July 2023 Portfolio Updates and thoughts on work vs FIRE

 

Portfolio allocation as of July '23.

• SG Shares: CDG, DBS, Haw Par, SGX, Valuetronics

• SG Reits: Syfe Reit+, DigiCore Reit

• US Growth: BABA, INMD, PYPL, SHOP, TDOC, UPST

• US ETFs: SCHD, QUAL

Markets have been on a frenzy and hence there's little portfolio activity to report for July. Again, the only purchase was my regular DCA for Syfe Reit+. 

Just for fun, this is the first time that I've calculated the month-on-month increase in portfolio value. Portfolio at the end of July was +6.9% higher than portfolio at the end of June, excluding inflows during this month. Interestingly, the increase in portfolio value is equivalent to more than 1 month of my salary! I think this reinforces my point about capital vs labour that I've written about before - in the long run, returns on capital likely trumps returns on labour, which is why I've been aggressively deploying my earned income into investments.

This week on my Instagram page, I have written a short commentary about the impact of projected inflation rates when calculating how much we need for retirement.

GIC had announced their 20-year rolling real returns, which was 4.6%. The sovereign wealth fund of Singapore reports its returns in real terms (nominal return - inflation rate), which means that it was able to generate returns of 4.6% above global inflation.

Earlier this year, when I posted my YouTube video / blog post regarding financial projections and assumptions for FIRE, I assumed nominal returns of 5% and inflation of 2.5%, to estimate when I would be able to hit my FIRE targets. This means an expected real return of 2.5% (nominal returns - inflation rate). 

The main area of contention by a number of people was that using a long-term expected inflation of 2.5% was “too low”, and many suggested using an expected inflation of up to 4%. 

People are prone to recency bias. Before the inflation spike in 2021, the last time that people were concerned about inflation was in the 80s… and now, many think that high inflation is here to stay.

The very same folks who are now expecting inflation to stay elevated for longer, tend to be those who also say that they’re “investing to beat inflation”, and possibly are expecting to generate nominal returns of 8-10%. At an 8% nominal return and 4% expected inflation, the expected real return would be 4%.

Consider the 2 scenarios below:

(A) Expected nominal returns of 5%, expected inflation rate of 2.5%. Implies expected real returns of 2.5%

(B) Expected nominal returns of 8%, expected inflation rate of 4%. Implies expected real returns of 4%.

It is ironic because using an expected 4% real return for FIRE projections is in fact more "aggressive" than using a 2.5% expected real return. Put another way, if you only need a 2.5% real return to achieve $X million by 40, you are being more conservative in you assumptions than someone else who would need a 4% real return to achieve the same $X million by 40.

In summary, it is crucial to consider your expected real returns when you do your financial projections - there is little value in assuming higher nominal returns to "compensate" for higher expected inflation - ultimately, it is the real returns that matter. 

 

FIRE musings - what is "work"?

Thousands of years ago, when humans were still doing barter trade, “work” was simply about sustenance. It was a means for survival. If you were a shepherd, you herd your sheep. If you were a farmer, you grew your potatoes. At some point, the shepherd and farmer will meet at the market square of the village, to trade some meat for potatoes, which will ensure that both families have both meat and potatoes to eat. 

Many centuries later came the industrial revolution. With machines, production lines and a much larger population, there was a need to organise people to produce stuff. And hence the “9 to 5” workday was created – an orderly system to get people into the factories, work for 8 hours a day, and get paid at the end of their shift.

Today, in significantly advanced economies, “work” seems to take on a larger meaning. With countless Ted Talks on “finding your purpose”, self-help books about self-actualisation, and to top it off, social media to project the “ideal” life to the world – people have come to see “work” as something more than purely about survival. People rationalise “work” as something that “contributes to society” (work = good; no work = bad), for prestige, for passion, for purpose, or some combination of these. Of course, while working we pay taxes, which in turn fund certain public initiatives, infrastructure and so on. That said, there are obviously some jobs that have more “purpose” than others, perhaps being a healthcare worker or an educator. 

But, fundamentally, whether in the barter trade era, the industrial revolution or today, “work” simply earns us an income to sustain ourselves. Because let’s be honest about it – how many of us will continue in our current jobs, if we won the lottery of a billion dollars tomorrow? 

Hence, I prefer to be a realist. I prefer to see work as exactly how our ancestors saw it for – a source of income for survival. Nothing more.

To me, here’s how I plan to reconcile working for survival vs doing something I love. In the initial years of working, I aggressively deploy capital, building up my portfolio quickly. At some point this will generate me enough passive income to cover my expenses. That will be the point I “retire” from the shackles of full-time employment, and can freely pursue what I love. 

Maybe you want to be a home-based baker selling pastries, but realistically that would bring in $500 per month. Baking is your passion, but how do you scale this up – with all the considerations about marketing, logistics, operations and inventory – for it to become a full-time stable business endeavour? And for all you know, the huge amount of effort spent may eventually cause you to lose your “passion” for baking, that you started off with!

But what if the person above is also a decent software engineer? Do they give up a lucrative career, fresh out of school, to pursue baking? Or would they be better off, working in a tech firm drawing $100k/year, save and invest aggressively, and then “retire” in their 30s to pursue their passion for baking?

Which route would be more logical and reasonable?

This is not to say that everyone shouldn’t pursue their passion. Anecdotally, I’d say around 20% of people I know have found roles that they’re passionate about and are well compensated for it. These are the lucky few. But for the rest of us in the 80%, who are not as lucky, it is up to us to create the ideal conditions for ourselves.

Does the source of income matter?

Another issue that puzzles me is the bias to see “earned income from work” as something superior than say, dividend income, rental income or other forms of non-conventional income (OnlyFans?). In society, we are brought up to think that effort should correspond with rewards – that “hard work” should be espoused, while those who have it “easier” are criticised. In school, you have people lamenting that they’ve studied very hard for an exam, yet someone who barely studied scored way better than them. “They don’t deserve it”, is the common grumble.

The same perspective plays out when it comes to generating income. For example, there are a number of people who may think that an early retiree in his 40s who lives off dividend income and play games all day is “lazy”, or perceive someone who lives off rental income from multiple properties as a “greedy landlord”.

But I’d say life is too short to give a damn about what society thinks. Live your own life, however unconventional it is.

Because at the end of the day, money is fungible. A dollar earned from dividends buys you the exact same amount of things, as a dollar earned from being stressed out over some pointless corporate tasks. To me, as long as one does not cheat or steal… there’s really little difference as to how the money is generated.

What’s the difference between a YouTuber who spends 15 hours a week producing 2 videos that generate $3,000 in AdSense revenue a month, compared to an auditor who works 15 hours a day in an office cubicle during peak season, earning the very same $3,000?

Consider the few scenarios below:

1. A 35-year-old private hire driver, earning 11k per month

2. A 23-year-old fresh graduate investment banking analyst, earning 11k per month

3. A 60-year-old retiree who accumulated 3 million in invested capital and now lives off 11k per month of passive income

4. A 45-year-old who inherited a 4 million dollar freehold property in a prime location, rented out at 11k per month

For the private hire driver, it probably involves 12 to 16-hour days. Extended periods of being seated and driving is gruelling. The person is also probably at the limit of their earning power. 

The investment banking analyst probably has to work 12 to 16-hour days as well. But of course, in a good year, with potentially 12-month bonuses, total comp is much higher. There’s also upside to their income as they progress in their career. Conversely, there is also the risk of retrenchment, especially in a year like this when M&A deal flow has waned considerably. 

Assuming the retiree has invested in a globally diversified portfolio of equity ETFs and bond ETFs – it is currently yielding 4.4% to provide 132k of annual passive income. The idea here would be to generate a perpetual stream of cashflows to fund the retiree’s lifestyle.

For the 45-year-old who inherited the freehold investment property, given Singapore’s gravity defying residential real estate prices, supply shortage and the prime location, it could be considered low risk as well. There’s obviously single asset risk, and hence the logical solution would be to use the excess cashflows from rental income to diversify into other asset classes.

The point of these 4 scenarios is that while we may all have our own preferences and prejudices about them, the reality is that $11k from any of the above sources would buy you the same amount of goods and services. $11k a month buys you a rather comfortable life in Singapore. If you want to spend $5k on a ski trip to Switzerland, $5k from any of the 4 sources buys you the exact same experience.

I still have a preference for scenario 3, because in Singapore, scenarios 1, 2 and 4 will be subjected to income tax, while 3 will not. Which is why my ideal retirement plan aligns with scenario 3.

Another perspective to see this would be from a longevity point of view, which would bring in the perennial tussle between capital and labour. Obviously for scenarios 1 & 2, these are from sourced from employment income (“labour”), which would very much depend on one’s human capital. The driver could very well be replaced by driverless cars, while the excel monkey could by replaced too, once AI gets sufficiently adept at re-arranging logos on powerpoint and financial modelling. 

Whereas scenarios 3 and 4 can largely be considered as perpetual. These assets, be it equities, fixed income or real estate, will generate cash flows with a high degree of predictability (“capital”), over a long horizon. 

Therefore, those in scenarios 1 & 2 would have to save, invest with a long-term oriented mindset, and eventually they might reach a level similar to the 60-year-old retiree with 3 million of invested capital.

In summary, a dollar earned from labour, converted into a dollar of capital via investing, will allow you to reap the benefits for a long time to come. While we all may have different perspectives on the meaning of work, this blog is ultimately about how to build wealth, manage that wealth sustainably, and above all, to have the freedom of time to live life well. 

Recognise that time is the most important commodity we have. And spend it well.