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My thoughts on an emergency fund

November 26, 2017 / FFsloth / 7 Comments

Everybody will agree that you having an emergency funds is something you definitely need to have. But how much you should put into it is a lot trickier.

The reason to have one is simple: having readily available cash can solve a lot of problems. Life in general is bumpy and even if you live a pretty frugal life you will, from time to time, be confronted by unexpected costs. It is never fun to have to shell out a couple of thousand euro’s to replace something that was working fine JUST 5 MINUTES AGO!! But even less fun is having something break down and not having the money to fix it. And some things need fixing immediately. Having only cold water to shower with is an ‘adventure’ when you are a 20 year old student (you are young, tough and do not mind having an excuse to go take a shower at that attractive friend of a friends place, since she happens to be staying in Ghent during the Christmas holidays as well …). But as a 43 year old I prefer to have enough funds to have this fixed immediately.

The size of your emergency fund, that is an entirely other matter. There are so many variables that determine the best size of an emergency fund that a one size fit all approach does not work.

Some reasons are very tangible: if you own a house you will need a lager emergency fund than when you rent because you have a bigger change of being confronted with unexpected costs. Some are psychological: you may find it a very reassuring thought to have a bucket full of cash at the ready.

So I will not be telling you how much money you should put into your emergency fund. I will tell you my thoughts and how they evolved.

You see, I was one of those people who liked a decent emergency fund mainly because of psychological reasons. I liked having buffers. Buffer one was my checking account. I liked to keep that at 2.000 euro. And that Is at the end of the month, NOT the beginning. So yes, it frequently shot up to 4.000 euro at the beginning of a month.

Buffer two consisted of my savings account where I liked to have 10.000 euro in it (this was as somebody who rented and did not have car).

And then there were my investments.

This three layered approach meant I was a financial rock! Life would have to be pretty creative to get me into financial trouble!

Looking back at it I blame my mother. Yes, I know, therapists always blame the mother but in this case he/she would be spot on! It’s my mother who manages the finances at my parents and she is a big believer of healthy cash buffers. Well, it’s more unhealthy cash buffers in her case as they frequently end up with 6.000 euro on the checking account! And the cash in their saving accounts … As an active investor making pretty decent returns for the last 17 years, it can be maddening thinking about their missed returns …

But in all honesty, I can’t really blame my mother. First off, she probably picked this behavior up from her mother and secondly, saving and putting money on the side is a good start!

But what is missing is a clear vision, goal on what to do with the excess cash. This is something most people do not have. How else do you explain that we Belgians have 365 billion (BILLION!!) euro on savings accounts (and with interest at 0,11% and inflation close to 2%, actually losing purchasing power each and every year!). With 8,6 million adults not living in poverty in Belgium this would mean an average cash amount of 42.000 euro per person. A bit much for it to be an emergency fund and some savings. Clearly, we Belgians keep to much cash. The newspaper De Tijd currently even has a special segment for it: van spaarder tot belegger.

Hell I myself only started investing because I like numbers and looking at companies. I had no clear plan! Sure, when the stash grew bigger you start thinking that maybe, someday you perhaps could live off dividends. But this was a vague idea. Not a concrete goal that seemed achievable.

It was the FIRE community that brought me that clarity and thus also had an impact on how I look at the emergency fund.

Now my emergency fund is truly an emergency fund, only to help with unexpected costs and not to provide some psychological safety feeling. I have to admit I am not yet fully cured as I still prefer to have 2.000 euro in my checking account (damit Mom!). But in general I want my money to work as hard as possible for me, not sit idly in a savings account losing purchasing power.

Because I keep a budget now I also have a better view on my expenses. Being frugal means that most of my stuff costs less, hence takes less money to replace (a washing machine is 200 euro used, not 600 euro new, a car max 8.000 euro, and so on …). Since I also save a nice portion of my income each month I also need less funds to cover a period of reduced income as there is a nice savings buffer that will take the first hit.

I also believe that the bigger your stash is, the smaller your emergency fund can be. Perhaps it is because I am an active investor but I know I will always be able to have my stash produce some cash flow. The bigger the stash is the easier this becomes. Sure, this will take a bit of time (perhaps even a week or two) but it also means your stash does not need to cover six months of living expenses. If you have regular option premium income or dividend income you definitely can reduce the size of your emergency fund.

All the above has helped me a lot in determining the right size of my own emergency fund. It used to be 10.000 euro even if I was renting and had no car. But even with a house, a car (and a Vespa) now I have put the size of my emergency fund to 6.000 euro.

The same amount for my girlfriend means we have 12.000 euro which would be more than enough to replace a broken car AND something in the house at the same time. Or cover a nice period of reduced income (the Belgian social security system does also help in case of unemployment or sickness).

As I said in the beginning. The size of your emergency fund is something personal and there are a lot of variables at work. But I have come to the realization that for us FIRE people conventional wisdom does not apply. Then again, isn’t conventional wisdom wrong for a lot of things?

The ethical side of FIRE

November 22, 2017 / FFsloth / 13 Comments

Apparently some people wonder if this financial freedom/early retirement stuff is morally right or wrong. Cheesy finance posted the question here and I was only going to type a short comment. And then I started typing and the short comment turned into a long one, which turned into this post …

The tax side

The ethical debate seems to be revolving around the question if we are committing a mortal sin because we will pay less taxes. Personally I have zero issues with it. I find our government incredible wasteful with the money people had to work so hard for. Frugality isn’t a trait often found in government bureaucracy. If they are just going to waste it, I do not feel very inclined to keep on providing my money to them. I also would like a much smaller government as in my mind they are now active in area’s better left to the private sector. Cutting the government budget in half would be a good start. And then cut it in half again …. This because I firmly believe a smaller and more efficient government would benefit our society a lot more than the over bloated wasteful one we have now.

So for me the tax side of FIRE is not a problem, on the contrary 😉 I sometimes refer to my frugal living as financial guerrilla warfare against the ever hungry government caterpillar.

The bigger picture

What I do wonder is if by checking out early from the workforce if we are slowing down the progress of society in general. With progress being defined as a better standard of living for the most people possible. Sure, most of us have jobs that do not really contribute to this and the job itself will be done by somebody else, so no actual loss there. But I have found I get more stuff done when I am working. I get pretty lazy without external pressure. That might just be me off course. And a whole lot of people who have reached FIRE seem to keep pretty busy or devote more time to self-development. But since, once FIRE reached we do not pay a lot off taxes, are we contributing in another, perhaps a more meaningful, way to society?

I have been wondering, where are the FIRE people who did truly exceptional stuff in their retirement? Stuff they would have never done if they still needed to work and is not only personal development but does benefit society as a whole? An innovation, a charity accomplishment, or even making big amazing structures for burning man …

Perhaps I look at it the wrong way. Perhaps the impact of the FIRE community will not be a few big exceptional accomplishments (because realizing the big exceptional accomplishment would probably turn into work at a certain point). Perhaps the impact will be more in a sort of grass root movement. Lots of people whom make small improvements in their own personal life and community because they have the time to do it. Buying less useless crap and focusing on meaningful experiences and relations with other people cannot be bad for our society.

Perhaps it will only be when a certain threshold of FIRE people in the society is reached that network effects and scalable stuff will start to happen and the impact on the whole society become visible….

Monthly expense report: October

November 3, 2017 / FFsloth / 6 Comments

October was challenging. Some high expenses but also the first serious withdrawal from my investment account. Full details below

Personal account:

Income: 3 551,63 euro

Expenses: 3 447,70 euro

Savings: 103,93 euro or 2,93%

First off the higher income: 3 550 euro as this was the month I did my first serious withdrawal from my investment account. I transferred 1 500 euro from my investment account. Total day trading profits are at 5 865 USD and I was planning on transferring these in full this year. The idea being to accelerate my savings, thus finish renovating the house quicker and being able to stop working one year earlier. I do not know if I will go through with this plan. Returns on UVXY puts are healthy so at the moment I want to plow as much money as possible into that. I will withdraw another 250 euro next month, bringing my withdrawal to an even 2 000 euro for the year. But above that, not sure what I am going to do yet.

Expenses are high because the extra 1 500 euro was immediately transferred to the girlfriends account. You see, back in March when I bought the Vespa we paid it 50/50 the idea being the girlfriend would also use it to go to work and such. Turns out it is too heavy for her to use (heavy as in weight, not horsepower) and she doesn’t use it at all. But I love the Vespa! I actually prefer to use the Vespa than our car. With this payment it is now completely mine. Trying to convince her to buy a lighter, 50 cc scooter with the money but no success so far …

Another big expense was the year subscription I bought for our local swimming pool. This will reduce my cost per swim from 3 euro to 2 euro and some change so it should save me money over the next year but I had to book the full expense now.

Without these two large expenses I would have been at 1 677 euro. But two visits to Ghent to catch up with some friends explain that overspend. Trying to be a bit less of a hermit and it is an expense that will probably be higher once I no longer work full time.

The joint bank account

Income: 2 312 euro

Expenses: 1 589,38

Savings: 722,62 euro

Lowest we ever spend in our joint account. Again due to our holiday . We didn’t spend a euro in our joint account the first 9 days of October! (we should go on holiday more often 😉
Adding half of these savings to my own meager savings and I come to savings of 465,24 euro or 13%. Not too bad for a month where I essentially bought half a Vespa.

We also received some good news from the government. Our tax refund will hit our account at the end of this year. This would mean we will start next year with a healthy balance in the joint account!

Using options when you are a dividend growth investor

November 2, 2017 / FFsloth / 7 Comments

It’s my not so humble opinion that options are perfect for those whom pursue a dividend growth strategy. You see, as a dividend grower who likes to buy and keep stock for a long period you get something for free with options.

The price of an option is determined by the current stock price, the intrinsic value, time to expiration or the time value, volatility, interest rates and cash dividends paid.

It’s the volatility part that is interesting part. You see, as a trader who goes in and out potions a lot volatility is indeed a risk factor for which you want to be rewarded. But as a dividend growth investor you don’t really need to care about volatility at all. All that matters is your purchasing price as that determines your dividend yield.

Volatility is the movement of the stock price: stock A which goes from 100 euro to 94 euro, then to 107 euro and then back down to 105 euro has a higher volatility than stock B that goes from a 100 euro to 102 euro and then settles on the 105 euro. For a trader the more volatility is indeed a risk as he might get forced out of a position. Both stock may start and end at the same price but the higher volatility of stock A makes it more riskier for our professional trader than stock B. As a dividend grower who is going to keep the stock for the long run, not so much. You want your dividend yield (the same for both stocks) and some long term capital appreciation (also the same for both stocks). But if you use options to buy stock A, thanks to the higher volatility, you can actually buy stock A at a cheaper price than stock B because the option premium you collect will be higher!

Buying a stock with a put

And that is not the only advantage options can give you. Playing with the strike price can lower your purchase price and playing with the expiry time can let you travel in time a bit.

A few practical examples of the fun (and bigger yield) you can have with options.

AB Inbev’s current price is 105,4 euro. Let’s say you like AB Inbev but prefer to buy it at 100 euro.
You could enter a limit order and wait, and wait, and wait. Me, I prefer to be paid to wait. So you could sell a put at strike 100. The December series still pays around 1 euro which means that until the third friday of September you have the obligation to buy AB Inbev at 100 euro a share. Deduct your premium from this and you will actually only pay 99 euro out of your own pocket. If the option is not exercised you just made a 1% return on your money just for waiting. It probably will not be exercised because as long as AB Inbev has a higher price than 100 euro in the market nobody is going to exercise this option as they can get more money for their shares by selling to somebody else at market price. Also, 1% in less than two months isn’t bad. I really have no idea why us Belgians have so much money on savings accounts bringing in next to nothing while such attractive yields still exist in the market. the only possible downside is you have to buy AB Inbev at 100 euro which will then get you a dividend yield of above 2% net (which still is a lot higher than your savings account).

But what if you want to be sure you get the shares AND pay less than 100 euro a share? That is easy, play with the strike price and expiry time. Going down the ladder here you will find the September 2018 puts. The 110 euro strike price gives you a current bid of 12,6 euro premium which means you actually buy at 97,4 euro and the 120 euro gives you a bid of 20 euro premium which means you buy at 100 euro exactly. Personally I would go for the 110 strike price.

If it gets exercised you bought at a price lower than today. If it doesn’t get exercised you just made 12,9% in less than a year (you only need to set aside 97,4 euro of your own money as the rest you get from the option premium). Actually, you do not even need all that money now! If you have a broker like Lynx which lets you use your other stocks at collateral you can even do it with money you still need to save. You need to have the money by expiry date which means you still have 9 months to save up the 9 740 euro you will need to buy the 100 AB Inbev shares. If you are able to save 900 euro a month you could already sell that put and pocket the option premium with 0 euro in the account to actually buy the shares. (American style options can actually be exercised any time before the expiry date but that does not happen a lot. And even if it would happen my broker is more than happy enough to lend me the money at a 3% interest rate. Selling the put either gets me 6% reduction on the current stock price or a 12.9% return if not exercised. I’ll risk the small chance of needing to borrow the money at 3%). You are in fact making money on money you not yet have. Perfect for a person who saves a lot of his wage and wants to invest it to achieve early retirement (hmm, I wonder where I could find somebody like that …)

So selling a put is used to lower your purchase price or play a bit with time and get you a stock in the future even if you do not yet have the money.

Selling a stock via calls

Once you own a stock it is time to take a look at calls. Selling calls is what you will do when you want to get rid of a stock because the dividend yield is too low. Or to create an additional cash flow from a stock.

Personally I would only buy dividend stocks if the dividend yield after taxes is above 2.5%. If it dropped below 1.6% I would want to sell the stock and then go on the hunt for a new one paying above 2.5%

Let’s say you already own AB Inbev. And you are not too happy with them not raising their interim dividend. But at the present 105 euro price you do not wish to sell. But 120 euro, that is a different matter. 120 euro, that might tempt you. Well, the September 2018 calls at strike 120 euro will pay you 2.2 euro. If you do not need to sell you just made an extra yield of 1.8% on your AB Inbev (and option premiums are tax free in Belgium folks!) If you do need to sell, well you got the price you wanted and now have the cash to write a put on a stock with a better dividend yield … I had a friend who usually doubled his dividend yield by writing some well chosen calls.

The fun part is you get your call premium now, when you sell the option, for a future obligation. But the premium money is yours to keep (with puts you need to leave the money in cash as it might be needed to buy the shares if the put is exercised). Since you already have the shares which you may or may not need to sell you the premium income of a call can be put to work immediately! You could perhaps use it to sell a put to buy some other shares …

A little word to the wise. While selling a put when you do not have all the money necessary to pay for the underlying stock is ok (as long as you know you can save that money by the time the expiry date comes around) do not ever do it with calls! Only sell calls on stock you own as your potential loss is unlimited.

Personally I would make an excel sheet for all my positions that calculates at which stock price my dividend yield drops below 1.6% and then go look if I can sell calls at that strike price and book some extra, tax free returns on those positions.

Why do it?

By buying dividend stock via puts and selling via calls I think you could add at least 1% to your return. That might not seem a lot for the effort you need to put in. But 100.000 euro which returns 7% during 10 years (and the return each year reinvested at the same 7%) gives you 196 715 euro.

Push your return rate to 8% and it is 215 892 euro. That is a 20.000 euro difference in 10 years. And who doesn’t like a big return?

It is also the reason why I would limit my number of stocks I buy to only 5 or 6 well chosen stocks. It is less work, and I am lazy. But putting more money in fewer stocks lets you use options. An option contract always work with multiple of 100 underlying shares so selling 1 put option on AB Inbev at strike 100 means you will need 10.000 euro to buy the shares. Having a lot of money in a few positions also means your option premiums start to become significant which means you can invest the money a lot faster where otherwise you would need to wait longer and sell additional options to get enough money to play with.

And your turn over rate does matter! The faster you can get money re-invested the higher your return will be. It is another advantage of a broker like Lynx. When an option is close to expiration and will definitely not be exercised you can always leave the position expiry but already sell a new option having your money or the underlying stock pull double duty for a week or two and save a bit on trading fees (every little thing helps).

I am not a dividend investor because of the high tax the Belgian government has on dividends (30%, auch) but if I was one I would have a highly concentrated portfolio with only 4 or 5 stocks (you can always choose a holding like GBL if you really want diversification). I would only buy new stock via puts and sell stock via calls. An excel sheet would track the dividend yield and determine at which strike price I would want to sell those calls. With only a handful of stocks the work would be minimal and your return should be 1 or 2% above those not using options …

Even if you want to skip buying the shares and you chose your strike price so that your options are not exercised (in essence being a premium hunter, which is something I do at times. Tax free money bitches!) I recommend to do it with stable dividend paying stocks. The reason being that once in a while you will get assigned and might even have to wait a few years before you can start selling calls on the stock at a profitable level. The dividend will make those years a lot more comfortable, especially if you are FIRE …

Special circumstance investing – October update

October 31, 2017 / FFsloth / 10 Comments

Google, in which I day trade a bit posted excellent quarterly numbers and hit an all time high in the month of October. So was it a profitable month for me as well? Let’s find out.

What did I do

Still patiently waiting on the expiry of my AB inbev puts (December). Ahold Delhaize finally moved in the right direction price wise but it looks like I will need to roll this one a bit more before making a profit on it.

I did close down the position I had in UVXY puts I bought in September for a profit of 1 252 USD. This was a 10,6% return in less than a month. I will be deploying way more money in UVXY puts in the future. Last month I explained why.

And then there was my day trading. I literally closed my last position 2 minutes before starting to type this post. Total profits in October are 1 100 USD.

I try not to get hung up on the profits I leave on the table while day trading but this month was very difficult. First off: I left A LOT of money on the table. And then there is the girlfriends portfolio…

The girlfriends portfolio

As I mentioned last month I do, on occasion, day trade in her portfolio as well. Last month I even made more money in her account than in mine. This month, well, this month was worse. Total day trading profit came to a whopping 1 830 USD! This is the second month in a row I did better in her account than in my own, and the difference is getting bigger! It shows I should work on my discipline and enter in fewer, but more profitable, trades when day trading. Lesson learned.

Off course the point of me managing her stash is to build it up as good as I can so the more money I make in her account the better. I do not think it would be very good for or relationship if I pulled the plug and she still had to work. But I have to be honest, it does sting a bit that my biggest day trading profit didn’t happen in my account. O, the fragile male ego!!

But all in all it was a pretty good month (especially because we were still on holiday for the first week of it). All of the above is generated by using leverage or using cash which was previously generated by using leverage. We haven’t added any extra money into our investments accounts for the last 7 years (all savings eventually going to home renovations). It is an extra on top of the growth of our old investments. And those old investments are doing pretty good also. I bought my very first Berkshire Hathaway B shares on 19 January 2006 at around 60 USD a piece. I did a lot of stuff in between (my trading overview is 12 pages long at present, and that is without my day trading) but never sold those shares and now am fully invested in Berkshire Hathaway.

The girlfriend bought GBL at 60,5 euro in September 2010 and never sold those…

Choose your stock well, and you only ever need to do 1 trade. It was what originally attracted me to investing. It is the only thing I have found where being lazy can bring in a lot of money. It is off course very boring. Which explains all of the above, because let’s be honest, this shit is downright fun to do!