonds that produced historically 3-4% lower returns than stocks. This would mean that to reach the same target within a similar time-frame, you would need to save/invest more to realistically expect to hit the same target.

When reaching for FIRE, checking for your actual risk tolerance might be the wrong approach though. Instead, you might need to ask yourself how badly you really want it, and accept to go for a higher risk level.

Risk tolerance can be trained

Now the good news is that as humans, we are highly adaptable and the more often we expose ourselves to risk factors, the faster we may be able to learn to manage those risks.

Watching your stocks drop the first time can be an emotional experience, but after a while, seeing your portfolio going up and down day-in and day-out, you might not care about those short term changes at all. What kept you awake at night on the first day won’t bother you once you gathered some experience, even if the concerning factors at play grow larger.

So, when is it enough risk? Certainly it’s something that everyone needs to discover by and for oneself, but don’t dismiss stocks just due to a lack of experience or because you think they are a risky investment. At the end of the day, managing risks means, among all, to manage our emotions – and the better we learn to do that the easier it will feel to go for opportunities once they reveal to us themselves.

Guilty pleasures

We all have some guilty pleasures. The movie, that everyone hates, but that you secretly enjoy watching over and over. The song, that you would never admit to your friends to have it on your playlist, but that you just have to listen to every now and then. The fast-food burger, that everyone know is not only bad for your health but also bad for your waist, but that you crave for after every work-out.

For someone who wants to retire early, guilty pleasures are even more of a concern. Because they include any not necessary spendings. Drinks or food on the go, online-shopping, giving into promotions and special offers, simple home improvements or even just that monthly Netflix charge, can quickly start feeling like a guilty pleasure. Because you know, that every Euro spent, is a Euro which does not make it into your savings or investment account, and thus will ultimately delay your dream of early retirement from becoming true.

But here is the thing. Being overly strict with yourself, can prove to be a counter-productive strategy.

The strategy to early retirement is actually simple: Spend less than you earn, save and invest what is left at the end of the month, and repeat the process until you hit your target. When it comes to determine how much one should save every month, the easiest answer is therefore of course: As much as possible. The more and the faster you safe and invest, the earlier you can retire.

Some financial planners or advisers might tell you to start by setting up smaller targets, like 10% of your monthly income. You might have already guessed it: This won’t work for an early retirement plan. Saving 10% a month might work well for a social security top-up-plan. But for early retirement and to escape the rat race, you need to get really aggressive and put as much as you can, as soon as you can to work. The power of compound interest, dividend and stock-price growth can only truly unfold it’s beautiful wings when it has enough time to do so, thus every delay, every wasted Euro and every wasted day does count and can have a significant impact, no matter how small.

You might hear or read stories about people who go as far as to save up 50% of their monthly income. While it may sound crazy, it’s definitely not impossible. The only real question is, how much you truly want it.

The yo-yo effect

However, no matter how determined you are, you are also a human. Humans have a soul, feelings and needs, that often go beyond rationale. Not surprisingly, while it can happen that following a super-strict regiment will get you to a saving percentage that will make your jaw drop, there is a high chance that you get either tired, annoyed or over-confident and without even noticing, snap back to your previous spending habits. Very similar to the famous yo-yo effect, as we know it from people who are trying to lose weight.

It’s not just about saving more – it’s a fundamental lifestyle change

I would say that reaching this goal of a 50% savings rate is definitely achievable, and it is actually something to really strive for. But you don’t need it from day one.

Your financial planner might be not wrong after all, and starting with 10% while learning about investments, understanding your spending habits and learning how to budget, track and adjust your money matters is actually probably a very good idea. This way you may lay the track for a step by step approach to adjust yourself and to slowly start shifting into sustainable changes to your lifestyle.

I have detailed budgets since 2014, and my savings rates looked like this:

  • 2014: 37,32%
  • 2015: 36,06%
  • 2016: 18,10%
  • 2017: 31,16%
  • 2018: 35,56% (expected)

My daughter was born by the end of 2015, so the majority of the initial baby-costs and family related matters kicked in a little later on in 2016. And of course I also needed to bring her and my wife to Europe so my parents will see their first granddaughter, so this was another factor and a few thousand Euros spent. But other than that, I got pretty hooked up between 31-38% year on year. While these numbers are not bad, they are for me a little bit frustrating to look at, especially since my salary has also grown during that time – significantly.  In 2018, I am earning almost 3 times what I was earning in 2014. This means, that I should be able to actually save significantly more.

Well, that’s not how life works and different circumstances required adjustments. Getting married, having a daughter and starting a family life definitely had a large impact on my overall lifestyle and spending habits. Also, it took me quite a while to bring my wife back from the dark side (of spending habits) and to get her aligned with me on our financial targets as individuals and as a family. This should start bearing fruits by 2019 and I think I am going to break through the 40% barrier by that time.

No regrets

But having said all that, you should not think that I would regret any of the Euros that didn’t make it into my investment account yet. Having a wonderful, understanding and supportive wife and a beautiful little daughter makes my days on earth truly worthwhile and I wouldn’t want to exchange any moment we had together for any of those “lost” amounts. It was actually absolutely not a loss of whatsoever, but probably one of the best investments I have actually done.

So my point in all of this is: Don’t hang up yourself if you don’t hit your magical savings and investment numbers immediately. Keep it up as your target and try your best to work towards it, but don’t forget that you still got a life to live. Living frugally is only enjoyable when you set your priorities right and allow yourself to enjoy the moments that truly matter. Even if they do cost some money sometimes.

Is a house an asset?

When you start planning your financial future, let’s say around the age of 25-35, one key factor to it, is to understand the difference between the 2 crucial elements that will determine whether your plan makes sense – or whether it doesn’t. You need to understand what are assets and what are liabilities.

The idea behind it is simple. You want to invest your money in assets. And you want to reduce the amount of your liabilities. Only this way you will start creating a cash-surplus as a result from your investments.

While it may sound simple, definitions of what an asset is, and what should be categorised as a liability, can differ and very much depend on your personal point of view. One such controversial topic is an investment in a house or a condo. How would you categorise it? Is it an asset or is it a liability?

Does it create cash or costs?

The topic is so controversial, because the idea of having your own house is not only being sold as a way to save money on rent in the future ahead, but also as the ultimate guide to your personal freedom. Having your own house, you are free to do what you want, when you want and how you want it. On top of that, a house gains in value over time. Right?

Well, it’s not that easy.

First of all, let me say straight ahead that I consider a house to be a liability. My top 12 reasoning points behind it are:

  1. Unless rented out, a house or condo doesn’t generate cash
  2. If rented out, it creates additional work and responsibilities
  3. The potential increase in value is very dependent on many factors that you cannot control
  4. If not regularly taken care of, a house or condo is actually dropping in value
  5. Repairs & maintenance, insurance, taxes – it adds up over the years and can actually end up costing a small fortune
  6. Depending on the country you live in, the amount of building policies and regulations can be ridiculous and you absolutely cannot do what you want, when you want it and how you want it
  7. If you don’t rent it out and use it by yourself, then you are bound to the place
  8. If you rent it out, there are tons of legal pitfalls if you get in disputes with your tenants
  9. Even if it gains value over time, selling a house is not a simple and straightforward task
  10. A house is not creating passive income, as you need to constantly devote time, effort and money to maintain it
  11. Having your own house may urge you to spend more money on decorations, furniture, etc., all the things that you want to have in your house even though they are not really necessary, thus deducting your available cash for other investments
  12. Paying a mortgage is not investing. It’s the opposite.

I am sure that pro-house advocates can find their own reasons and counter a few of these points, but certainly not all. Also, I admit that there is some romantic sentiment to the idea of just having your own place to be and as we all know just too well, feelings and sentiments can out-weight logic on occasion.

As for my logic, it is very simple: Assets should generate cash. If an investment doesn’t generate cash, it’s not an asset.

I used to have a different point of view on this topic until I read the book “Rich Dad, Poor Dad” by Robert Kiyosaki. You can find more details on it in my “Good Reads” section. The book has quite a poor title and I don’t think that it’s particularly well written. I am also not even sure, whether the story told is true or not. But it has a few eye-openers in it, and the definition of assets and liabilities is one of them.

Assets generate cash.
Liabilities cost cash.

That’s as simple as it gets.

The Vagabond Theory

As you can see at the top and just underneath of my blog title, this blog is the beginning of a larger scheme that I will start referring to sometime in the future. The life of a modern vagabond. I have been traveling now for almost 11 years, changing cities, countries and continents every 1-2 years on average. Therefore, I have a natural desire of investing in assets that do not bind me to a place.

While my career path is certainly not a typical one, I believe that our world is developing into a, work-wise, world without the ancient boundaries of borders. Now more than ever, planning a successful career requires us to be flexible, to travel and to constantly adjust to new challenges.

In my opinion, not only is this hard to do if you devote a large part of your pay-check to a house somewhere that you think you want to live in, in let’s say about 20-30 years from now. Also, you should be prepared to expect, that this one place that you admired so much in your child- or even young adulthood, might look very different to you once you left it for a couple of years, and returned to it at some later point in the future. There are just so many great places in this world, why focus on just one so early in your life?

On top of that, there is such a thing that I call the “vagabond dilemma“. It describes the feeling that once you start traveling and the longer you travel, the harder it gets to consider settling down.

The ultimate freedom of housing

Ultimately, it comes down to your character, lifestyle and expectations. If you are devoted to a career, travel the world and are looking for the ultimate freedom, buying a house is probably not a smart move. A modern vagabond is certainly better advised to put his cash in stocks, bonds and other easily convertible and accessible assets that come with less restrictions, require less time and less attention to take care of.

Just last week, I had a thought, that to reach ultimate freedom, it would probably make even perfect sense to me to live permanently in a hotel. If you travel around Asia and plenty of places in Europe, you can easily find beautiful 4 and 5 star hotels that will cost you not more than a 100 EUR per night. This adds up to roughly 3000 EUR a month and it might sound like a lot at first, but if you really think about it: This price will include a daily, sumptuous breakfast for 2, a gym that you can mostly use 24 hours and usually also comes with a sauna and a pool. You might have access to a club lounge which you can use for working remotely and which usually also includes unlimited coffees, soft drinks, even beers, wines and often light canapé dinners. You get a housekeeping service for your room on a daily basis and, finally, you don’t need to buy anything on equipment. If anything gets broken, the hotel will fix it. Some hotels are already catering to working nomads by providing dedicated contracts with fixed rates for a specified period of time, that may offer even better rates and additional perks.

Surely, this is not something that would appeal to everyone, but it is an interesting idea and I am not dismissing it as a future perspective. If you love freedom and want independence, this is pretty much the definition of independent living. The best part of it: Your housing doesn’t consume any of your time. You have every minute of the day, every day, dedicated to only those things that you truly want to do.

If you have your own place, this is probably one of the biggest trade offs of all. There is always something that needs to be done in a house. From small things like fixing light-bulbs to larger projects like repairing showers, toilets or rooftops.

Doing your own thing

Now, there is also some positive sentiment to taking care of your own house, and let’s face it, life is not all only about money. Spending some time on a veranda or a roof and just fixing your own stuff has some positive sentiment to it and it may probably even offer some mental health benefits.

I mean, it’s probably kind of calming and relaxing knowing that you just take care of your stuff. You can feel relatively safe there, since nobody can kick you out (as long as you pay your taxes and paid back the mortgage) and if you got children, you might have some pleasure in knowing that this is something that you can leave with your kids once you’re gone. If they want it. If not, they can still sell it.

That’s also worth something.

Paying a mortgage is not investing

My last point, is also my point no. 12 in the above list. We are talking about investments, but paying a mortgage has nothing to do with investing. It’s figuratively the opposite.

Taking a loan from the bank and paying it back for a long part of your life, is not a desired target. The first years, most of your money is not even going into paying back the debt, but the largest part is going into paying back interest that is being calculated and charged in advance. So usually, the first years of paying back are not even reducing your debt.

Investments should grow and generate cash while appreciate in value. This is just not the case for most house and/or condo buyers.

Disclosure: I am not a financial advisor and these articles do not represent a recommendation for financial decisions. Please do your own due diligence and invest upon your own conclusions, considering your personal preferences and risk tolerance.