When do you give up your dreams for pleasure?

 

Collectively as a movement, we are getting better at the nuts and bolts of retirement planning. We are getting close to being able to balance our spending needs with maintaining a sustainable portfolio. But most of the folks in the movement have not mastered the fine art of living in retirement. Many are unprepared to decouple their personal identities from work. Others still live in fear of running out of money to spend.

As such, Welcome to the Hyunam-Dong Bookshop by Hwang Bo-Reum is another good book to read for folks at the tail-end of the FIRE journey. It gently talks about the mental processes of South Koreans who choose an alternative lifestyle against conventional measurements of success and shares some of the internal struggles of folks who drop out of mainstream life. 

I encourage readers to enjoy this book by supporting the author and its Singaporean translator. Instead, I will talk about one philosophical question raised by the book:

When should we give our dreams for pleasure?

The concept of a dream in this case is a little different from what we understand conventionally what it means. A dream is something you may long for to fit into what society deems a success. So in this case, for a South Korean, perhaps a dream is to become a senior manager of a chaebol. When a person is pursuing a dream, he is trying to achieve a long-term kind of satisfaction, but every conscious moment is a struggle through hard work, stress, anxiety, and pain. 

From a Korean perspective, the pursuit of a dream comes with sacrifice.

As opposed to a dream, pleasure is closer to conventionally what we think it is. Moments of pleasure signify the feeling of happiness and blissful contentment.

I was a corporate drone chasing my dreams of climbing up the rungs of a multinational when I was in my 20s, but after rounds of getting outsourced and doing outsourcing in the IT field, I realised that life-long employment is a pipe dream, and not everyone makes the director of a company. My dreams shifted to attaining financial independence through dividends investing. But after starting to live on dividend payouts at age 32, I carried working and meeting other conventional family milestones until I was 39 when I finally met my Waterloo in the public sector. 

This was a stage in my life when I was the most smug and confused. I spent 4 years studying law because I wanted an option to remain relevant in society. Law is, after all, the discipline chosen by the recently departed Charlie Munger, it is also the best thing to study if you have no idea what you want to do in life. I will never regret law school because every case is a latticework of models. But fate intervened when we sold out eight investment seminars during my days as a law student. After finding actual legal practice training worse than public sector work, I finally threw myself into investment training which I remain today.

The truth is, even post-financial independence, and having no idea what my dream is today, I was still struggling to stay relevant when I attempted to start legal practice early this year on top of my investment training business. This time, disaster struck. Not only was I unable to find clients for my legal work ( hard even for senior associates), but my hyperactive thyroid made a comeback. Luckily, I was able to salvage my legal training by taking some gigs in adult education this year for a small allowance. 

Until I read this book, I was not even aware that it's ok to give up a person's dream for pleasure. If you can live on your dividends and can work a little to reduce your rate of expenses to less than 3% of your overall investment portfolio, I know from my simulations that you can even enjoy spending more in your later years, while data from academics show that household expenses begin to drop when the head of the family reaches 50 years of age. 

What does giving up your dreams for pleasure like? In my naivete, I thought it was to start drawing down your assets to travel around the world. But many forms of FIRE do not have much money catered for travel - I have 5 pax in my family so every trip will be very expensive. 

I think what the book has done for me to generate some viable alternatives that will not break the bank. 

In this book, there is a story of a graduate who did well in university and has chosen to become a barista for the bookshop. He has a very fixed schedule in life, doing yoga, choosing coffee beans, and then serving coffee in the bookshop in the afternoon before retreating back to his apartment for rest and contemplation. His mother is distraught that he does not have a real job, but he takes coffee making to a whole new level, much like the concept of a shokunin or craftsman in Japan. 

Maybe being a master craftsman like those you find in Japan can be a pleasure. I definitely will not be able to monetise my Monte Carlo programs that simulate retirement portfolios and gradually improve them every time I see another research paper, it's just a way to add gravitas to this blog when I say that someone is underspending or even incorrect from a rational point of view. 

I think by now, you would have realised that I've not really gone beyond a paragraph or two on the book I was attempting to review, but it is obvious that this book has been extremely consequential in my life at the moment. 

Hope that some readers will attempt to read this and engage with me on this blog.

But people do enjoy spending their money !

In the rush to come up with sustainable ways to spend down your retirement assets, we often run into the problem where the thought leadership would reduce the withdrawal rate to achieve a safer withdrawal plan. It is only within the financial blogosphere that this is encouraged and celebrated. 

Everywhere else in the real world, we tend to forget that people actually enjoy their money and if you actually want to make your finances sustainable until you are age 120, a lot of your wealth will remain unspent. For me, unspent wealth is fine as I have biological kids, but the FIRE movement is full of singles so this will just result in a lot of extremely wealthy godchildren, nieces and nephews. 

The problem is that the conventional approach to FIRE using the Bengen approach, suppose you begin with a portfolio size of $1,000,000, and you designate 4% or $40,000 as your expenses the following year. Then you adjust it by the inflation rate the following year, and so on. The idea is that you won't run out of money in about 30-40 years. 

But in reality, folks are living longer, and that fear of running out of money will cause advisors to recommend lowering the starting amount to around $25,000 to increase the probability of sustaining the retirement portfolio closer to 50 years.

I leave it to readers to see how ludicrous it is to tell a millionaire to live within an inflation-adjusted $25,000 a year every year, some people may even think that some work is better than early retirement. 

How do we address this critique in a data-driven manner?

My solution is to run a Monte Carlo simulation of a 60/40 ETF portfolio and actually simulate the probability of having cash left after 50 years. However, I also enhanced my code with a measurement of utility.

When it comes to spending money, we prefer to spend it spread over a period of time rather than concentrate on a particular year. Spending more money creates more happiness, but does so with diminishing returns. There should also be a reasonable discounting factor where spending money now when you are young is better than spending it when you are old. The solution from economists is to apply a discounting factor into a class of Constant Relative Risk Aversion (CRRA) equations to amounts withdrawn for enjoyment. 

[You don't have to worry about the math because I have already coded it into Python Jupyter Notebook. ]

So let's start with a baseline. 4% withdrawal rate of a 60/40 portfolio. Adjusted annually by inflation that averages 3%. Risk aversion is that of a seasoned but cautious investor. We have a fixed time preference of 2%.

The first problem is that there is only a 16% chance of surviving 50 years. However, the expected utility of 24.66 is a baseline that measures the pleasure of spending the money over time. 

Now let's observe what happens when advice is given to reduce the withdrawal rate to 2.5%.

As it turns out, my simulations would support this lowering of the withdrawal rate to 2.5%. The probability of surviving 50 years is increased to 72%. We also have a higher utility as the money lasts longer and spreads over a longer period of time thanks to more compounding from money not spent.

So my models vindicate the advice to reduce the withdrawal rate to 2,5%!

Now, let's see what happens if we stop the Bengen approach. I modified my code to withdraw the prevalent balance of the portfolio at the same 2.5% rate. So if the portfolio rises to $1,100,000, we will spend $27,500 in the subsequent year. We ignore the effects of inflation. 

Because we have to draw 2.5% of the prevailing portfolio, the withdrawal system is 100% sustainable over many years, but note that the expected utility is even higher than the Bengen system because where the underlying portfolio does very well, you keep up with spending and enjoy more in that particular year. I repeated the simulation with 3% with no significant change in the expected utility.

What can we conclude from this series of experiments?

If you are offered a safe rate withdrawal of 2.5% for your portfolio by an advisor, do consider the feasibility of withdrawing 3% of your prevailing portfolio size instead. You will derive more enjoyment from your money over the next 50 years.

However, there is a weakness of this approach. What happens when you come across a year where your portfolio has shrunk so much that 3% of its size cannot sustain your expenses?

In a vacuum, it may be a reason to abandon this approach. 

But in reality, our basic needs should be reinforced by having an Enhanced Retirement Sum in our CPF Life before taking into consideration returns from our diversified ETF portfolio. Most of us are also sitting in gold mines otherwise called our residential properties. 

Ultimately, it may even be a reason to struggle hard when young to have a spouse and children. 

As I've said in a podcast before, children are the annuities of last resort. 

[ My program allows different risk appetites and time preferences. It can also adapt to a different mix of ETFs. The backtest is extreme and stretches back to the first availability of Yahoo finance data. ]

 

 

Is there Right and Wrong in Personal Finance?

As I continue to run into the rabbit hole of finance discussion groups on Telegram, I'm beginning to see a common phenomenon where useful discussions sometimes get derailed by "peacekeepers".

These peacekeepers often use some common tools like "different strokes for different folks". Some variant argument that says in effect "to each his own". As personal finance is personal, therefore argument of right or wrong or any value judgment is incorrect and affects the harmony of the environment. A variant of this system of argument goes on to accuse people of trying to enforce their views on others, being unaware that enforcing peace is also another form of enforcement and tyranny.

I'm not going to swap one tyrant for another because I actually believe that some financial moves are objectively better than others and just abdicating for the sake of harmony is not just sweeping the problem under the carpet, it betrays a lack of intellectual rigour and creative imagination.

My first argument is that "different strokes for different folks" will not cut it in a finance forum. I notice that when anyone mentions ILPs, almost 100% will agree unanimously that ILPs are a bad thing, so exceptions to the "different strokes" argument do exist.

My second argument is that some very similar strategies can be differentiated with financial metrics, like the Sharpe Ratio. Even extremely personalised and subjective metrics exist in the field of economics like Expected Utility. There are equations that describe their behaviour. We can estimate how much utility a strategy can bring for the user if we can do a bit of coding.

Take for example, that growth investing guru who likes to troll dividends investing forums. Arguments are almost childish. To these guys, Ali Baba and Tesla represent an investment into innovation and the future. Dividends are a dead-end strategy for boring boomers. Using a simple ratio like the Sharpe Ratio, maybe this guru is right, or maybe he is wrong, but at least we will know where he is coming from. It is also more likely dividend investors sacrifice some returns to take on lower volatility.  

I hope I can get some time to work on more complicated strategies like the rate of withdrawals in retirement. It may be possible to answer this question objectively using expected utility and time preference discounting. 

Current arguments on the rate of withdrawal have stopped being objective in any way. If the author of such strategies is concerned about every single tiny piece of risk in the future, then the only smart thing to do is to reduce the safe rate of withdrawal, blithely ignoring the fact that normal people do get satisfaction from spending some money. What is the point of following these arguments if they keep channelling fear and race to the bottom?

To give everyone an idea of what I'm working on next, I am beginning to suspect that spending 4% and then locking it down at the inflation rate may not anyone any favours if their portfolio actually does well. However, the alternative to spending 3% of the prevalent portfolio size at the time of the withdrawal may be better over the long term. 

I don't know which is better, but I have the mathematical tools and programming knowledge to get this matter settled once and for all. 

 

Rich Dad, Poor Dad, or Ape dad?

It's been quite a while since I had a conversation about Rich Dad, Poor Dad by Robert Kiyosaki. The book had an enormous influence on Gen X but for dubious reasons. It centres around a false dichotomy, where you can learn from Poor Dad and then live a life of indentured servitude as an employee, or you can follow Rich Dad and run a successful business empire.

According to the book, my actual dad would be a Rich Dad. The chain of pet shops he founded still exists today, but my dad's primary mode of wealth creation was real estate. My dad sat on a piece of landed property and resisted all of his friend's suggestions to sell it and propelled himself to multimillionaire status while his pals languished after spending all the proceeds from selling their landed property. Along the way, he bought and sold some properties in JB with mixed results. 

In contrast, for the most part of my professional life pre-FIRE I would have been a Poor Dad. My dad never would have wanted me to walk down the road of a businessman because of problems meeting rental payments, staffing issues, and fighting with other business partners. I was exposed to company theft when I was a kid because my parents needed to find a plan to catch a salesgirl red-handed for stealing from the cashier. My dad impressed me as to why deal with so much of life's unpleasantness when I can get a degree and work for an MNC. Expat directors bought a lot of dog food from us and I was able to view their beautiful homes.

The path of an employee is a much smoother road than that of an entrepreneur. While rewards are great for folks who run businesses, one thing Kiyosaki leaves out is the survival rate. I grew up in a retail environment, so I was able to witness the turnover of retail outlets in the 1980s and 1990s. Business failures don't live to tell tales of their successes. 

Of course, I was never able to succeed conventionally as an employee in the end because I discovered dividends investing. Why bother even working for anyone if you can find a way to get paid for all your living expenses, and then work for yourself?

The modern approach towards wealth generation cannot be simplified into a Rich Dad - Poor Dad dichotomy.

One way of getting an interview sample of millionaires Rich Dads is to consider John Mauldin's latest book Eavesdropping on Millionaires. I really like the interview format because multiple interviews were made 6 and then 12 years after the first interview. But you need to do the hard work of sifting out the commonalities between all these millionaires. 

One thing I found is that successful businesses have a much higher tolerance of risk compared to ordinary people. They can deal with a lot of ambiguity and can bounce back after a defeat. Another point is that almost all of them grew their wealth using investment instruments thereafter. Finally, many of the millionaires talk candidly about their children and most of the time, but seems to me that business acumen cannot be transmitted to future generations. If only more interviews are done in Asia where things are very different.

The problem with reading millionaire interviews is that these guys made money in a different economic climate. So the question is how to make money in the current era. 

To solve that problem, Gonzo Capitalism by Chris Guillebeau gives a wonderful rundown on new ways of making money that Gen Z is getting themselves into. Chris goes all out to feature the weird ways of making money from becoming over-employed, to dabbling in NFTs and launching an IPO to sell your future earnings. For FIRE folks, Chris also talks about why he does not agree with FIRE and I like his arguments on that as well.  

I think if some of these Gen Z's succeed, there will be a rise of a new kind of dad - an APE Dad. Because younger generations in the US are saddled with expensive educational loans and saw through the pandemic, they will experiment with financial instruments with an asymmetric risk profile. To most of us, it may sound absurd to take welfare payouts to ape investors in Wall Street Bets but this kind of craziness is here to stay. 

I enjoyed both books immensely and actually think that you are better off reading them than anything by Robert Kiyosaki as sooner or later you might be subliminally programmed to join some MLM program. 

Let's be open-minded about how the young and old make their money. As I'm not young anymore, I'm fine with spending a fraction of my dividends and supplementing my income working for myself if the need arises. 

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. 

Why distilling common sense is not enough for investors

You might be wondering why I am reading so quickly. Sometime in September 2023, Amazon stopped selling The Economist on the Kindle and I've stopped my subscription to clear all the books I bought over the past few years. As The Economist is a hard read, I've released a lot of energy to read all the books on my KIV list.

I've decided to go easy on myself because lately, I've gotten into the "Adult Education industry" and have a small new gig that gives me extra pocket change, as I needed to come up with slides in a different field and maintain my investment training business at the same time, I decided to read books which are more inspirational and less heavy.

But years of reading the heavy has made it really hard for me to enjoy reading the lighter stuff. 

I think the essence of writing a best seller these days is to write fluff to appeal to the feeling and non-conscientious masses and just enjoy the stream of revenue that comes from folks who really can't give a damn about the internal contradictions in your work. In this case, The One Thing by Gary Keller is laughably absurd as it is actually a book about many things. You obviously need to be in good health with a supportive environment before you can focus on that One Thing that can improve your business or change your life!

My learning journey on how to write things that sell like hotcakes continued with Morgan Housel's Same as Ever.

As a book for investors, Same as Ever clearly disappoints. Morgan Housel has adopted the same formula as Yuval Harari. Say stuff that is uncontroversial and commonsensical, but back it up with a series of wonderful stories and memorable illustrations. In this sense, the book was good, I was emotionally affected by the opening chapter about a ski accident that caused the death of the author's friends.

Same as Ever will be an instant hit with folks in this finance blogosphere because, ultimately, you cannot disagree with anything Morgan says. Examples such as the idea that wounds can heal, but scars remain forever. People will be emotionally scarred by their economic experiences. Like folks who went through the Great Depression put a ridiculously high premium on security and may avoid equity investment. 

The book will not help you grow if you are already an investor. If anything, the book can only reinforce your confirmation bias. 

But, is it possible to deeply enjoy an author's work without having one's investment thesis fundamentally challenged? The answer is yes. 

I can even put in a suggestion on how the book can be improved. 

Morgan Housel needs to take greater risks. He needs to see if some of his ideas can be used to predict the future. A fundamental part of being an investor is to predict the future and monetise uncertainty. 

He did not do it, so I will do it for him.

For the folks who lived through the pandemic, I expect that they will not consume as much as earlier generations who partied when they were younger so I expect the younger Gen Z folks to be more frugal. This may create second-order effects which may impact brand loyalty negatively and even alcohol sales. A frugal generation can trigger deflation and lower interest rates on fixed deposits. 

The next group who will be disrupted are those hit by AI. So far we are only seeing this affect creatives in Singapore who developed a more aggressive hustle culture and fully intend to use AI to become even more productive. However, families and professionals experiencing AI disruption will scale back on equity investments as their own human capital becomes more volatile. This will be universally bad for equity markets.  Will local creatives mirror victims of the Great Depression given that they were labelled non-essential and then slammed by MidJouney and Dall-E? I think highly likely.   

Of course, there is a probability that Iwill be wrong, but what is the point of specifying common sense, and backing it up with beautiful illustrations without using it to predict the future? 

The New China Playbook

 

If you have been a subscriber to The Economist, you will have noticed how biased their reporting is in China. Almost all the news features are negative, and you will think China can be quite a dystopia. 

So, how does one read something that can counterbalance the negative articles in the Economist?

The New China Playbook by Keyu Jin fits the bill. The author was aligned with the Communist Youth League of China and educated in the US, and she has primarily painted a positive picture of the country. 

The book is very broad, and I want to point out two interesting points I learned from the book. 

The first point is the notion of "six wallets". In China, women will generally not marry guys who do not own their homes, so this can create rampant speculation and home values at high multiples of the annual income of citizens. All this being said, home ownership remains high thanks to the "six wallets" available to married couples. Thanks to the one-child policy, a married couple would not just have each other's finances to fund home ownership but also the wallets of their parents. If you and your spouse are only children of parents who are only children, then you may have access to as much as "ten wallets".

The second regards the idea of shadow banking. I've always thought shadowing banking is a loan shark activity that is highly illegal. But as it turns out, shadow banking is enabled by commercial banks and local enterprises that issue a new savings instrument called wealth management products, which can be moved off their balance sheets. Worse, to avoid a lost decade as in Japan, China announced a fiscal splurge where shadow banking became an essential source of funding for local governments. Details are complicated and involve a Local Government Financing Vehicle or LGFV.

As enlightening as the book is, readers need to remind themselves that the author, despite stellar Western credentials, seems to remain a card-carrying Communist, so she will put a positive spin on China. But her very factual description of the financial system in China does not give me any good feelings about the future of China at all. I would not like to partner with the mainland Chinese who share a common bloodline with me as they seem to be expert players of whatever loopholes and regulations the government throws at them.  Communists do not seems to understand the spirit of the law.

But, overall, combined with negative press from magazines like The Economist, this book is a welcome mix that can show investors a different perspective of China. 

I hope that similar books will be written for India and Japan to fill an investor's shelves.

 

The FIRE Journey requires cultivation of Inner Strength (neigong)

 

In case anyone is wondering Ji Yong's beloved epic Return of the Condor Heroes has just been translated into English and is available for purchase. As my mother tongue was quite bad when I was a kid, I was unable to participate in appreciating this part of Chinese Literature until quite late in my life. 

I think what I really appreciate about Jin Yong's novels is the concept of the Wulin which denotes the society and milieu that the martial artists live in. The Wulin has its own rules of conduct and some acts are seen as being righteous and others as being dishonourable. I'd like to see myself as being part of different Wulins. I used to have a role in the tabletop RPG world, but now I am squarely in the financial blogosphere. 

If we apply this analogy of the Martial Arts Wulin to the Financial world, then players in the industry would also play a role similar to martial arts world in Ancient China.

In this case, IMHO, a fee-based advisor like Christopher Tan would be the equivalent of Wang Chong Yang, founder of the orthodox Quan Zhen Sect. He has pioneered a martial arts style called BTIR and literally published a Master Financial Planning Manual (Walter Kluwers) which I cut my teeth on, and gave me the confidence to eschew financial advice from commissioned advisors and cultivate my inner strength to attain FIRE over twenty years ago. 

Naturally, I see ILPs as some kind of poison that is spreading to the middle class of Singapore and kind of commissioned advisors who go into Tinder to look for prospects or use balloons to lure kids akin to Ouyang Feng, Poison of the West.

I don't really see myself as a hero or villain in this Wulin. I'm amoral, have my own economic interests, and aspire to be more like the Lord of Peach Blossom Island. 

Today I just like to comment on the recent Endowus event that Christopher Tan was made to comment on FIRE. I think overall it was an insightful presentation and I would wanted more from the master, but I cannot in my good conscience agree totally with Christopher Tan over his comments on the FIRE movement. 

Christopher Tan made that comment that FIRE is not suitable for everyone and it is possible to end up missing out on life if one were to totally devote themselves to the pure attainment of Financial independence. 

In theory, Christopher Tan is right that if one were to devote too large of an allocation to dividends stocks, there may be no budget left to really enjoy yourselves. He is supported by a large amount of finance literature, ranging from financial planning books from the US that talk about saving 10% of one's income to books like Die With Zero which recasts travel as an investment that produces memory dividends. 

In practice, folks rarely attack a financial problem with this level of fanaticism. 

My rebuttal is as follows:

* cues flute music *

a) Some people actually enjoy FIRE

Christopher Tan in his wisdom knows that FIRE is hard and most folks would not enjoy attaining it. But over time I've noticed that folks who are INTJ and throng the forums on financial independence really enjoy going through the process of doing it. For ENTJs like me, I want the power that comes with FIRE, but I will not retire if I have a good career and a high status in my life. 

(A five-digit monthly dividend is good, but appearing in Money Mind is sometimes more fun! Why not do both? ) 

For someone like me who trains people for a living, I do know that if FIRE is introduced to an INTJ/ISTJ before they get pitched by an FA, I win because I know I have an alternative that fits that personality type and some commissioned FA down the road loses a sale. 

b) You do not need to complete the FIRE journey to enjoy it

Fans of this blog liked my initial idea of accumulating $300,000 as a target to get some passive income going but I realise that this goal is too intimidating for some people. Instead, I'm a strong advocate of setting aside $24,000 at around $2,000 per month to get an average of $100 of dividend income every month within a year of learning about FIRE. 

Trying to get $100 a month just requires setting aside about 50% of the median income for one year. If you quit after you attain your goal, it's fine because the $100 increase in income is something you can keep for a long time to come. 

This is money that you can earn beyond your day job. You can pat yourself on the back.

c) You may be missing out on a little bit of life right now just to get a better life later

Insight from economics is that while we do like to spend money now, we can also find spending a larger amount in the future more satisfying. The extent of this is dependent on our personal rates of time preference.

People who have investment portfolios can enjoy a bit of their money as they go along. I did a spreadsheet to optimise a person's Expected Utility on a portfolio of local blue chips and it's possible to spend about 2.8% of your local portfolio and adjust it upwards based on its total asset size every year. The key idea is that investment gains beyond 2.8% will enlarge the size of the portfolio and enable a larger expenditure in the future after compounding, but this entails farming half your dividends back into the stock market.

So in practice, if you start early, FIRE will not stop you if you have a desire to see the Arctic before you are 35. You can still pay for your first date with your future wife in Saizeriya.  

d) The FIRE journey is like the cultivation of neigong.

We have to accept that ultimately the journey to attain dividends requires discipline and plenty of learning. Not everyone in the Wulin can cultivate their inner strength and become a martial artist. Martial artists still need to be served food in an inn. Someone needs to till the soil. 

I think it's fine to decide to take on the FIRE journey or to pursue other interests in your life. But what I find puzzling is that some folks would go spend a weekend at a financial conference and still think FIRE is challenging.  

I think the only downside is that the Jin Yong Story will not be about you at the end of the day. 

( But you can still be the protagonist of a story about sparkly vampires. )

Thoughts when $1 SGD is $3.50 MYR

 

I was fortunate this week that I was invited to take a short half-day trip to JB with a pal who is Malaysian Chinese, and someone who earns in SGD and spends partly in MYR. This trip is useful to me because I'm thinking of running more errands in JB, but I do not wish to hang around for too long as all I need to do is collect rent, have a meal, and buy medication for both of me and my mum before heading back to SG.

Right now the exchange rate is ridiculous, but I don't really benefit from this. For most Singaporeans, you can afford to arrogantly go into JB and convert your SG to MYR and live like a king ( or at least arrogantly get a full body massage). For folks like me, I collect rent in MYR, spend whatever is reasonable there, and then convert the remaining amounts to SGD to buy dividend stocks back home.

 So if you think about it, I actually get less SGD over time and even have to deal with traffic jams which would definitely get worse this school holidays. 

Today I just want to talk about some random topics to earn back the lay-person readership who has read about 14 hardcore articles I've put up over the last two weeks.

a) Are Singaporeans arrogant in JB?

I was really privileged to meet my friend's aunt, a feisty woman who is in her 80s, and had breakfast with her. She ripped into me immediately and said that Singaporeans are arrogant to which I agreed.  If her money is x3.5 times the strength of mine, she'll have trouble being humble too.

I had a bowl of my favourite curry mee for $8 MYR - probably very expensive for locals but it's actually less than $3 SGD. 

But the strong Singapore dollar is no longer something we only experienced in Malaysia. In Istanbul, I was able to spend $138 SGD at Salt Bae's Nus-ret restaurant on a decent steak and a lamb chop. In Osaka, I fed my family of five in a small family udon shop for $35. 

( Do you know that GunPLA is half-price in Japan? )

But 1M65's recent video makes sense. Singaporeans should refrain from saying that everything is cheap when they travel because locals don't like it. We also did not really earn it, our Central Bank has been loading on gold for a number of months and Gold has been on the rise based on the momentum algorithms I run on a weekly basis. 

b) Malaysians who work in Singapore benefit from a strong SGD too

When we think about Malaysian locals' experience with arrogance, we must not forget that a lot of Malaysians, now Chinese and Bumiputra, perform their skilled trades in Singapore for x3.5 their home currency as well. 

I would argue that the economic impact of Malaysians who work in Singapore would be much larger given that they spend a larger proportion of their salaries in Singapore. This effect on inflation for Malaysians who work in JB is non-trivial as we news reports of better travel budgets and expensive home renovations made in Malaysia. 

My buddy has his share of envy from his relatives who are green-eyed because he earns SGD and spends MYR. I like his retort though, he asks them whether they liked spending the bulk of their lives travelling to Singapore to study at 4am in the morning. 

 All things considered, my views on investing in Malaysia have not changed. I regret that I was unable to liquidate my family's properties in JB and now I'm experiencing shrinking rents after currency translation. While I am trying to increase my time spent in Malaysia just to escape the high cost of living back in Singapore, my suggestion is to simply rent rather than buy from Malaysia. 

The long-term view is murky. It is now vital that the Anwer government survive this term and hopefully gain another.  The Perikatan National Party is known for the worst policy decision in the country for letting citizens draw from their EPF during the pandemic, so I hope they don't win,

I cannot imagine the Singaporean government ever publishing such figures as it may reinforce racial stereotypes back home, but this is certainly disturbing given that many Malaysian Chinese not only have EPF but also CPF in Singapore.

The Ringgit will continue to weaken, but I think Singaporeans will not enjoy the full effects unless they move further north away from JB where many folks actually earn in SGD. 

#14 The Missing BIllionaires - Can we invent a new form of FIRE from all this?

 

The Missing Billionaires by Victor Haghani and James White begins with a brilliant idea that with better financial decision-making tools, there would have been many more billionaires today. It then goes into first principles tying up returns, risk and a person's risk aversion to come up with useful formulas on position sizing. Later on, concepts like Expected Utility are added to the mix to assist readers with decision-making. I think this book would have been much better as a textbook with worked examples to illustrate real-life investment problems. However, some glaring gaps exist in the book, such as how the volatility of an asset class is estimated. I'm lucky that I've done some programming work to do this with Yahoo Finance data because otherwise reading the book will only give you some murky theoretical ideas that are hard to apply in your investment lives.

But all things being said, I would not do a chapter-by-chapter review if the book does not have ideas that are monetizable. There is definitely some room to make these fundamentals the cornerstone of a new investment course for beginners with some finessing in 2024. Of course, to be able to sell this course would be determined by how much I can automate the calculations and hide the equations from the actual student. I would be creating a spreadsheet for local dividend investors using these concepts to convince myself that it can add value to retail investors. 

I think more interesting, concepts of the book can create a new kind of FIRE called PlumpFIRE.

I've always found FATFIRE hypocritical as folks who want to do this are quite high-powered executives who probably successfully FIREd but enjoy working so much, that they look for an excuse to make their lives more comfortable. Sometimes FATFIRE folks may even be responsible for the toxicity at work. 

A more reasonable form of advanced FIRE, which I call PlumpFIRE can be taken from some concepts of the book. 

Here's what PlumpFIRE looks like:

• As many annuities as humanly possible to generate a bare minimum standard of living. I suggest using CPF-LIFE at x1.5 of FRS to generate about $1,500 in terms of today's monthly income. Use the Standard plan to max out your purchase of annuities as this is money your kids do not need. Bonus points if you can defer your CPF-Life payouts.
• A large diversified and balanced investment portfolio that can be globally diversified ETFs. This portfolio fluctuates in value and you spend 2.5% of its value by liquidating stocks or dividends every year. The idea is that by spending way less than the returns of the portfolio, you can expect an increasing capacity to spend every year as the portfolio gets bigger, enjoying more spending in your later years. This is also much safer from sequence-of-return risk. For this to work, you must be able to adjust your standard of living from portfolio fluctuations, so the Bengen 4% rule does not apply to you.
• A portfolio of $1,000,000 can generate $25,000 a year. Plus $18,000 from CPF-Life. This results in about $43,000 of expenses a year, which is three times the basic standard of living for a 65-year-old in Singapore. 

You can always carry on working until your portfolio hits $2,000,000 if you want to spend more money. The odds are over time, your payouts will grow over time because your spending rate is low.

 I think PlumpFIRE will be a good mid-point between FIRE and FATFIRE.

If you have attained FIRE, I think PlumpFIRE is the next milestone. 

#13 The Missing BIllionaires - Risk and Uncertainty

 

We've come to the last article on this streak. For this book, we are at Chapter 18 and the rest of the book delves into various esoteric chapters under the Puzzles section. It is probably more productive that I conclude this series for what the book means to me and blog readers and encourage interested parties to either buy or read the book. 

( Judging from some discussions on the telegram groups, the book is getting traction for the local audience )

In this article, we will be discussing risk and uncertainty. I was laughing at some FAs who do not seem to appreciate the importance of the standard deviation of an investment portfolio, but the rabbit hole goes deeper. Most financial assets do not follow the normal distribution. Investors have to confront issues like fat tails, skew and actual events like war and recessions when they run actual portfolios. So anything that cannot be captured or measured as part of a parameter like standard deviation, skew or kurtosis gets lumped in a category called uncertainty. 

The book discusses the differences between risk and uncertainty then concludes that mathematically, then concludes that ideas like expected utility and the Merton share remain useful as adjustments required to account for uncertainty are de minimus. Adjustments downwards are only necessary for investors who are really risk averse.

So this is a fairly depressing conclusion for local investors who buy ILPs. 

Not only are ILP investors paying a ridiculously high cost that may be compensated by assuming more risk by the fund manager, but the ILP locks down your money longer forcing you to confront more uncertainty in the markets. 

Maybe the conclusion in this book can be used by disgruntled ILP customers one way in a FIDREC dispute. The way an ILP locks down your money, imposes ridiculous penalties for early redemption and makes you pay ridiculous management fees may one day be mathematically proven to be inappropriate for any retail investor under any circumstances.

But today will not be the day it happens yet.

That first step begins with refinements made to financial education at the street level. Pushing education on returns, risk, Kelly Criterion, Merton Share and concepts of utility to the masses may require huge educational reform.

For me killing off English Literature in favour of Economics at Secondary 1 will be a great way to start. If you are too sentimental about English Literature then maybe force Pride and Prejudice into the syllabus because Mr Darcy is sexy because of his passive income.

Our history texts should also consider key moments in financial history like Pan-Electric and CLOB because as a financial centre, we need to know what folks like Mahathr can do to mess us up really badly. I'm still traumatised from learning about useless shit like what Gambier is and the Anglo-Dutch Treaty.

But I think as a reader if you do love the humanities, you'd probably not enjoy reading this blog so much. Secondary school really refined my hatred for studying the humanities. I thought three years of law school could reverse it, but I think it polarised me further.

#12 The Missing Billionaires - About Options

When markets run out of assets to be bullish on, my industry will resort to talking up options trading. This is natural as you can be profitable strategies regardless of whether markets are bullish or bearish. I am not into options because they are zero-sum games. For every option you buy, someone has to write it to you. 

The options writer and options buyer can both be profitable at different times.

But the author wants to give options a chance. He wants to examine whether options can improve the expected utility of a portfolio. Even after analysis, the author believes very little about how options can provide a significantly higher Expected Utility for the investor. According to the author, investors can vary the proportion of their equity allocation in place of buying options.

It gets even worse when we consider the costs of playing options, which often comes with a wide bid-ask rate. Odds are most retail investors will be losing out to the brokerage houses and financial institutions who usually take the other side of the trade and have sophisticated tools to assist them.

Interestingly, the book does consider one specific scenario where the use of options would make sense. For young investors, according to Ian Ayres and Life Cycle Investing, it makes sense to leverage their equity portfolio using options to get more than 100% exposure to the asset class. 

But of course, some investors can treat long-shot options bets like lottery tickets. 

Just keep your positions small and utilise only fun money to do this. 

[ The next chapter of the book is on taxation; we will skip to the last chapter I will review tomorrow and end this series of articles. ]

#11 The Missing Billionaires - Your personal inflation rate is not the inflation rate

 

We are onto Chapter 15 of the book. Almost 75% through!

This is a compelling and insightful chapter that really blew my mind. 

If an American adult in 1900 were to maintain their average expenses and increase it by the CPI every year, in 2022, they would only be spending $5,000 every year, while the average expenditure in the US would be 11x that number at $55,000!

This turns many retirement ideas on its head because the 4% withdrawal rate used in retirement planning is just adjusted by the CPI annually.

There are several ways to interpret this. One interpretation from the book is that most of us desire an increase of some amount over CPI. The book suggests that CPI+1.5% is a good start. Another interpretation is that our spending is higher than CPI because humanity keeps innovating and creating goods that impact our lives far more than the inflation rate. There's always the next Apple device around the corner. We should be prepared to work to continuously increase our standard of living. 

If we have to find a way to match CPI+1.5% every year, then we've got quite a big problem on our hands when we design a portfolio. Bonds provide too low a return once you factor in their non-trivial volatilities ( T-bills was 12%, not counting forex translation for Singapore Investors ).

According to the book, the best way to match CPI+1.5% is a portfolio of treasury inflation-protected bonds, which Singapore does not issue.

But there is good news.

A portfolio of equities can generate an earnings yield of 1 divided by a cyclically adjusted PE ratio after accounting for inflation. For Singapore, this earning yield is 7.4%. Is high. Furthermore, company earnings are generally less volatile than stock prices. The volatility of company earnings is only about a third of the swing in stock prices.

If you diversify your stocks across low CAPE markets and have the patience to hold them over the long term, your odds of beating CPI+1.5% are high.

So, what's the Holy Grail in building an investment?

The Holy Grail is known as a Constant Standard of Living Annuity. Something that can create a cash flow that lets you maintain your standard of living over time at CPI+1.5%.

But like the Holy Grail, this is hard to achieve as a Singapore Investor. Singapore does not issue inflation-protected bonds, and the only recourse is to look at a diversified pool of equities.

This may explain our national obsession with REITs' limited inflation protection and rental collections as dividend yields. 

It also shows us that lobbying MAS to issue inflation-protected bonds may be something that the middle class really needs. 

#10 The Missing Billionaires - How theory meets practice for actual asset classes

 

We’re into chapter 14 of the book and this is its most practical chapter that everyone should just buy the book and read it and I really don’t want to spoil what is otherwise an excellent chapter that debunks a lot of the bullshit spread by the industry.

The most important point for readers are three points that the authors believe in:

A) Markets are fairly efficient 

B) Costs matter

C) The market portfolio is the only investment that everybody can own at the same time. 

I think this is what ultimately divides the run of the mill commissions based FAs and the proper fee based businesses like Providend. 

Yesterday i was buying a war game from a Carousell trader and he was complaining that these days FAs would not even use the term ILPs when hawking financial products to the public. It takes a while to understand that you’re dealing with an ILP when terms like surrender value and bonus units comes into the discussion. The smart salespeople know that people are starting to understand the truth behind ILPs.

The fundamental problem with the alliance of commissions FAs and active unit trust managers is that once you account for management fees, the only way to generate more returns is to take a higher risk with your money. Another words, you need to be compensated more than 1% returns when you pay 1% in fees because you’re taking a higher standard deviation with your fund. To realise this, you need to not just understand what a standard deviation is, but also what the Kelly Criterion or Merton Share is. It comes as no surprise that commissioned salespeople will be willfully blind to these fundamental concepts and laypersons will not know any better. 

I’ve also grown to respect Providend’s decision to just promote market returns in their investment solutions, as in most cases, this is as good as it gets and paying a fee to minimise underlying costs do give a retail investor the best chance to grow their wealth over time. Removing conflict of interest is expensive, but over time, would be worthwhile. 

At the back of my head, I am aware that if we no longer have a monopoly in fee-based financial advice as in the current case in Singapore, it may not be possible to just talk up plain market returns without losing significant market share against a more enterprising ( but as yet non-existent ) business that provides fee based advice. 

In this case, my prediction in the event if the government outlaws commissioned sales, a new breed of financial advisor will appear in the market that will be forced to look into factor investing to gain market share. 

Another valuable insight from the book is that the value, momentum and beta factors seem to survive the test of time and there is a high confidence that such funds do outperform over time. 

[ At the personal level, I hope that I, one day, I can duel against Dimensional Fund Advisors regarding their unwillingness to apply the momentum factor in their products. I got some useful numbers to show from my own home-made Python based trading advisors. 

The reality though, is that I’m a small fly. 

A ronin with a rusty sword.]

#9 The Missing Billionaires - Understanding your own risk tolerance and time preference as an investor

 

Suppose a demon comes up to you and forces you to play a game where you will toss a fair coin. If the coin comes up heads you gain 20% of your total net worth. If the coin comes up tails, you lose 20% of your total net worth.

What percentage of your total net worth would you pay to banish the demon so that you do not have to play the game?

There is no right answer, although, in practice, savvy investors are happy to pay 4% to make the demon go away. 

These are concrete examples of how a decent financial advisor can learn a bit about the risk tolerance of their clients. I don't think this is the practice here in the industry, but readers can use the book to confront FAs in Singapore just to look at their confused faces. 

The end result of the series of questions is to get the answer to the following question :

• What the the overall risk aversion or lambda of an investor ? 1 = SBF, 2= ssavvy investor, 3=layman.
• To what extent is the time preference of the investor? What is the discount rate to make a $10,000 expenditure in one year equally satisfying as a $12,000 in two years? 

The book acknowledges that even in these questionnaires, context will drive risk aversion and time preference. Wealthier people can delay gratification longer so can apply a lower rate of time preference. Poorer folks will prefer taking $19 today rather than $20 tomorrow.  Risk aversion was found by researchers to be low at minimal levels of wealth, higher at median levels of wealth and then low again for upper echelons of wealth.

But this is certainly more interesting and useful than the fact-finding exercise conducted by FAs here who really want to know your salary to find out how much commissions they really can squeeze from you.

In the following chapter, a discussion was made about human capital which I have blogged about and taught a lot. All financial considerations should take into account the human capital of the investor. A civil servant with bond-like salaries can afford to take a lot more risk than a real estate agent with a strong market risk component in remuneration.

This is also one point that actual FAs in Singapore mostly fail to address.

A large part of the religious wars between the crypto, techno and dividends investors are largely due to differences in risk aversion and time preference. If we accept that it varies from person to person, we would have a more adult way to discuss the pros and cons of each investing style. 

It should be normal that a guru to one can often be a goondu to another. 

 

#8 The Missing Billionaires - What mortal retirees really need

 

In the last article, we concluded that if you live forever and invest in a balanced portfolio, the prudent and long-term thing to do is to spend about 2.5% of the value of your portfolio and adjust your expectations to the rising and ebbing size of your wealth hoard.

But what happens if you do not live forever? 

In most cases, people die at age 85 in Singapore and if you spend 2.5% of that wealth annually, it is highly likely that you will leave too much to your beneficiaries after you die and underspending in your life. Which is fine for married folks with kids but not singles. 

The solution is to buy annuities, which allow you to buy a monthly cash flow that will pay you so long as you live. This will boost the amount of money you can spend safely while you are still alive at the cost of losing a fraction of your wealth. 

But there is a problem. US firms put so many conditions and fees on their annuities that in practice it is not worth owning them, that's even when authors painstakingly claim that decent annuities without complex financial engineering can earn companies a hefty profit for companies. The situation is even worse in Singapore, where annuity products off the shelf aren't even designed to pay for life!

But thanks to CPF, we have CPF life, where up to $300,000 can be bought under the Enhanced Retirement Scheme that will indeed generate a monthly payout for life. CPF Life is not designed to provide a comfortable retirement as amounts are way below what a basic standard of living is for a 65-year-old in Singapore, but it remains the most attractive option against all other commercial alternatives.

So as far as any Singaporeans including myself are concerned, I will take every opportunity to hit my ERS. I'm not far away from ERS, in spite of not working in a conventional job for close to a decade, but I have to channel as much as legally possible to hit ERS earlier. 

If there is anything I want from CPF, it is to extend CPF-OS to SA transfer to ERS levels and to allow the $8,000 annual tax-deductible top-up until that level. If the book is right, getting about $1,500 of today's money for life will definitely improve outcomes for many investors from the point of view of a person's expected utility of spending income, this is even if they have multi-million dividend portfolios. 

( Note that if your dividend portfolios do well at age 65, you can even defer your CPF-Life payouts to get a bigger monthly payout. This is a very powerful form of optionality for Singaporeans. )