Dividends for the Month of November and the meaning of investment

Collected a small sum of dividends for November:

$326.40 from First REITs
$28.54 from Suntec REITs

Yup, that is all I am reporting for my dividends for the month of November. For December, I will probably be making some small investments into the stock market again. Both to increase my passive income as well as to buy stocks that are currently undervalued.

Just some thought about investments. Nothing educational really. Perhaps more philosophical.

What is investment really about? If someone (e.g. a layman without much knowledge about investment) was to ask me that question, I think my reply would go something along this line:

Investment is basically just delayed gratification. If I have $50,000 in cold hard cash today, I could buy a car straightaway. On the other hand, I can choose to delay this gratification, invest the money, and hope to earn some returns from it that would justify the length of delay in my gratification.

For example, I could take this $50,000 today and buy a normal 1.6L Mitsubishi Lancer (no sports rim, etc). So if somebody asks me to delay my gratification say for 1 year, I will have to ask myself.... "If I can only buy a car one year later, what do I expect?"

Some might expect the exact same car model perhaps with sports rim. Some might say... "Huh??? You want me delay one year?? Then I will have to rely on public transport for one whole year... no way!! If you want me to delay by one year, I want a BMW 3 series..

This then defines the "reward" that the person is looking for in turn for the delay in their gratification. The person who only wants the additional sports rim is looking for a smaller reward versus the one who wants the BMW 3 series.

As reward is tied to risk... I could then tell the first person to simply put the $50,000 into a bank deposit account that gives 1-2% interest per annum and assuming that there is no inflation for the year and prices remain the same... he could easily afford the exact same model of car he wants with sports rim. This is basically a low risk investment.

For the other person who is expecting a BMW 3 series, I would tell him to invest it in the stock market now.. only problem is that there is no way I can guarantee that in 1 year's time, his $50,000 will turn to $150,000. Instead of becoming $150,000 , it might become $10,000 or worse still...nothing.

On hearing this, he might have to fine tune the reward that he expects based on the risk level that he is able to accept. Basically, the higher the reward from the investment, the higher the risk.

Consolidating My Thought on Financial Freedom

It has been a few months since I started this blog to write on my journey to financial freedom.
Since then, things have changed quite a bit.

Firstly, the global financial crisis has hit, shaking my confidence in the Singapore stock market. Shares that I am holding have dropped to record low prices. While I am investing mainly for passive income, looking at the prices of REITs and hearing all the news about the credit crisis really makes me worried whether my passive income strategy is the correct method to financial freedom.

Secondly, books that I have been reading lately have altered my belief in a stable and predictable business cycle of ups and downs. What we don't know and don't plan for can destroy our journey to financial freedom. Some of the worst case scenarios I can think of are:

a. The Greatest Depression in Human History.
b. Hyperinflation
c. Severe Oil Crisis that disrupts everything
d. War
e. Death

All these have changed my perception about investment and financial freedom. I remember reading the book about the Richest Man in Babylon. In it, we are advised to use 10% of our money to work hard for us. The richest man in Babylon saves up 1 gold coin out of 10 gold coins he gets and uses that 1 gold coin to work hard for him.

The problem with this simple rule of investing is that it does not take into account the unpredictable events that I mentioned above. So what if I invest in the Singapore Stock Market and have a $1 million stock portfolio only for severe hyperinflation to hit reducing my portfolio to peanuts?

What I hope to achieve is financial freedom. The ability to choose whether I want to work or not, and not working because I need the money to support my family.

A quick analysis of my current financial situation:

Debts:
1. Housing Mortgage ($253,000)
2. Car loan (estimate $30,000)

That is a lot of debt! If I do not spend a single cent, it would take me a good 5 or 6 years of my current annual income to totally pay off this debt. How did I ever get into this situation? 10 years back, I had $0 dollars in debt. After starting a family, I have a 6 figure debt in just a blink of an eye.

4 years back, I could choose whether I want to work or just rot at home. Now, I simply have to work because not working is NOT an option. I would simply not be able to finance my debts..

So here I am, stuck in a pile of debt. With a 5k per month salary but only managing to save an approximate $1k a month.

My Financial Freedom Journey seems fraught with difficulties, uncertainties, psychological barrier and the like. It seems that I am all alone in this journey...

My passive income stands at $3000 a year. That simply won't do. I need to find ways to increase my passive income..

Global Financial Crisis

By right, the global financial crisis ought to be the perfect time for me to start loading up on cheap stocks and shares. The only problem that I am facing is the psychological fear of losing even more money.

I have been loading up on some small cap stocks as well as REITs that provides good yield. Perhaps I would start loading up on more blue chip stocks to balance my portfolio. My philosophy to investment is now this : "Nobody can predict the future".

It makes no sense reading business news or watching the business news. Everyone has no clue where the economy is heading not to say where individual stocks are headed..

If banking stocks drop further, I will probably load up on DBS.

Other Blue chip stocks that I am eyeing are SingTel, SingPost and NOL.

Wiki's Definition of Passive Income

A Brief Introduction to Passive Income

Passive income is a rent received on a regular basis, with little effort required to maintain it. It is advocated by some authors, especially by Robert Kiyosaki.

Some examples of passive income are:
Repeated regular income, earned by a sales person, generated from the payment of a product or service that must be renewed on a regular basis, in order to continue receiving its benefits - also called residual income.

Rental from property;

Royalties from publishing a book or from licensing a patent or other form of intellectual property;

Earnings from internet advertisement on your websites;

Earnings from a business that does not require direct involvement from the owner or merchant;

Dividend and interest income from owning securities, such as stocks and bonds, are usually referred to as portfolio income, which can be considered a form of passive income;
Pensions.

Passive income is usually taxable. The American Internal Revenue Service defines passive income as "any activity... in which the taxpayer does not materially participate." Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing.

The Interent Revolution

Edward de Bono in his book Handbook for the Positive Revolution states that "at some point value must be created in order to be distributed and enjoyed." [2] There is a lot of real value on the Internet, and a lot of it is free to any websurfer. There is value in free information, free education, free entertainment, free socialization, and social interaction platforms. Since the beginning of the commercialization of the Web, entrepreneurs have been trying to find viable business models of selling the web content and services. [3] Some of the problems of selling the online content can be attributed to high cost of software, high cost of qualified labour, expensive equipment, office space etc. These can be minimized in one person operations which use free software and have very small business overheads. In such cases, even a relatively modest income, together with frugal lifestyle, might be sufficient enough to form a basis for a viable passive income model.

An Emerging Industry

With the advent of Web 2.0, the concept of a passive income became a nucleus of an informal grassroots, (bottom up) movement and an emerging cottage industry of loosely coupled, independent individuals, who use a combination of their life story, personality, interests, and practical knowledge, to produce an engaging content and an alleged passive income. Appearing honest, transparent, and promising nothing, these individuals report in their blogs, podcasts or websites, their income sources, methods and strategies they use, to any reader or listener, without any additional requirements. There are no registration, subscriptions, or any other kind of fees. They claim to obtain their income mainly through advertising, remuneration for referrals and recommendations, and through donations from appreciative readers. Steve Pavlina represents but one example of such activities; although, it is not clear how long a passive income generated in such manner can remain so without any interventions, addition of new material, or site maintenance. The long tail effect could partly explain survival potential of such one person or family businesses.

Four Steps to Financial Freedom

When one googles "Financial Freedom", the website Four Steps to Financial Freedom will appear as one of the top websites. This website is apparently owned by a certain Sean Toh.

It is quite amazing. How did he capture the keyword financial freedom such that his website appears top on the list when the word "financial freedom" is googled?

Is his website interesting to read? Was there any useful information about financial freedom?

I must admit that the website has a lot of words like "financial freedom" and "wealth" but overall, the website does not provide any useful information on the four steps to Financial Freedom. Unless you buy his product of course

So today, SgFinancialFreedom is offering his very own thoughts on what the Four Steps to Financial Freedom should be:

Step 1. Earn Money

It is impossible to start your journey to become financially free if you do not start earning money. Income can come from two sources: Active and Passive.

Active income is earned from your day job. Passive income is earned without you having to do anything. An example of passive income is dividends from stocks that you earn.

Explore increasing your income through both active and passive sources.

Step 2. Save Money

The second step is simple. You just need to make sure that you spend much less than the money you are earning. A good start will be to save 10% of your income.

For those who are more hungry, you can save as much as 50% of your income.

Step 3. Buy Assets

Assets put money into your pocket while liabilities take money out of your pocket.

To become rich, you need to acquire assets like stocks, real estate, businesses. This will help increase your income.

Step 4. Repeat Steps 1 to 3

I know this sounds lame. But it isn't. Simply work through Steps 1 to 3 repeatedly and you will see your income increase, your savings increase and your assets slowly build up over time.


Read Related Articles:
1. Top 10 Money Saving Tips
2. Save Electricity, Save Money
3. Retire Young, Retire Rich
4. 3 Key Lessons from Rich Dad Poor Dad
5. 3 Sources of Passive Income

Stable Job versus "Unstable" Job

Should one leave a stable and well paying job for an "unstable" job (a job that one is interested in)?

What if by staying on for another 20 years in the stable paying job (that one does not really like), one is able to earn more than $2 million? This would be more than enough to pay off all debts (housing loans and car loan) and even have some cash to spare for investment. After achieving this financial freedom, one can then move on to pursue one's interests that might not pay so well (the "unstable" job).

But what is the opportunity cost? What if by opting for the "unstable" job (i.e. pursuing one's interest, one is able to earn even much more? Should one take such a great risk? We only live once..

These are questions that I have been pondering over and over again in the past few weeks.

How important is financial stability to me?
Should I stick to the stable job and guarantee myself a comfortable life or should I opt for a job that interests me but that might not pay me so well?
Would I regret it if I stay on in my current job and give up 20 years of my life doing something that I do not like?

If I stay on in my current job, I am certain that by the age of 50, I would be able to pay off all my debts and even have quite a sizeable sum of money (region of 6 figure). That is given that I do not overspend.

However, what if I leave my job and am able to earn even much more than my current job?

The Gone Fishing Portfolio

As most people will have heard before : "Never put all your eggs into one basket". 

This saying is perhaps what everyone hears when they first start investing.  But how many of us truly understand what it means to diversify?

When I first heard of this saying, I thought it meant not to put all my investment money into 1 single stock.  How wrong was I!  The proper interpretation of this saying should be " Never put all your money into stocks alone "

Asset allocation is perhaps the single most important determining factor of any investor's investment returns.  Based on the Nobel Prize Winning Modern Portfolio Theory, rational investors ought to use diversification to optimise their portfolios.  This does not mean just diversifying within stocks in a single stock exchange but across countries and across other investment instruments like bonds, gold, commodities, fixed income instruments, etc.

In the book Gone Fishing Portfolio, Alexander Green who is the investement director of The Oxford Club proposes an asset allocation that beats both the S&P500 in returns for both good years and bad years by just spending 15 minutes a year for making your investment decisions.

In the Gone Fishing Portfolio, the Vanguard mutual funds is chosen because of its low cost and also because it provides an excellent diversification opportunity.  5 principal long term investments are used : stocks, bonds, property, cash and precious metals.

Your eggs are spread around by diversifying into investment instruments that do not perform similarly so that your overall investment is protected in both good times and bad times.

Have you been burnt by the recent selloff in the stock market?  Has your networth depreciated significantly?  This could be due to the fact that you have placed all your eggs into a single basket called the stock market.  Perhaps it is useful to take this opportunity to diversify your assets so as to optimise your returns for both good years and bad years.

The proposed asset allocation mix under the Gone Fishing Portfolio is as follows:

Vanguard Total Stock Market Index (VTSMX) - 15%
Vanguard Small-Cap Index (NAESX) - 15%
Vanguard European Stock Index (VEURX) - 10%
Vanguard Pacific Stock Index (VPACX) - 10%
Vanguard Emerging Markets Index (VEIEX) - 10%
Vanguard Short-term Bond Index (VFSTX) - 10%
Vanguard High-Yield Corporates Fund (VWEHX) - 10%
Vanguard Inflation-Protected Securities Fund (VIPSX) - 10%
Vanguard REIT Index (VGSIX) - 5%
Vanguard Precious Metals Fund (VGPMX) - 5%