Investment Moats

Of Having More Conviction, Rolling Returns and Dimensional Core Equity

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When we put our money in fixed deposits or savings account, we can reliably count on that if we put the money in on May 2018 and take it out in May 2020, we will get a certain annualized and cumulative returns.

It is difficult for a person new to investing to visualize their returns when the asset’s value or return is volatile. If you invest in individual stocks, unit trust, or ILPs, the value of your investments change over time.

With this kind of uncertainty, it is no wonder wealth builders stuck to tried and tested forms of investment.

I tried to think back to what convinced me to put my money in the stock markets instead of fixed deposit last time. At the start, I was not particularly convinced when the books showed that if you keep your money from 1929 to 2001, your wealth will compound at a 7-10% a year rate of return.

The time frame was too long and I read that the markets are always known to be uncertain and volatile.

I don’t think I would invest for 70 years. How would it fare in a shorter, but long time frame?

What if I was unlucky to put a huge chunk of my money in a time frame that was unfavorable? Would I regret my decision to take risk instead of putting my money in something else?

I viewed the markets with skepticism even as I was learning to be an individual stock investor.

What greatly convinced me was to look at the historical returns of various past long term periods. These periods are long but not super long. They are more practical and applicable because as new investors, we need to see some results in order to be convinced.

I think 5,7 and 10 years are a good time frame to judge.

An example of a series of rolling returns

The table above was taken from a Providend article I have written this week on Rolling Returns, Conviction and Dimensional Core Equity Fund.

It shows 5 different rolling 10-year periods and they’re corresponding annualized and cumulative returns. We observe that the returns are not fixed. In some 10-year periods, the return can be very good (1991-2000) but most are close to the average.

By reviewing the rolling returns, we gain an appreciation of the range of returns we could get if we are lucky, not lucky, or when our luck is pretty even.

The article goes into more data but I would just like to highlight what is likely to happen as you lived through a 20-year investing period.

1-year Returns

The histogram above shows the 1-year return of the Dimensional Core Equity Index from 1990 to 2019. This is a fund that tries to outperform the MSCI World index, so it is rather developed market-focused, very diversified (7000+ stocks), tilted towards value, higher profitability and smaller companies.

Each bar shows a range of returns. For example, there are 53 instances where the returns are between -0.2% to 7.7%.

In this 29 years time frame, if we break them up into months, there are 348 1-year periods. The range of returns varies wildly. The median returns is 11.5% a year. But there are some years where the returns can be negative.

5-year rolling returns

If we stick with the portfolio for 5 years, you will observe the cumulative returns tends to skew towards more positive.

There are still some 5-year periods where your returns are negative. The worse will be that you invest $100,000 and 5 years later it ends up $80,000.

That is not a good feeling.

But you could also have $100,000 becoming $261,000 in 5 years.

20-Year Annualized and Cumulative Returns

If you managed to stick in the fund for 20 years, you can see the range of returns above. Based on this 29-year history, there are 130 20-year periods.

The most unlucky investor got only 4.2% a year annualized return after 20 years. His $100,000 grew to $221,000 in 20 years.

The investor in the middle grew his money to $419,000.

Investing in equities can be uncertain. It depends sometimes on your luck, but it tends to be positively skewed.

For the young accumulator, you can look at this in a different way: Each $12,000 that you put in each year goes through 1 of these 20-year periods. Some of your $12,000 grow at only 4.2% a year. Some $12,000 grow at 8.2% a year.

The volatility of your returns are smoothed over time.

There are data on more different time frames in the article.

Do let me know if this kind of narrative helps you as a new investor or you have other suggestions about what convinced you to put a large chunk of your net worth into something.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

Levels of Wealth That Buy You Some Freedom

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Would you escape one prison, only to find yourself jumping into a different prison?

One day, I stumbled upon this discussion between one of our associate adviser and a client adviser. They were discussing how much a lot of people would yearn to escape wage slavery by being financially independent.

However, in financial independence, you would be imprisoned by the anxiety in wondering how much you could spend, so that your money can last long enough before you passed away.

If you think deep enough, that conclusion is not too wrong. The prison, in this case, is to have something dear held captive against your will. If you are an office worker, you are forced to work for a paycheck which would pay for what your family needs. In financial independence, your stability will be taken away from you.

Anxiety Plagues those that have greater Financial Awareness and those whose Situation Are Borderline

I think that being trap in a prison in both cases is only true, for people that are paranoid by ensuring that they have quite a sound plan before they pull the plug to stop work, or in the case of work, jump into a job knowing full well that it is secured.

On the job spectrum, you are a self-aware terrible performer or a self-aware strong performer. The former knows that you might not be around anytime. Your situation might be volatile but you sort of accepted that and YOLO as much as you can. The strong performer knows that more or less she is safe and even if she is not, a strong performer should do well in another organization.

On the financial independence spectrum, suppose you think you need to spend $40,000 a year and you are really tired of working and wish to take a break. If your portfolio is $100,000, you know that sooner or later, you will need to look for a job. If your portfolio is $5,000,000, you know more or less you don’t have to work for a long time.

The greatest anxiety usually occurs when you are in the middle. In some scenarios, you are safe. However, in another scenario, you are not so safe. You are a self-aware average performer at work or that you know you have accumulate a sum of money that most trusted adviser cannot say for certain it will last for a long time.

There are also the blissfully unaware ones who have less anxiety (but that may not always be a good thing).

In the latest Schroders Global Investor Survey, the average percentage of retirement savings people think they can realistically take out each year and not run out of money is 10.3%. If you are a long time Investment Moats reader, you would notice that this is a very optimistic withdrawal rate. Perhaps too optimistic.

We May Need a New Way to Determine Levels of Our Wealth

I pondered on that discussion they have and wonder that perhaps whether you are rich or not is more of a state of mind.

Real wealth may be to free us from worries.

So the right measure is how rich can you be such that you do not need to worry about spending on ___________. The sign of financial independence readiness may be whether we can live a life with little anxiety.

In the past, I had introduce you to a ladder of wealth stages that you could use to track your progress when building wealth.

The idea is that you need to do things to get to a better wealth position. Each stage is an improvement over the previous one.

10 Stages of Wealth | Financial Security | Financial Independence | Financial Freedom

Each stage is also has a certain utility.

For example, as you become more motivated, you earn more, optimize your expenses and invest well, you will move up from Stage 4 to Stage 5. Having a wealth asset that is worth 5 years of annual expenses is definitely more useful than just 1 year. Imagine if you really do not like your domain at work and wish to make a career transition which can be risky.

You may need a longer runway to feel safer, and that can be provided by 5 years of annual expenses instead of 1 year.

The stages of wealth were distinguished by quantifiable amounts that is meaningful to you. If my expenses are $25,000 a year, stage 5 to me is $125,000. If your expenses are $60,000 a year, stage 5 to you is $300,000.

You may have encounter friends who have a lot of money, more than you but they seem to still suffer from the same anxieties as yourself.

In a way, quantifying your wealth might not make the person link to how to utilize this wealth. Perhaps only when you reached Stage 7, you are so far down learning about personal finance that you understood the utility of the level of wealth you have now.

Perhaps we need a better way to link our wealth to give us a feeling that money at certain levels are really useful.

Distinguishing Levels of Wealth Based on Mental Freedoms

Stewart Butterfield and his team tried to get a multiplayer game off the ground. The game didn’t get off the ground. However, they found that they really like this messaging component they built into the game very well.

So Stewart’s team decided to pivot and focus on turning the messaging component into an app.

This app is Slack, which is a messaging application that many teams use today to communicate. Slack got listed in Jun 2019 and this made Stewart Butterfield a very rich man.

In an NPR | How I built this with Guy Raz episode, Stewart told the host that wealth beyond a certain point does not make your life better.

That is very cliche. However, Stewart did list what he considers as his three levels of wealth:

  • Level 1. I’m not stressed out about debt: People who no longer have to worry about their credit card debt or student loans.
  • Level 2. I don’t care what stuff costs in restaurants: How much you spend on a particular meal isn’t impacted by your finances.
  • Level 3. I don’t care what a vacation costs: People who don’t care how expensive the hotel is or which flight they go on

Compared to my stages of wealth, Stewart’s levels of wealth does not quantify the wealth but focus on quantifying the financial freedom that it provides.

Nick Maggiulli from Of Dollars and Data expanded on this beautifully by re-engineering Stewart’s three levels with something we often can relate to:

  • Level 1.  Paycheck-to-paycheck: A $0-$0.99 per decision. You are conscious of every dollar you spend.  This includes people with crippling debt.
  • Level 2.  Grocery freedom: A $1-$9 per decision. How much specific grocery items cost don’t impact your finances.
  • Level 3.  Restaurant freedom:  You eat what you want at restaurants regardless of the cost. A $10-$99 per decision
  • Level 4.  Travel freedom: A $100-$999 per decision. You travel when you want, how you want, and stay where you want.
  • Level 5.  House freedom: A $1,000-$9,999 per decision. You can afford your dream home.
  • Level 6.  Philanthropic Freedom: A $10,000+ per decision. You can give away money that has a profound impact on others.

The beauty of Nick’s ladder lies in that he help us quantify how much wealth we need to have so that we will not spend and be anxious about it. Nick determines that if a spending decision is varying just 0.01% of your liquid net wealth, it doesn’t matter much whether you choose something more expensive or cheaper.

Let us take Level 2 as an example. What would make your choice of grocery be inconsequential? Take $10 divide by 0.0001 and you have $100,000.

Whichever grade of celery, chicken that you choose, it will make very little impact on your net wealth at $100,000.

The level of wealth needed to gain freedom to buy something without thinking

This gauge I feel is pretty good. For example, when it comes to eating out, I really care less about the prices now. Whether a meal is $5, $10, $40, it really matters less to me. In comparison, my portfolio gyration in a day is the difference of 1 or 2 MacBook. My choice of food would impact my finances less than what happens to my portfolio.

When you attain a certain level of wealth, you should feel rich enough. It should free you up from something that you were constrained to.

Does Nick’s Solution Alleviate Anxiety Well?

If Nick and Stewart’s levels of wealth worked on me, then it is truly remarkable.

Unfortunately, money anxiety is a state of mind.

Long-time readers will probably know my rough liquid net wealth. My level would probably be Restaurant Freedom on Nick’s level of wealth.

We eat 90 meals a month. If each of my meals cost $100, that is $9000 a month. In 1 year, this moves 10% of my liquid net wealth.

Going crazy on one or two meals do not matter. Going crazy with the frequency matters. Perhaps the real Restaurant Freedom is when you have $10 million.

Despite this, I got to give props to Nick for creating a better framework for us to think about this.

You Should Try to Spend Well According to Your Level

Another beauty of what Nick created was that it allows you to see what kind of spending decision you can loosen and what you cannot loosen.

If your liquid net wealth is $100,000, you could loosen on eating out and groceries because the impact is less. You should control how much you spend on vacations and home choices. They still impact your wealth.

If your net wealth is less than that, then in order to progress up, you cannot ignore control of your groceries and restaurant stuff.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

FX Rates Offered By Standard Chartered Singapore Tightens to 0.30%

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I updated roughly 1 month ago on my blog that through Standard Chartered Banking LiveFX, the exchange spread we get for currency conversion seems to have improved.

The spread that we used to need to pay was about 0.80% difference between what they quote versus the spot foreign exchange rates (FX). with LiveFX, this sort of reduced to about 0.40%.

I was helping a reader verify some figures on my Standard Chartered Banking LiveFX and noticed that the rates seem lower than 0.40% now.

Sell and Buy are rates offered by Standard Chartered LiveFX. We compare them against OFX and X-Rates

I compared the rates versus the quotes from 2 other platforms.

They have come down closer to 0.30%.

This is good news for those who are investing/trading overseas stocks.

At this rate, it is possibly cheaper than some of the traditional brokers. But not as close to the spot rates that we could observe if we were to use Interactive Brokers.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

3 Articles on Work and Life

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Dan*, a partner at a major Boston law firm, was due at the office, but instead, he was curled on his bathroom floor, unshaven and in his pajamas, crying into a towel.

– What Happens When Your Career Becomes Your Whole Identity

This feels more like a scene in a movie than from a Harvard Business Review article but it was actually from the latter.

The worse part of my job did not reduce me to this level but I would imagine some of my peers would have experienced something similar. Your friends would ask you seriously why put up with this, just quit it. However, if they were in your shoes, I wonder if they would take their own advice seriously.

Parts of your work is going to struggle and sometimes we do not know whether this is an acceptable struggle or that this is beyond our limit. As a new bird, you would not know which is which, thus the answer is not so straightforward.

Navigating work has always been an important aspect of financial independence. But perhaps not in a way that you think.

It is important not in the sense that the money allows you to be financial independence.

Rather there can be many conversations about work and financial independence. For example, are all work suppose to be repulsive? What if we do not find work repulsive?

How do you “survive” the period where you have set up your financial system and are just effectively waiting for the “cross over point” where your cash flow from your portfolio is more than your expenses?

Over the weekend, I came across three articles about work and I realize they are applicable to the topic of financial independence as well.

When Your Work is Your Identity

The first article explores some of our existential crisis: Who am I if I am not the highly paid, senior manager?

Many of us started liking what we do, but as we progressed in the career, we started being more and more unhappy in our career.

Progressing in our career usually means an emphasis on spending time at work, versus time for other things. We start to wonder if we would be happier if they have more friends and a happier family if we had spend our time out of the office instead.

But we are afraid to hate our job because our career has been such a big part of our identity that if we hate our career, it would be similar to hating ourselves.

Psychologist called this enmeshment with your career. Usually, it is used to describe the blurred boundaries between 2 people. However, in this case, it is between you and your career.

Being enmesh means your identity cannot be developed independently.

When you engage in any intense activity for a great majority of your waking hours, that activity will tend to become more and more central to your identity. It displaced other activities that you might identify with.

For some of us, our career achievements are highly valued in our family or community. There are high value placed upon professional and financial achievements. We fear failure will make our family disconnect with us. And thus this drives our identity to be more work focus.

We have also reached a certain socioeconomic class. It may not be the glamorous things but that you have succeeded to have access to your friends you are comfortable with now. Our identities are highly influenced by how we present ourselves to them.

Whichever level in this socioeconomic class, your identity is focused on certain wealth, achievement and influence. To maintain these 3, you need to maintain this good career.

Some of the better suggestions provided sound very cliche:

  1. Rebuild your network. Reach out to friends and family. recent research on adult friendships has shown that having just three to five close friends is associated with the highest levels of life satisfaction.
  2. Decide what is important to you. Review your principles and values. “Values Clarification”: Reflecting on your desired direction in areas like relationships, community, careers, and parenting. Rank their importance to you as well.
  3. Look beyond your job title. Reframe more in terms of skills at work that can be used across different contexts than on your job title.

Tasting the Extreme Ends of Working and Living Life

Julian Hebron at The Basis Point shares his reflection of working, not working and ultimately coming back to work on his own terms.

  1. Career success is measured by metrics such as money, expertise, and credibility.
  2. Life success is measured by something much more personal.

To gain career success it requires you to put in hard work and often, it involves some sacrifice of time from personal and family time. This will win you money, expertise or credibility or a combination of all three.

If you continue down this path you will either

  1. Taste career success through a combination of money, expertise, and credibility
  2. Gear down career success ambition and gear up life success ambition
  3. Pursue #2 but eventually settled for a blend of #1 and #2

What I understand from Julian is that when you have a taste of two extreme ends, you tend to understand where you would not wish to go. The most comfortable position might be a blend of somewhere in the middle.

Julian was able to gain this perspective because he climbed high enough that he has seen some form of success. He was able to weigh the tradeoff between career success and life success.

Not everyone has attained that privilege.

At the same time, we cannot discount that successful people have accumulated wealth capital, wellness capital, and social capital.

Why are Older Workers Less Anxious at Work?

Washington Post has a good article questioning if we reduced our ambition as we age. I thought the article explain the heck care attitude that people tend to stereotype older workers.

I do not think older workers do not care about their work so much. Perhaps I have seen some older workers who are more dedicated, always telling the younger ones to maintain certain standards.

However, perhaps as we get older, our philosophy about working have gradually shifted:

  1. We find contentment with the station in our life. We wish to perhaps learn to enjoy this setup in our lives.
  2. We may start becoming more selective in pursuing gigs and less anxious about how they would turn out.
  3. Started shrugging instead of worrying whether the kids will be late for school.
  4. We accept that we will die one day and are selective about who we spend our time with.

A lot of studies have indicated adults’ happiness over the years resembles that of a U-shape. We started off in our grown-up years feeling pretty good about ourselves. This falls over time until our 50s to hit our peak happiness around 65 to 72 years old.

All this seems to set us up for a period where we feel like we are more in control, and that we are least anxious about things (in terms of our work, not life). This might free us up to do better work.

I think what was not explicitly spelled out was that as you stay in the industry longer, some of the skills that used to take you a long time to do well became much easier for yourself. You tend not to forget how to do these things and you could customize these things well to suit what is required.

Trying to refine these areas of your work might not yield the highest benefit. The biggest wins tend to be able to selectively carry out those projects that you are best suited for.

Unfortunately, not everyone can be in such a privileged position to be able to do this. What I do see are very competent, older folks being overloaded with more work, from acceptable load to unsustainable load until it breaks a person.

Overall, the theme seems to be that if you are able to move up to a higher part of the value chain, all this advice will work for you. However, if we have not, then you would find these advise a little unrealistic.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works