Year ends are always a good moment to take a minute and look back how the past year has been. Not only on a financial basis, but on a happiness level as well. Last year has been characterized by lots of travelling, having some academic headwinds but overcoming them, buying a first apartment and enjoying life in general. I can conclude that despite some difficulties, I have been happy in 2017.
But now, how have the financial markets behaved towards me and was I able to meet my goals?
1. Invest €26,000 in the stock market.
–> I’ve been able to pour €31,100 into the stock market. This is higher than foreseen and due to lower expenses.
2. At least €6,000 in an index tracker (i.e. S&P500 or All-World).
–> Not completed. However I would like to own more trackers, I do not feel comfortable paying the expensive valuations for the majority of stocks. I can’t really call this a failure because everything is circumstantial in investing.
3. Receive €2,250 in dividends.
–> I’ve received around €3,150 in dividends. This is a rather big difference due to exceptional capital distributions of Resilux and Symphony International. Adjusted dividends would have been €2,500 so still beating the estimation.
4. Reach a net worth of €125,000.
–> Crushed this goal. Mainly because of major subsidies and a parental gift. Leaving out the parental gift and checking the amount that I worked for (or found a way), the net worth would come in at €239,000. Excluding everything except money from my job, my net worth would come in at €129,000.
5. Read at least 5 books about management, economy, finances, stock market…
–> Got stuck at 3. I’ve enjoyed ‘Rich Dad Poor Dad’ most. Currently I’m still reading 2 other books but it’s taking ages. After studying and reading research papers a lot, I just don’t feel the need to read another hundred pages. I’m already glad that I’m giving reading a shot, knowing that it is not one of my favorite hobbies.
In hindsight, I have enjoyed a pretty good 2017 on both a financial and ‘living’ level.
From an investor’s point of view, there are a couple of things to avoid. 1) taxes and 2) broker costs. This is where options come into play very handy. If you live in Belgium, you’re probably walking like the Hunchback of Notre-Dame due to all the heavy taxes onto our shoulders. Enter: options.
A normal transaction (<€2500) of stocks (turbo’s as well) would cost me €7,25 broker fees for the Brussels Stock Exchange and slightly more for other exchanges (€10-something) + government tax of 0,27% of the invested amount. So let’s assume we buy 100 stocks at €20 each, this results in €2000 accompanied by €12,65 in costs. Now the price goes up to €25 and we decide to sell our position. This means we have to pay €14 (higher taxes). Eventually we paid €26,65 in broker fees and government taxes, reducing our total profit by more than 5% of the total amount!
Now, if we would have done the same by putting up an option construction, this would cost €2,45/contract. Let’s assume a buy and close so €4,90 in total. This makes a difference of €21,75 or almost a fivefold! Options are free of taxes. And now we are only calculating with relatively small amounts of €2,000 so imagine what €50,000 would be. I’ll skip the calculations, but a difference of around €300! These €300 can get you back and forth to Miami, just to give an idea.
Check the picture below to see how options work:
This is how it works in a nutshell. Now there are a lot of different option strategies of which quite a few are explained in this link: Investopedia Option Guide
It’d be double work to type this all over again. I will just review the option strategies that I prefer using. Note that an option implies 100 stocks!
Covered Call: Are you thinking about selling an expensive stock when it hits a particular price? Sell a covered call option. Let’s say you would want to sell Wal-Mart at $100 with deadline in June. This will give you an extra $4,50 a share so $450 in total. What’s your risk? If Wal-Mart goes higher than $104,5 then you would have less profits, however this is not true because you would already have sold them at $100. So in my opinion you’re only fucked when the price dips under $95,5 but then you can repeat the construction and still collect dividends in the meantime.
Naked puts: Here is the advantage that you can work on margin, you don’t actually need the cash. But beware!!! Know what you are doing, things can get bloody working on margin if it goes the bad way. Of course you don’t have to work on margin, but it can boost your results significantly. I do it, but not excessively. Let’s say you want to buy AB Inbev at price €95 but you don’t have the cash to buy 100 stocks. Sept18 puts @ €95 give an option premium of €8 so basically you would buy them at €87 if exercised. This gives some downside protection and you can profit from the movement of a 100 stocks. So as long as the stocks trades above €87, you’re making money. If the stock would dip below that point, you can roll the option (buy it back and sell it again at a lower strike).
Sell both a call and put: There’s probably a name for this construction, but I can’t find it. Let’s say you have your eyes on a stock that’s not particularly expensive nor cheap. In my opinion, Walt Disney is a good example. Trading today at around $110, I’ll use this price. Use different strikes, but same deadline. What I would do in these circumstances: sell 1 call @ strike 125, deadline sept18 for $2,70 and sell 1 put @ strike $97,5 deadline sept18 for $2,90. This results in a $560 premium. You make a profit if at deadline the stock is moving in between the $91,9 – $130,6 range. Note that this is quite a good spread for the range. The risk for this construction is that the stock suddenly makes a huge move. Think mergers, very bad results, fraud… So choose wisely about which stock you pick as underlying asset. In normal conditions, the stock price won’t go up or down that fast so the time factor in option price will decrease which means profit even if the stock price stays the same!
These are my most preferred tactics.
Options can be very profitable and have certain cost advantages but beware when working on margin and always know what you are doing.
I’d like to start this post with a quote from Conor McGregor fitting right in:
I’ll add a quote from Felix Dennis:
“Most people don’t want to be rich.”
At first, I didn’t fully grasp the meaning of the phrase. But, after some thinking, it actually is very true. Very few people have the dedication and persuasion to chase what they want. I see it every day in daily life. Things are too hard, people are tired, want to have fun or don’t want to put in the effort. No one will throw everything into your lap. Nothing worth having comes without effort. Sacrifices are unavoidable. Did you ever reach something awesome without hard work?
Research showed that 74% of the 18-34 year olds in Belgium does not invest. This is in my opinion the most interesting target group, as this lays the foundation for wealth and a maximum compounding effect. Of the remaining quarter that does ‘invest’, only 18% decided to go with stocks. The rest does put some money in mutual funds, bonds or low yielding tak 21-23 products. I was astonished by this numbers. This means only 4,68% does invest in money making assets with potential. Taking the whole Belgian population into account, this amounts to 9% which is still really low.
During my study time, there were a lot of people with higher grades than me. Not only because of luck, but mostly because they had a better understanding of the matter. So I would expect them to be good on the stock market as well, or at least have an understanding of it. Truth is: they don’t and it’s a missed opportunity. How is it possible that smart people don’t figure it out for themselves? Lack of interest, knowledge, scared?
But the actual point of this post is about finding a balance between investing and living your life. The thing is, I love the game of investing. However I do not think one should love investing to actually invest. Going with an all-world or s&p500 ETF might provide very decent returns as well with few to zero activity needed. Sometimes I’m having trouble between deciding to live in the now vs investing. I try to allocate as much cash flow as possible towards my stock portfolio and thus we meet the opportunity cost. I’m not a man who needs lots of stuff to feel good, but I do appreciate quality and soundness in products. When I’m considering to buy something I often compare the price to a stock. Last week I was looking at new shoes and the price was approximately the same as 1 AB InBev share. I preferred the 1 share above a new pair of shoes.
Normally I don’t have problems to restrain myself from buying items. What does make it a problem for me is if it could have an impact on my social life. Let’s go on Saturday to an adventure park, dine at a restaurant, continue the evening in the movies theater and finish with some cocktails. That’s all fun and games but in the end of the evening you’re €120+ out of the pocket. I do however not like it to refuse an evening out or say no to a social event.
How do you handle this problem? Do you make a weekly/monthly budget for social activities or events? Do you sometimes regret not being able to go out when the budget is zero, even though you do have cash available?
Stock prices are trading at high multiples, real estate is selling at expensive prices and bonds are not interesting at all. Precious metals are not that attractive for the longer term and cryptocurrency is just a bubble, right?
So, what to do with your money? To make it more interesting, what would you do when you were young again?
Imagine your somewhere in your mid-twenties and I’m giving you a budget of €250,000 that you are free to invest. To keep it simple, you don’t have to worry about a car, a house for your family or your future kids college money.
What investment paths would you take?
The purpose of this post is to get to know different people’s opinion on what to do with saved up cash. In my opinion, it’s always interesting to read plans or possibilities.
Accompanied by all the big enterprises reporting results, I can’t stay behind in reporting some numbers of course!
As the stock market has been rising lately, so did my net worth. However, there was an enormous rise in net worth. Why? This was due to 2 main factors: 1) subsidies 2) gift.
The subsidies are coming from the government linked to the apartment I bought. Long story short: this should be a little over €100,000. The gift I received came from my parents and was €75,000. Whether or not it is ethical to accept gifts, is another debate. My main rule of thumb was to not accept what I could not pay myself.
In the calculation of the mortgage, the intrest costs for the coming 20 years are already included. I leant €160,000 and the intrest costs are around €32,000 in total. I value the apartment around €320,000. There are some other costs involved linked to the mortgage, notary, administration… These are deducted as you can see above. I will still have some costs to furnish the apartment, so any frugal tips are welcome!
It’s gonna be hard to achieve impressive results in the future as my monthly cash flow will be reduced by around €800 due to the mortgage. However for every €800 I pay, €640 stays in my pocket and only €160 is paid for intrest over the years. Assuming an appreciation of housing prices in the future, this will help boost the net worth. This will hopefully offset the opportunity costs of not being able to allocate this money into the stock market.
– The only regulation for receiving the subsidies is to put your place of residence at the apartment for 20 years. As this does not prevent me from buying other real estate, I don’t consider it a dealbreaker.
–> Even without the gift I crossed the €250,000 mark on my own. This means I will have to put up a new goal.
– It took me more than 2 years of searching the real estate markets to find a unique deal like this. I consider the apartment both an investment and living opportunity. Some quick calculations showed that, hypothetically, even if I would never live in the apartment and pay taxes/maintenance every year, I would still end up with a decent profit.
Let’s assume you are convinced of the importance of investing and want to start. What are the first steps?
Pick a broker
There are plenty of brokers online. I would recommend to not choose for a classic bank because they will sell you their own products on which they make the big bucks. They also have the habit to (over)charge you for every fucking service. Yes, I’m talking about you BNP Paribas (amongst others). For instance, they charge money to receive and deposit dividends from companies on your bank account. Scandalous!!! As if Belgian people don’t already pay enough taxes on their dividends (30%).
I would suggest going with online brokers such as BinckBank, Lynx, MeDirect, DeGiro… Depending on your own wishes and requirements, compare the costs and services. I have accounts at BinckBank and Lynx. I like BinckBank for their fast & clear communication and easy to understand platform. Lynx is more complicated but allows in turn way more possibilities to trade. I would suggest Lynx for a more active investor/trader who already has quite some experience. Lynx is also better for option trading. Watch out for the ‘lending of securities’ (in Dutch: uitlenen van effecten). Brokers such as DeGiro use it often and try to lure you with some extra yield. However, these actions are in most cases not profitable from a risk/reward view and I avoid them due to high risks when things go south. If you would consider doing this, read all informations very well!
Where to put your money?
Depending on your own will and time, you can choose to buy individual stocks. This, however, requires lots of follow-up and research. Prepare to read annual reports and many more. This is in my opinion the most profitable way of investing if you know what you’re doing. I consider this active investing.
What about bonds? It depends, in times of high yields it might prove very smart to buy a couple of bonds. Buffett did the same in his old days. However in these days, with yields at extremely low numbers, it does not make sense for me. Unless you want to bet your money on the Nigerian government, you’ll have a hard time finding some good-yielding bonds.
Mutual funds? Often banks promote their own products, for instance mutual funds. This is a basket of different stocks in which you can invest with a smaller amount. I’m not a big fan of these funds. Fund managers and banks almost always pay themselves (very) generous remunerations (1-1,5% easily) and they don’t guarantee a higher profit than the index. These forms of active investing are underperforming the index in more than 80% of the cases. Buffett even dared the hedge fund managers to a risky bet in 2007; which they are quite guaranteed to lose.
See this link: Buffet’s bet
Trackers/ETF’s: the way to go? If you don’t want to invest your time in analyzing and picking individual stocks, then I would suggest you go down this road. ETF’s are a very cheap way of investing in an index and their purpose is to duplicate the index. Costs are way lower than those of mutual funds (0,20-0,40% on average) and they often outperform mutual funds and the average stock pickers over longer periods. You also have less worries about individual companies and the risks are more spread. Don’t expect 20%+ years over year but the average return is 6-7%. That’s not bad for basically doing nothing at all. This requires 2 minutes a month to buy additional shares.
Important: If you don’t need the dividends from ETF’s, opt for capitalizing ETF’s (‘Acc’ as abbreviation). ETF’s that distribute dividends have a ‘Dist’ tag. Capitalizing ETF’s keep the money inside the fund and this way you avoid paying 30% taxes on them. I prefer Vanguard or iShares to invest in ETF’s.
I’m a proponent of investing in American stocks. If I would have to pick a portfolio of ETF’s, it would mostly consist of S&P500 (at least half), All-World and Emerging-Markets. Pick ETF’s in which you strongly believe. This makes it more bearable on a mental level.
There are plenty of other investment possibilities such as precious metals, oil, valuta or cryptocurrency. I do not know enough about these products and don’t really see them as an investment so I stay away from those. If you do have the knowledge or firmly believe in them, don’t let me stop you.
Bogleheads is a very interesting website if you want a closer look to all possibilities in Belgium.
Keep your income high and the expenses low. Have the discipline to pay yourself first. Invest this money on a monthly basis or quarterly basis for example. Be sure to check how much transaction costs you have to pay. I’m paying around €7/transaction so I don’t buy in smaller numbers than €1,000. This way the transaction costs don’t take too much of my yield.
One of the mistakes I made was in my first month of investing. I transferred €7,000 onto my broker account and started speculating, hoping for some quick profits. It was the week before August 24, 2015 (Black Monday). It didn’t turn out that well and after 2 years I finally got to close some positions at a very small profit. After that life lesson, I knew where I wanted to go. Advice: don’t put all your money at once in the stock market! Today I’m very happy I started with only €7,000.
Even when the stock market goes down, keep on buying. Especially then. Your profits are made when you buy, not when you sell. From time to time, stock markets will crash. That’s life. However, they always bounce back up. It might take some years but they do come back stronger. Try to behave rational and look at the underlying strength and fundamentals of a company or tracker. Search for value (=/= price).
Analysts are not goddish. Sometimes I ask myself how some analysts arrive at their price target or recommendation because it makes no sense at all. For smaller companies, analyst price targets might be self-fulfulling prophecies so I don’t take them for granted. I believe they give an idea of the market sentiment on a particular stock and how the future projections might evolve. Do your own research before buying into stock. For research I base myself on previous results instead of future projections. Growth can have a price too, but without a solid history it is more speculation in my opinion.
As I mentioned in my previous post Great news, I took a rather big mortgage of €160,000 to pay off my apartment.
As a matter of fact, I could have paid cash for my apartment without a loan. So why didn’t I go down that route?
Return of stocks > cost of intrest onloan
My intrest rate is 1,89% fixed. Add up the accompanied costs of acquiring a loan and my total yearly intrest rate (costs included) should be around 2,20 – 2,30%.
However, it is not that hard to achieve yearly around 6-7% in the stock market. If you put in some more work, it can even go higher. So, given the high margin of safety, the choice was easily made. This way I can keep all my money in the stock market and keep collecting dividends.
The money I receive from my parents, will mostly go into the apartment for furniture, machines, painting… I expect to still have some cash left after that. Problem is that I had to promise not to buy stocks with the money from my family (they are quite opposed to the stock market, unfortunately). That cash can be put in a savings account to pay for apartment expenses while I can keep transferring my wage minus the mortgage in the stock market.
Another option would be to buy a second property and I will probably walk down this aisle if the current tax laws stay applicable. I would look for a studio/apartment up to €140,000 and rent it out. This would be a combined effort of paying an amount cash and getting another loan. The rent should cover the loan. This way I can optimize my tax form. I would like to achieve this by age 25.