Don’t Panic!

Stocks Sink

It’s already been an eventful year for the markets, but waking up this morning I must say I did a double take at the stocks app on my phone. The S&P 500 Index was down 3.3% overnight, with the fall being led by the popular tech stocks. The NASDAQ was down 4.4%.

The stock app also offered up this article, which  is a quick but worthwhile read at a time like this. There’s some simple advice in here for individual investors:

  • Don’t panic.
  • Wait a few days for things to settle.
  • Make sure you know yourself and don’t be aggressive with money you are planning to spend in the near future.

Makes sense right? While this may not necessarily be the start of the grand reckoning that many are expecting, there are going to be more days like this, so it’s best to be prepared.

Here are a few things I would add:

  • Diversify – should you really be 100% in stocks? Are you prepared to ride out the storm for as long as it takes? A well diversified asset allocation will not capture all of the upside in the good times, but it also won’t absorb all of the downside when things go south.
  • Don’t try to time the market – the pros get this wrong, so what chance do we have? You are right to be buying after a significant drop in prices, but you don’t have to do it all at once. Add a little and then wait a few days.
  • Knowing yourself means knowing your base currency, your risk profile and your time horizon.
  • There is more to come -The Cboe Volatility Index rose past 20 for the first time since April. The US Federal Reserve is walking a tightrope trying to return rates to normal in order to avoid the economy overheating, whilst trying not to upset the stock market. The Bank of Japan can not even hint at “tapering” or reducing bond purchases without setting off an avalanche.

It’s likely to be a rough day for Asian stocks today. Be prepared, stick to your long term plan and don’t panic!

Update to this post, 12th October 2018: Ray Dalio says it better than me in this 5 minute interview, but the message is the same – stick to strategic asset allocation and don’t try to trade and time markets.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

What’s the Plan?

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Looking back, I have posted on a wide variety of subjects over the last year or so. It’s interesting to note that the posts that get the most views are almost all related to specific investment products.

I found this out years ago when we were doing financial planning seminars. Often we would spend 20-30 minutes on a specific financial planning issue, and then for the last 10 minutes we would have a guest from an investment company talk about an investment product or fund. All of the enquiries after the seminar were related to the product, not the planning process. I concluded that people find it easier to examine a product and decide if they like it or not, than to think about long term planning.

Maybe planning is just too hard? Certainly many people are busy and pushed for time. For that reason I’ve decided to boil it down to its simplest form. Financial planning in three quick steps. Here we go:

  1. Have a plan!
  2. Cover the basics
  3. Think about where you will spend the money

If you do nothing else then at least spend some time on these three points.

Have a plan – are you more likely to succeed if you have a clear goal and a simple step by step plan how to reach it? Of course you are! Where are you going to be in 10, 15, 20 years? What do you want to have? About how much do you need?

“I should save money for my daughter’s education” is not a plan. “I need $80,000 in 18 years time for my daughter’s education, and I’m going to start investing $200 a month from now in order to get there.” – now that sounds more like it! (calculated on average return of 6.5% p.a. by the way)

Ask yourself some simple questions and at least get a basic roadmap. The plan can be adjusted as you go.

Cover the basics – read this post, take action on these three points and breathe a sigh of relief! (Emergency cash reserve, basic insurance, some kind of pension)

Think about where you will spend the money – Are you staying where you are now forever? Are you likely to return to your home country or go somewhere else? Go with the most likely outcome and save in your base currency. Also, think about the most tax efficient way to get the money you save now back there. You may need to get some advice on this but at least start thinking about it.

And that’s it! If you get to work on these three points, you have probably done more financial planning than most people do in a lifetime!

Financial Planning for Babies

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You may have noticed that there have been no updates on here for over a month. Apologies for that – our first son was born in early May and we are just getting into the swing of things!

As some of you will know, having a new born baby is very exciting, but also exhausting. Going from a solid 8 hours of sleep a night to waking up every 3 hours is a shock to the system. However, after a couple of months the little one starts sleeping longer and the brain starts to return to something approaching normal functionality. That’s when you may start thinking, “So what do we need to prepare financially now we have a new baby?”

Before I get into the financial planning stuff, I found an excellent blog: 2020 Mum in Tokyo – the “baby admin” section here is really helpful when it comes to working out what paperwork needs to be done to register your baby’s birth in Japan and overseas. It’s particularly useful if one or both of the parents is British.

So what kind of financial review should you conduct after a new addition to the family? Keeping it simple, I would look at two things: Insurance and Savings.

Insurance

Assuming you have already covered the basics and have an emergency cash reserve, basic medical cover, and income protection insurance in case you are sick or injured long term, the main thing to address after the birth of a child is life insurance. You may not have thought about it this way, but life insurance is really about replacement of income – if you were no longer around, what income would your family need to have the lifestyle you want them to have and be able to do the things you want them to do?

It’s also important to cover any liabilities. Do you have any debt that you would want to have paid off if something happened to you? If you have a loan on a property in Japan in your name, you will almost certainly have adequate life cover to dispense of this loan in the case of your death. If the loan is in your spouse’s name only, you may need additional cover. If you have loans on property overseas you need to check if they are covered. Do you have any other liabilities? Make sure you get an accurate total.

On to income – what income would your family need monthly if you were no longer there to provide it? If both parents work, keep in mind that if one of you is no longer around, the surviving parent will need to take care of the kids and may not be able to earn at the same level they do now. Do you want your child / children to go to university? What would that cost per year? Many Japanese life insurance policies can be set up to pay out an income rather than a lump sum – you may find something like this easier to plan with. (talk to an insurance professional to make sure you understand the options)

If you are looking at a lump sum payout, here’s how to calculate what you need:

If annual required income is $50,000, for example – at an interest rate of 5% per year you need $1,000,000 in order to generate the income without spending the capital. If you calculate at 2.5% you need to double that. If you are assuming zero interest rates, a million dollars will last 20 years. It’s up to you how conservative you want to be.

So if you need $1,000,000 to cover the income and you have uninsured loans of $280,000 (for example) you need $1,280,000. If you are adding in 4 years of university at $25,000 per year, then you need $1,380,000 in life insurance cover.

Obviously if you have significant assets already that could cover some of these costs, you can reduce the amount of life cover accordingly.

Savings

A new baby can be a great motivator for saving money! What is interesting is that I often find that people are less willing to take risk on money they save for their kids. They take it so seriously that losing money is not an option and they become overly conservative. While I understand why someone would feel this way, it’s a little counterintuitive. The time when kids really start to cost money is when they go to college / university, and that’s still 18 years away. Saving money in cash for that time frame means you will barely keep up with inflation. Also, the dollar cost averaging effect of regular saving means you can afford to take some risk in the early years.

It’s a good idea to start with a target in mind, so do some research on what school costs today. Don’t forget to factor in that higher education costs are rising faster than inflation year on year. This article may help get you started.

Once you have a target in mind, work backwards to how much you need to save each month. Use a simple online savings calculator to help figure it out. Here’s a simple one you can try.

In terms of investment vehicles, look at tax advantaged investments first. Japan’s Junior Nisa is a good example, allowing parents / grandparents / guardians to make contributions on behalf of children under 20 up to ¥800,000 per year. (the UK has a Junior ISA, while the US have 529 College Savings Plans)

Lastly, you may find you are entitled to reimbursement of medical costs related to the birth / child benefit in Japan. This can be a good way to kick off a savings account for your new family member!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Saving for Retirement in your 30’s

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Twitter storms are a daily occurrence, but it’s fairly rare to see one erupt around the subject of financial planning. However, that’s exactly what happened last week as this MarketWatch article suddenly got the full treatment from angry (and witty) thirty-somethings on social media.

The anger was mainly directed at the idea, from Fidelity Investments, that by age 35 you should have twice your salary saved. Obviously this is meant as a general guideline, but it met with a considerable amount of vitriol from people claiming it is out of touch and unrealistic for many people, with the 2008 financial crisis, crippling student debt, and low-paying jobs cited as the factors making it difficult.

So how useful is this guideline? Are young people under too much pressure to prepare for the future, when they are struggling to live day to day?

If you are 35 today and planning to retire at 65, you have 30 years in which to save. Assuming you wish to replace 50% of your income in retirement you need to save 15% of your income per year. If you’ve already been saving and have a head start, then hitting your long-term target is going to be significantly easier.

Of course, these days many people are running up large amounts of debt just to complete their education. The first 10 years of work are often spent paying that off and getting into a position to start saving for the future. So if you are 35 and don’t have a big chunk of money saved you are not alone, and it is by no means too late. That said, if you are 25 and have the ability to save even a small percentage of your income for retirement you should seriously consider doing so. Even if the amount seems trivial, the extra 10 years of saving will make a significant difference by the time you are 65. The charts in this article do a good job of illustrating the benefit of starting saving early.

Remember that saving for retirement is one of three basics you should be looking to cover as soon as possible, along with building an emergency cash reserve and arranging basic insurance. It’s probably better to focus on accomplishing these three things, rather than trying to hit a specific number by age 35.

Goal Setting Part 4 – Financial Independence

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Today we have the fourth part of our series on setting financial goals, based on Tony Robbins “Wealth Mastery”, and this is a pretty major milestone: financial independence.

I have heard many definitions of financial independence, but I think this is the clearest: You have achieved financial independence when you have accumulated a critical mass of capital that, invested at an 8% rate of return, provides you with enough cash to live the exact same quality of life you have today, without ever having to work again for the rest of your life.

What we are talking about here is becoming independent from work. It doesn’t necessarily mean retiring, or stopping work. In fact, most people who achieve financial independence continue to work in some form or other, often on something that is meaningful to them.

Wealth mastery actually has two more stages after financial independence:

Financial freedom involves accumulating enough capital to provide you with sufficient income to live the lifestyle you desire, without having to work again. And absolute financial freedom is when you feel certain that you can do virtually anything you want, whenever you want, wherever you want, with whomever you want, as much as you want.

What you are probably realising as you read this is that the goal here is income without having to work. It’s not about having enough money to just buy everything you want. A new car purchase can be broken down into monthly payments, as can a new home. Kids school fees are paid on a quarterly / annual basis. It’s much easier to break your ideal lifestyle down into monthly payments, rather than a list of what you want and what it costs. The income to cover your lifestyle of choice could come from investments, property, royalties, a pension, or any combination of these things.

The key is to work out what is the monthly income you would require, and from there calculate the critical mass amount you need to accumulate to cover this. Once you get there, you need to know how to generate that 8% return without taking too much risk.

What is the total amount of capital you would need to be independent from work?

Goal Setting Part 3 – Financial Vitality

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Moving on to the third installment on setting financial goals, based on Tony Robbins “Wealth Mastery”, today we will look at Financial Vitality.

You have achieved financial vitality when you have accumulated a mass of capital that, invested at an 8% rate of return, provides you with enough cash to meet the six goals of financial security, plus the following three additional financial goals, without having to work again unless you want to.

  1. The ability to provide for your children’s education.
  2. Providing for basic entertainment needs.
  3. The purchase of new clothing, or one or two reasonable luxury items.

Obviously the big one here is children’s education, and it will require some research in order to understand the numbers on this goal. Here’s a little date that may help:

For school, Santa Fe Relocation Services website has a great overview of the cost of international school in Japan here. As a minimum we are looking at JPY 2,000,000 per year.

Higher Education costs will of course vary from country to country. There are some useful numbers in this article. Education costs are rising every year so you will need to keep updating your research but currently, including tuition, room and board, you could be spending somewhere between $20,000 and $40,000 per year.

What is the total amount of capital you would need to accumulate to achieve financial vitality?

Goal Setting Part 2 – Financial Security

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Continuing our series on setting financial goals, based on  Tony Robbins “Wealth Mastery”, today we will look at the second milestone, known as Financial Security. People have varying definitions of what it means to be financially secure, which is fine. However, if you are not sure how to define financial security, perhaps the following will help:

Financial security is not just a matter of job security or income. In order to be truly financially secure you need to accumulate a critical mass of capital that, invested at an 8% rate of return, provides you with enough cash to meet the following needs forever, without having to work again unless you choose to:

  1. Monthly mortgage payment on your home until it’s paid off (or otherwise your monthly rent)
  2. You and your family’s food needs each month
  3. All utilities
  4. Transportation needs
  5. Insurance
  6. Taxes

We are using an 8% return here based on a diversified, growth-oriented asset allocation. Feel free to change the annual return to fit your expectations.

Go ahead and calculate how much you need for each of the six categories above. If you don’t know the amount for each of these monthly expenses, then that is the first job. You can’t have a target for financial security without understanding these basic numbers.

Here’s a simple example:

  1. Mortgage: $1,200
  2. Food: $330
  3. Utilities: $360
  4. Transportation: $280
  5. Insurance: $320
  6. Taxes: $460

In this case the monthly total is $2,950, so annual is $35,400. That would require capital of $442,500 @ 8% return.

Now calculate how much capital you would need to be financially secure.

 

 

Goal Setting – Financial Protection

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We’ll spend the next few posts looking at various milestones in the financial planning process, and start to understand exactly what you need to have in place for each stage. I am going to borrow heavily from Tony Robbins “Wealth Mastery” here as he has done an incredible job of helping people get clarity on their financial goals.

Today we’ll start with Financial Protection. This is the basic minimum goal for everyone. The idea here is to be absolutely certain that you and your family are protected, no matter what life may throw at you. You want to financially bulletproof yourself and your family against sickness, unemployment, an economic downturn or whatever else may lie in wait.

You have adequate financial protection when:

  1. You have accumulated an emergency cash reserve large enough to cover your basic living expenses for a minimum of 3 months and up to 24 months, depending on your needs. If you lose your job tomorrow, you need to be able to cover these basic expenses for as long as it takes to find new employment. If you have a very secure job or highly marketable skills, you may be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable. Write down the actual amount of money you need for your emergency cash reserve.
  2. You have obtained income protection insurance to protect yourself and your family against long-term sickness or disability. The amount of insurance you need is directly related to the amount you already have saved. Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost. Write down how much income you would require per year if you you were disabled and unable to work ever again from tomorrow.
  3. You have at least obtained basic life insurance to provide for your family if you were to pass away. Even if the amount of cover is small, try to at least meet your family’s basic income needs. If your family needs a minimum of $25,000 per year to pay the bills, then look at $500,000 in cover. The $500,000 invested at a 5% return = $25,000 per year. Go for a simple term life policy and set the term so it expires when your youngest child will become financially independent. Write down the amount of life insurance required to cover the basics for your family if you were no longer around.

Loss of income due to job challenges or long term illness are the main causes of economic trouble for families. If your choice is to make the first contribution to a retirement plan, or pay the first premium on an income protection plan, the latter is going to be far more valuable if you have an accident or illness.

Cryptocurrency Trading Basics

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Having written a couple of posts on Bitcoin and how to protect yourself when trading / investing in cryptocurrency, I thought I would share some basic information on the trading side. Please don’t expect any high level technicals, trading charts or buy / sell recommendations; I’m still learning this myself. I bought Bitcoin around May last year and have been holding it ever since. I have no intention to sell it in the near future.

However, the volatility in crypto makes trading hard to resist. I started trading in January this year on Quoinex, a Japanese exchange. Quoinex ticks all the boxes for security that I mentioned in my previous post. It also has its own cryptocurrency named QASH, along with other well-known tokens such as BTC, BCH, ETH and XRP.

So, here are some basics to get you started, based on my experience so far:

Select an exchange – are you going to trade in Japan or overseas? See my previous post on how to protect yourself when selecting an exchange.

Account opening – The initial application involves filling in your basic information online. For Japanese exchanges this may require some Japanese language ability. You will need to upload a proof of identity and in some cases a proof of your residential address. In Japan, the exchange verifies your address by sending a postcard by registered mail that you have to sign for. You should also set up two-factor authentication to protect your account. This involves downloading an authentication application such as Google Authenticator to your phone and pairing it with your account.

Deposit – If you are depositing FIAT currency you will first need to register your bank account details. Once these have been approved, you can then create a funding request. Then you follow the instructions to wire money to the exchange. If you are depositing Bitcoin or Ethereum you will create a funding a request and then follow the instructions to transfer BTC / ETH to your exchange account. If you are planning to send a large amount it is a good idea to do a smaller test transaction first and make sure it arrives safely.

Buying and selling – Once your account is open, verified and funds have been deposited, you are ready to trade. If you are new to this I would suggest starting small while you get used to the trading interface. The basic orders you will use to begin with are market orders and limit orders. A market order allows you to buy / sell at whatever price is available at the time. A limit order allows you to specify the price you want to buy / sell at and matches you with bids / offers at that price.

The first thing you should learn how to read is the Order Book. This shows you a real time list of bids / offers on the exchange for the particular token you are looking at. This gives you a picture of how much is being traded at the moment and at what price. You will see two prices here: the bid price is the price that traders are willing to buy at right now, and the offer price is the price traders are willing to sell at.

Be very careful using market orders. Cryptocurrency is extremely volatile and the price can move considerably in a matter of minutes. Just because “X Coin” is now trading at 100, it does not mean your order will get filled at that price, particularly if it’s a large order. You may get partially filled at 100, and then the rest of your order gets filled at all kinds of different prices. Some new traders have had nasty shocks, finding that they have just bought at a much higher price than they expected.

Limit orders are much safer. With a limit order you can specify that you want to buy at 100, and your order will get filled whenever other traders offer to sell at that price. Unlike stock accounts, where typically limit orders are “good for the day” unless you specify otherwise, crypto limit orders are good for as long as you want to keep them. This is particularly useful if you don’t have all day to watch the markets. You can select the price you want to buy or sell at and come back later to check if your order has been filled or not.

Margin trading – most exchanges offer the option of using leverage. Essentially you are borrowing money from the exchange to increase the size of your order, and taking on significantly more risk in the process. Given the volatility of crypto markets I would advise extreme caution with leverage. Personally I don’t use it at all.

Withdrawal – once you are done trading you are free to withdraw your money from the exchange. Depending on the exchange, it can be sent back to your bank account in FIAT currency, or you can transfer BTC / ETH back to your own wallet. Remember that coins left sitting on an exchange are at risk of hacking and theft. Also note, particularly for traders in Japan, that a withdrawal creates a taxable event. Make sure you are aware of this before you move money or tokens.

Tax – I will talk about Japan in particular here. As noted above, making a withdrawal (which includes transferring tokens to another wallet outside Japan) creates a taxable event. Crypto gains in Japan are treated as miscellaneous income and you will need to declare them and pay tax at your marginal rate. For high earners this can mean up to 50% tax on gains. Calculating the profit itself is no easy business. This post provides a useful guide in English. I am already aware of one company in Japan that will assist (for a fee) in calculating cryptocurrency gains. I’m sure we’ll see more companies like that spring up in the near future, along with applications linked to exchanges to make the calculation easier.

I hope this helps people with an interest in crypto trading to get started. As always, I would stress that cryptocurrency trading carries a high degree of risk and you should only trade amounts commensurate with your knowledge. Start small and be prepared to make mistakes you can afford.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

50 Cent and the Art of Being Wrong

 

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I’m sure you noticed that last week saw a sudden return to volatility in markets. As discussed in our 2018 Investment Outlook, this kind of correction was long overdue. The one thing we didn’t know for sure was when it would happen.

Which leads us to a major lesson in investing, taught this week by 50 Cent. (well not that 50 Cent…)

Nomura apologizes to investors burned in bet against “fear index”

The mysterious trader nicknamed ’50 Cent’ made $200 million last week as the market blew up

The articles above show two sides to the same trade. After a long period of almost no volatility in the stock market, Nomura managed to convince investors that the status-quo would continue. The chart above, plotting the inverse of the VIX volatility index, essentially shows what happened to those investors last week.

Meanwhile, the trader nicknamed “50 Cent” spent the last 12 months being expensively wrong on his bet on a (let’s face it, inevitable) return to volatility. Wrong that is, until he was right and made a profit of some $200 million.

The lesson here, of course, is that when things are good (stocks hitting all-time highs and volatility low), it’s easy to get caught up in the fervor and keep buying. It’s much harder to realise that things can’t go on this way forever, but not know exactly when they will come to an end. You will note that “50 Cent” did not make this bet a month ago. He started acquiring large amounts of call options over a year ago. He didn’t know when he would be right, he just knew he would be.

Now this is a financial planning blog not a trading blog, but the lesson is still valuable. Those Nomura clients aren’t professional traders, they are regular people. It’s likely that many of them did not realise how much risk they were taking. However, if stocks are at all time highs, you probably shouldn’t be betting the farm that they will keep going higher. If another asset class has underperformed for the last few years, that doesn’t mean you should write it off forever.

It takes a mixture of common sense and courage to go against the crowd, especially if it means you might be wrong for a while.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.