We live in a technologically advanced society where working your money to make more money is easier than ever. It’s called investing. You can now do them 100% digitally and it’s as easy as just tapping buttons on your mobile phone. However the increase in accessibility meant that far too many people who weren’t ready, jumped into the investing scene, got greedy and lost their precious savings. My hope with this guide is to educate and train people to be ready for making sound investment decisions of their own. There is no magical formula shared with you here to get you rich quick. Instead, all I will be discussing are the relatively reliable ways to stay out of financial troubles and grow your wealth over a long time. It will require a great deal of discipline, sweat and consistency. However that’s just the price you have to pay to get it done.
Imagine a stereotypical Chinese martial arts movie where the protagonist seeks an old master to be his disciple. To his surprise he is given a gruelling schedule to repeat the same basic moves over and over without any explanation. This makes him feel extremely frustrated. But he gets it done anyway. Of course the enlightenment follows soon after once he truly realizes the benefits behind the repeated basic moves. Learning to manage your own finances is a lot like this. The basic moves themselves aren’t difficult at all. What drives people crazy is that you have no other choice but to repeat them over and over until enough money has been saved to do something new and exciting.
Basic 1 – Income Statement
This only takes about 1 hour a month to do but it is the very foundation upon which everything else you do happens. Set up a scheduled alarm (I use Google calendar) to remind yourself on the day you get paid towards the end of the month and never ever miss a month.
- List all the different incomes you have and add them all up. I’d imagine most people just have only one income source.
- Divide all your expenses into two categories: recurring and one-off and list them. Add them all up to get the totals for each category.
- Recurring expenses are the expenses that are going out on a regular basis. Some examples are:
- Student loans
- Netflix subscription
- Mobile phone
- One-off expenses are the essential (not for pleasure) expenses that had to happen that month as a one-off. Some examples are:
- You spilt water on your laptop by accident and had to buy a new one.
- You lost your one and only winter coat and you need another one.
- You needed an emergency dental work.
- You had to call a pest control service because your wife is absolutely terrified of spiders.
- Recurring expenses are the expenses that are going out on a regular basis. Some examples are:
- Find out the Net Profit which is calculated by
Net Profit = Total Income - Recurring Expenses - One-off Expenses
- Split the Net Profit so that at least 50% of it is set aside for investing and the remaining is for free spending that would be used for anything you want.
No matter how small you contribute towards investing in the step #4, if the investment gives you any kind of returns, it would then become your additional income source for the following month and your Total Income grows bigger and bigger each time. If the Total Income grows and your expenses are staying the same then you will be able to gradually increase both the investment contribution and free spending amounts over time. Of course, as you can imagine, this totally depends on what and how you make the investments (which I will cover later) but after 15 years of doing this and never missing a single month, my wealth has snowballed beyond what I imagined I could achieve.
Ultimately, you do all of the above to just live within your means. To put that into a perspective, after living as a homeless for about a year, I was fed up with doing absolutely nothing. So I got off my lazy ass and got my first job as a dishwasher at the age of 18. I wasn’t given a lot of hours at start so my Net Profit was only about $200. Since I have only ever done 70% / 30% split in my life (it was true then and it still is that exact split over 15 years later), that meant that I was left with mere $40 (30% of $133) each month for free spending. I couldn’t do much with such a small amount but I accepted that that’s what I deserved. Today my 30% free spending is around $2,200 and that’s after all the increased Recurring Expenses such as a big mortgage on the 3-bedrooms house. This means that the 70% I am putting aside to make investments is a whopping $7,333 a month which is fueled back into making the snowball grow ever more.
I’m not gonna lie. It was fucking difficult getting to where I am today. Especially the beginning when the only thing I wanted was to go from $40 to $100 in free spending each month. That $100 felt like some kind of a cursed magic number that could never be broken. But the same $100 increase in free spending today from $2,200 to $2,300 almost requires no effort, just a matter of waiting a couple months and I know I will get that. Was it all worth it? Well, let’s get into what is meant by all and you can decide for yourself. My answer has always been yes! And based on my observations most will answer that with no!
Basic 2 – Increase The Income
This section probably only applies to more the younger audience who are still flexible about what they can do with their primary income source. If you feel you’ve reached a certain point in life where you can’t do much about it, please skip and move to the next section.
When I followed the steps mentioned in Basic 1 – Income Statement section above, for the first 10 years, I found myself relying heavily on my one and only primary income source. The investments were still too small to make any significant difference. I’d imagine most people are in similar situations so naturally we have to talk about the elephant in the room.
When it comes to the primary income, it ultimately comes down to choosing one of the two battles:
– A battle with others in the form of competition out in the real world
– A battle with yourself in the form of resisting temptations
Do you want to be a famous YouTuber or a Twitch streamer? Do you want to start your own business and live the life of an entrepreneur? It sounds like a lot of fun and above all, there’s a great deal of money to be made in the millions. But you must also realize that this kind of career path is mostly about competing with others. You just have to be very aggressive and always stay one step ahead of your competitions to stand out. The reality is that only the very few will be successful and most will lose the battle, often returning home empty handed. The competition is so fierce that the advices I’ve given in Basic 1 – Income Statement should be disregarded in many cases and put all your resources into business related expenses such as marketing. You have no other choice because others are going all-in.
I honestly didn’t have much choice but to go with the second battle. I was too poor to embark on anything that required initial capital and also not educated enough to know what to do in anything. Good thing is that this is the type of battle that has relatively predictable outcome if you just do the work. Essentially, almost always, you are the only thing that’s getting in the way of becoming successful.
This battle can be won by tackling two fronts:
– Increase the incomes
– Decrease the expenses
Increasing the income requires a great deal of hustle in the beginning. There’s just no way around it. Whether working as a uber driver during off hours or becoming a university student to pursue a white-collar job, the more hustle you put in the more income you will likely make. It’s quite predictable, and that’s just how things are. However you can’t be doing this forever because life makes it more and more difficult for you as you get older. You need to slowly build up your investment portfolio to replace active income with passive income bit by bit. To put this into perspective, it took me 10 years of hustling like no other to get to a comfortable stage where my passive income was big enough that I could finally start to quit the multiple active income sources I had going on. I will talk about how investment portfolios could be made and managed in the later Advance sections.
Basic 3 – Decrease The Expense
I used to work for one of the major banks in Canada as a software engineer where I got to know a guy who was working there as a financial analyst. He had his fancy CFA designation and was getting paid over $200k a year in just the base salary which doesn’t include the bonus. The bank hired him to find investment opportunities that could yield just a small percentage more. This usually translates to something as small as mere 2% more returns on investment.
How hard do you think it is for you to make extra 2% increase in your Net Profit by cutting down on your expenses? If you think it is, you should just descend down the mountain and leave. I have nothing else to teach you. It really is easy and in fact you should look to increase it by not just 2% but a whopping 30% – 50%. That’s like hiring the great investor Warren Buffet as your personal investment advisor.
Remember the martial arts movie analogy from above? This is the part where I instruct you what to do and you just gotta do it.
- If you are not settled down with a partner (like a marriage), you should be living in a cheap room rental.
- If you are leasing a car and it has significant monthly payments, either get rid of it or trade it in for a cheaper car that has no monthly payments on them.
If you do those things you would immediately experience 30% – 50% increase in your Net Profit. With much bigger capital invested each month, you have a good chance of ending up with a giant snowball at the end of 10 years. Note that I said you have a good chance, which implies that there is no guarantee. It’s already difficult as it is even if you pour in lots of capital but not doing so already becomes practically impossible.
Advance 1 – Stop Trying So Hard To Make Money From Investing
Let’s face it. Investing is a legalized gamble. At the end of the day you are taking on some risks for some unpredictable returns. Therefore you must master the art of gambling, in other words, knowing how to manage your risks.
First step to managing your risks is to just stop trying to make money so desperately. This is such an important thing to grasp and I overlooked emphasizing this emotional aspect of investing when I was teaching my best friend how to invest in stock markets. It turned out to be one of the biggest mistakes of my life which I regret to this day. He was a complete beginner in investing. I decided to discuss with him all the investment opportunities I come across and take him through the entire thought process of purchasing the company stocks. We had a great start with all our diversified investments making great returns. He was blown away by the fact that one could make such a lot of money without even breaking a sweat. And then it was only a matter of time until we were bound to hold a losing stock. To me it was just one loser out of the many in my portfolio. However he couldn’t bear the feeling of losing his money and letting it just slip away. Especially since he was already on a winning streak and got used to raking in all the profits. He got greedy. He started buying more of the losing stock behind my back to try to make all the losses back. In just a matter of couple days he lost tens of thousands of dollars and called me with such a panic in his voice. Let’s just say it was the kind of call you wish you would never have to sit through again. In the end he sold all his stocks at a big loss and he stayed the hell away from the stock markets ever since.
What exactly is the correct mindset when managing your investment portfolio? Let’s say we are gambling on a fair coin toss. It doesn’t really matter whether you pick heads or tails since the coin has exactly 50% chance of landing on one of them. So we are going to keep it simple and always bet on the heads. You have an initial capital of $10 and the minimum bet is $1. When you lose you lose everything you bet but when you win you make a 2% return. For example, if you win with betting $1, you get back exactly $1.02. The 2% return is quite a small profit for winning. The only way to get rich by playing this game is to play as many rounds as possible. You would be an absolute fool to bet all-in on a single bet which would take you straight out of the game. If you managed your risks properly, you would have made thousands of small bets and made a killing in the end. Investing is quite similar to this in the sense that you want to be diversified enough to feel virtually nothing about the small investments that are losing money here and there. At that point, you get into the state of mind where you are no longer so desperate to make money from a single investment decision. Because sweating over it is just not worth it.
Advance 2 – The Holy Trinity Investment Portfolios
Sometimes a picture is worth a thousand words.
The word portfolio here just means a collection of investments that belong to the same risk level: low, moderate and high. Unfortunately there are many different opinions about what kind of investments belong to which risk portfolio. I will share with you my definitions and specific investment examples for each level but this really comes down to personal risk appetite. Keep in mind that you are still diversifying across many investments even within each of the risk portfolio.
Low RIsk portfolio for me consists of the investments that must be made without any leverage. They also need to have low volatility, i.e. low fluctuations in price, and are generally expected to make positive returns over a long time. No leverage and low volatility because you want to keep this layer safe. This layer for me currently makes up around 50% of my entire wealth and that proportion should only grow as I become older and wealthier, eventually aiming for around 80%. When you are just starting out to build your wealth, it is ok to move a good chunk of your money from the Low Risk layer to the Moderate Risk layer to invest into something big like a real estate. At which point it could even drop down to being just 5% and you’d end up with an inverted pyramid with the Moderate Risk becoming much bigger than the Low Risk. Whenever the inverted pyramid happens you should do nothing else but putting all your efforts into re-building the Low Risk back up to an appropriate size. If the Moderate Risk investment you just made was a good investment, it should help you re-build the Low Risk layer faster. (ex. monthly rental income from Moderate Risk) Below are some examples of what I consider low risk investments.
- Your employment, if it is secure and gives you consistent payout.
- A rental property that is 100% owned by you and gives you monthly rental income.
- Buying ETFs from stock markets that are massively diversified.
- A basket of dividend stocks of companies that are big, financially sound and with great yields.
Moderate Risk portfolio for me consists of the investments that are low to moderately leveraged or moderately speculative even though there is no leverage. This layer for me currently makes up around 50% of my entire wealth. That is not really ideal since it’s not a pyramid but more a square. This is because I am still in the process of growing the Low Risk portfolio. Rental incomes from all of my properties and various stock profits from the Moderate Risk layer have been re-invested straight back into the Low Risk portfolio for a number of years now. I am planning on doing nothing else but continuing to do that for another 5 years. Below are some examples of what I consider moderate risk investments.
- A rental property that is 25% – 50% owned by you and gives you monthly rental income.
- A basket of specific industry / sector stocks for the purposes of making a speculative bet
High Risk portfolio for me consists of any investments that are highly leveraged or just beyond my abilities to even estimate their risks. These are really unpredictable investments and you should invest in them with great care. I’ve only recently broken the net worth (mark to market asset values – all debts) of 1 million dollars and I personally never even considered this layer so far. Over the course of my 15+ years investing journey, many people I personally know have invested their entire savings into only this layer. At the time of this writing (2021), one friend of mine who invested into the Ethereum coin became a multimillionaire, got himself a Tesla car, a big house and basically retired. But all others failed their investments and they are nowhere even close to being a millionaire. I am kind of in the middle and it’s fine because that’s where I wanted to be. Below are some examples of what I consider high risk investments.
- Stock picking individual stocks.
- Bitcoin or any other crypto currencies
- Purchasing highly leveraged derivatives like futures contracts or CFDs
- Any collectibles that may appreciate in value such as an art piece
Again, these are just my definitions that worked for me. You don’t have to categorize the investments like the way I did. For example, an expert art trader might consider investing into certain art pieces as low risk just because he has so much experience and knowledge about them. How you define your own holy trinity portfolios is up to you but it is critical that you actually take the time to define them. Then you must strategically set goals to make regular investment contributions into the portfolios with appropriate sizing.
My Journey To Building My Pyramid
In this section, I am going to just straight elaborate on what I did, what was the result and why I did them. Hopefully my journey could serve as a concrete example so that above theory makes more sense to you.
- I purchased one particular REIT dividend stock that paid out monthly dividends with the annual yield just above 5%. This was when I was just taking baby steps in investing and the only reason I did this was because I liked the idea of getting paid every month. For about 4 years, I did nothing but following the Basic 1 – Income Statement steps and investing everything into this one stock. The price of the stock didn’t move much but the overall funds did pile up nicely. There was no pyramid structure then since I was too ignorant to consider it.
- I completely sold all my stocks which turned out to be around $60k, borrowed around $40k from friends and family and purchased my first condominium unit that did not even begin the construction yet. The construction itself took 5 years and then I collected the monthly rental income afterwards.
- While the condo unit was being built for 5 years, I focused on my education, career and hustled to work 3 jobs at a time to pay back the debts ASAP. This is also the time when I’ve learned about the pyramid portfolio management and started building up my Low Risk portfolio again.
- Rather than having one single dividend stock, I constructed a basket of 15 dividend stocks with all equal sizes initially. Then I did periodic once-a-month rebalancing to bring the balance of the portfolio back to equal sizes again. I really liked this approach because stocks are generally super easy to be converted back to cash. When you need the money, you can sell your shares and have the funds deposited to your bank account in about 1-2 days. I diversified across 15 dividend stocks which is considered to be quite diversified and furthermore most of them were REITs and that makes them even more diversified. I did this because I knew I didn’t have the time or the knowledge to pick the winning stocks myself. Here is how I pick dividend stocks:
- Each company must be huge in size. I generally look at their market cap, and their financial reports (income statement & balance sheet) to get a feel of what the scale of their business is. Once you have seen a number of competing companies within the same industry you can tell which one is a big player vs. a small player.
- Each company should have a good track record of dividend payments. Sometimes they just decide not to pay you.
- Take a look at their annual financial reports (income statement & balance sheet). All I am trying to do is to try to find really obvious problems like unreasonable amounts of debts piling up or something. Other than that… I don’t really have any opinions about the company because I don’t ever try to pretend to be smart about this.
- Warren Buffet famously said, “Diversification is a protection against ignorance.” He also said “[It] makes very little sense for those who know what they’re doing.” Well… I took that advice and decided to diversify to do exactly that. To protect myself against my own ignorance.
- One key fact about the stock market is that as long as you are making regular contributions to buy the stocks every month and you are diversified enough, you come out winning over a long period of time even if the market experiences dramatic crashes time to time. So that’s what I did over the years.
- If you are just casually reading the news spending 30 mins a day, it’s really hard to miss major events that happen in the world. Here is a list of them that I personally partook in:
– 2008 housing crash: bank stocks, REITs, etc.
– Oil crash: oil related company stocks
– Rise of industrial REITs
– Nuclear power plant failures in Japan: uranium miner stocks
– Rise of electric car popularity: lithium miner stocks
– Global COVID pandemic: hospitality, cruise, electric utility stocks
Usually when these things happen I just wait. And then wait some more. Then the news make it sound like the world’s coming to an end. That’s when I sell exactly 5% of what I have in the dividends portfolio and buy the things that were affected by the event. Once I buy them, I just completely forget about them and continue building my dividends again. In fact the 5% of the dividends portfolio accounts for around 2-3% of my total wealth and I am totally comfortable losing that to $0 even if it happens (it never happens though). These targeted investments would be considered Moderate Risk portfolio and I try my best to diversify with a number of specific stocks. Out of the 6 major events mentioned above, I lost money in only one of them. That was the one where I bought the Uranium miner stocks when nuclear power plants blew up in Japan. The prices of Uranium went down so low that I thought it was a bargain… but it never bounced back up so I sold at a -20% loss. All other investments though (not including COVID as it is still happening) returned around 50-100%. All these profits are put right back into buying more dividend stocks and I continue to just patiently wait until some other major event happens. I am still reading the news 30 mins a day everyday. Just the headlines because news articles are so boring.
- Every time my dividend portfolio becomes big enough, I carve out a big chunk of it and just buy another property. The 2nd property took about 4 years. The 3rd property took about 3 years and the 4th property took about 2 years. and the 5th property took less than 2 years. It gets faster and faster. I did sell off my 1st property which I held for 10 years and sold for almost twice the price I paid to purchase it.
Other Investment Tips
- Max out tax relief registered accounts allowed by your governments. In Canada, such account is called TFSA. In UK, it’s called ISA. This is an absolute must. You can still manage your own stock portfolios with the money in these accounts.
- When buying properties, I stick to newly building / built apartments or condominiums. Once they are rented out they rarely cause any problems like plumbing issues.