Thursday, November 16, 2023

Are Financial Influencers spending too little for their own good?

 "If you are spending, you are doing something wrong in this life" - Kyith Ng of Investment Moats fame

I caught Kyith making these tongue-in-cheek comments in the financial independence forums, subsequently, the Investment Moats blog published an article here which opened up avenues to analyse the lifestyles of thought leaders of the FIRE movement in Singapore. At the same time, some anonymous commenter called out Kyith for living like a Monk.  

The question is: can we resolve this question objectively without getting too personal?

The answer is yes, I built a framework using the equations in The Missing Billionaires book to project the ideal spending percentage for myself (an SG dividends investor using STI as a model) and for Kyith (a more sophisticated globally diversified ETF investor modelled after the VWRA ETF), I've come to the conclusion that Kyith of Investmoats is highly likely to be underspending and the calls comparing him to a monk can be justified objectively. 

I'm showing my work here, if you wish to understand the spreadsheet then, read the book that inspired this:

For Kyith's column, I used the PE ratio of the popular VWRA ETF to estimate long-term returns of global stocks, then I compared it with the real rate of return for SSBs that is sadly, currently negative to generate the mean return of the portfolio. The final outcome is that Kyith should be okay even if he spends 3% of his prevailing portfolio size for the rest of his life. 

As his blog hints that 2.5% is safer, we can easily conclude that he is drastically underspending his funds. Even more so, as he is single and may even have a strategy that is better than VWRA, I suspect his underspending is quite severe and even spending 4-5% of his prevailing portfolio may not seem too much considering that he still has CPF Life after age 65.

We should however note that this model assumes that he has a risk aversion similar to most savvy investors. If we adjust his risk aversion to members of the non-investing public then maybe his 2.5% is justified. I should remind readers that Kyith's 2.5% is actually quite brutal as it adjusts itself to the inflation rate and not to the size of his portfolio, so he's not likely to benefit from future increases in his portfolio size, hence he can't enjoy his life from increased spending in the future. Bengen's approach to the safe rate of withdrawal ignores the fact that for most individuals, their personal inflation rate is 1-2% higher than CPI adjustments in practice.

Finally, we can extend this insight when we observe other key thought leaders in the FIRE, space. AK71 does not seem to spend very much of his dividend payouts either. The only observed adat points of his expenditure is on Neverwinter Nights.

Naturally, I would not be writing this if I had not designed this spreadsheet for myself. 

Sadly for myself, considering only my local portfolio, according to the model, I'm actually overspending. But I have a justification because about half of my expenses go to the home mortgage which increases my home equity. I am also working as a trainer and part-time lecturer to make up for the shortfall.

My risk of underspending is very low as I will end up spending quite a bit on my kid's education in the future.

Perhaps, we can philosophically explore whether there is anything wrong with living like a monk. I was certainly underspending during my 20s and early 30s and have no regrets about doing what I did to build up my dividends portfolio. 

At the end of the day, I tried forming a conclusion based on a model derived from a book. It is possible for a rival advisor to use a different model to come out with the opposite conclusion. But I think that this process beats the "different stroke for different folks" argument from many financial advisors who simply do not have a framework to even think about risk and expected utility in the first place. 

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