Staying on the FIRE Path

One of the greatest challenges of investing is keeping the long-term plan in sight. If you are like many investors who are on the FIRE path, then you are probably reading blogs on a regular basis, watching financial TV shows, listening to podcasts, etc., to keep abreast of things. Constantly submersing yourself in media is a recipe for the fear of missing out (or “FOMO” as the kids call it these days). However, keeping your long-term goal in view will help you to properly avoid these fears and keep you on the FIRE path.

Over the past few years I’ve seen a number of hot topics, and seen a lot of people make quick money. Two key areas that have constantly crossed my path have been bitcoin (or any coin or ICO based off of blockchain or some derivative), and marijuana stocks. I have read about many folks making tonnes of money off of bitcoin, and when I overheard someone who works at my local cafeteria talking about it—and how she leaves her computer on all the time to mine bitcoin—I knew that bitcoin had hit the mainstream.

Many of my friends also ask me about marijuana stocks. I personally know of at least one person who made over 100x her money by buying penny stocks in the marijuana sector a few years ago, and those stocks are north of $5.00. If you buy for $0.10 and sell for $5.00 you’ve made a 4,900% (yes, four thousand nine hundred percent). To rub salt in my FOMO wounds, she put the money in her tax-free account, which means she walked away with not having to pay any capital gains taxes.

My view is that folks who make tonnes of money off of early trends/hype such as bitcoin or marijuana are either incredibly patient, have a very strong stomach for the potential of losing money, or are incredibly stupid. Of course, one view is that you should always have “play money” for your investments. E.g. if you say that you’ll spend $100/year on any stock you want, you can probably have some fun playing with penny stocks or bitcoin. Heck, you may make a hell of a lot of money. However, for the most part I see a lot of people being sucked into hype because they do fear missing out on the next big thing, on the next “dot com” craze, or some other fad.

For myself, I have a long-term plan, and to support that goal I’ve got several goals and sub-goals, to help keep me on track. Of late, one of my tactical goals is to improve my asset mix. As I mentioned in my previous quarterly update, my focus over the next six months will be to increase my real estate exposure, which is just over 10%, a far cry from my nominal target of 20%. I consider myself disciplined in that I have an investment strategy at hand that forces me to avoid things like bitcoin and marijuana stocks (however, I have been toying lately with allocating 0.10% of my portfolio towards “fun stocks”, which would open me to up being able to invest in anything just for kicks).

However, even when ignoring hype stocks, by my listening to podcasts, reading, and compiling The Dividend Gangster dividend list, I have been exposed to several interesting companies. For example, one company which recently caught my eye is MTY Food Group Inc. (covered in my July 20, 2018 dividend update). The company recently agreed to purchase sweetFrog Premium Frozen Yogurt. The firm also has a fairly solid (albeit short) dividend history with some consistent increases, and depending on the valuation model it is may be considered undervalued. Seeing companies like this ignites a FOMO reaction, and makes me wonder if I should buy some shares of MTY to get in on the ground floor before it shoots up even higher in value, or makes its next dividend increase.

But it is times like this when discipline and keeping your eyes on the long-term goal—sticking to your plan—is most important. I could certainly go out and buy some MTY next week when I make my bi-weekly stock/ETF purchases, and buying it would certainly satisfy the itch of adding another company to my portfolio, and a potentially strong dividend player at that. When I look back at other companies I could have purchased “for a steal” (e.g. I was originally looking at Lassonde when it was $100/share, and it is now north of $200; or Canadian Tire at $90 and it is now north of $160) but didn’t bother, I am reminded of opportunities I missed out on. That said, purchasing common equity would push me further away from my tactical goal of re-balancing the portfolio by building my real estate exposure.

The simple reality is that capital (for most of us, that means plain old money) is a limited resource. To quote one of my professors, strategy is the “allocation of scarce resources”. Within that context, strategy in investing is the allocation of scarce capital, i.e. the money you have to spend. There is only so much money to go around. And when I view my portfolio in that context, the need to balance my portfolio to reduce overall risk by sticking to my target allocation outweighs the need to scratch the investing itch by finding a new company to add to my holdings.

So, when friends and peers ask me about a hype stock (bitcoin, marijuana), or even a non-hype stock (should I buy some BMO for my portfolio?), my first question back to them is, “What are your long-term goals?” If a stock—hype or otherwise—makes sense to add to a portfolio, by all means, do so. But only if it makes sense. Buying to follow the crowd because you’re sacred of not making the quick money is one of the furthest things form investing strategy I can think of.

Onwards and upwards!


The Nine Year Plan

I’ve come to the conclusion that I hate work.

Well, let me rephrase that. I don’t hate work. I actually like work. I like the people I work with. The work is somewhat interesting, and occasionally challenging. But, I hate the idea of the structured daily grind, the rat race, the nine-to-five, whatever you want to call it. I also have a lot of side projects I’d like to work on, but with the newest edition to our family, I never have time for side projects. I work all day, come home, handle nightly duties (feeding, bathing, housework, paperwork, etc.), crash, repeat. On weekends I try my best to give my partner some time off from babysitting, and the rest of the weekend I spend time taking care of other errands and what not. In short: I spend so much time supporting life, I don’t have a life.

Now, don’t get me wrong.. This is all natural for me, at this stage in my life. A new family, a steady job, paying off car, house, condo, etc., all means that I have to make some sacrifices. Unfortunately, those sacrifices are things like pulling together a portfolio to participate in the annual Contact Festival, finish work on PART so that it is in a state that can be used by the public (truth be told I’ve used it for managing my investment portfolio for a few years now, and it works great), and some other side projects..

And for those reasons, I hate work.

So, what to do?

I’ve been crunching numbers, and mulling over what would be realistic goals, and pulling together my vision for my financial future. To that end:

  1. Retire from full-time work in 9 years, working at most 6 months out of the year
  2. Have an average before-tax salary of $100,000

There, one vision, two goals. As I said, I don’t mind work, but I want time to do my own things. And having six months of free time every year, will certainly afford me with the time to work on those things. The assumptions baked into the above:

  1. The $100,000 average before-tax salary will naturally adjust by inflation
  2. Any debt load I have in 9 years will be covered b the $100,000 salary, with enough to have a comfortable lifestyle

To accomplish those goals s going to take some fancy financial engineering. One of the biggest logistical challenges is that the bulk of my investments are tied up in either my LIRA or my RRSP; this means that any income and/or gains from those investments will not be available to satisfy goal #2. My non-RRSP/LIRA funds are relatively minimal at the moment: the past few years I have shifted many investments (primarily US companies) into my RRSP to take advantage of the zero withholding tax Canadians have when they hold US investments in registered accounts.

So, I am essentially starting from ground zero. If we do some quick back of the envelope math, to generate $100,000 in income at an average yield of 4% (a number I literally pulled out of the air, but it is fairly trivial to find reliable ETFs and/or individual companies to pay an average 4% yield) would require $2.5million in capital: $2,500,000 x 4% = $100,000.

Luckily the entire $100,000 does not have to come from investments. Up until recently I was a Project Management Consultant, and as such I still have my corporation. If I were to go back to project management consulting, it would be a fairly easy task to pick up at least one six month contract per year. If we do some more back of the envelope math, even at a very low hourly rate of $70/hour (which is the low-end of project management consulting rates in Toronto, in the finance sector), working six month yields:

Days per Week 5
Weeks per Year 26
Hours per Day 7.5
Total Hours 975
Hourly Rate $70
Total Revenue $68,250
Less CPP Contributions $969.15
Net $67,280.85

A prudent decision would be to take out the $50,000 salary I need and leave the other $17,280.85 in the corporation “for a rainy day”; an added bonus!

So of our $100,000 target, there is now $50,000 remaining. Looking at the March results, I am currently generating approximately $1,000 net annual passive income that is not locked into a registered account; this leaves $49,000. Generating that much passive income is not an impossible task, but it is a daunting one: how to generate $49,000 in annualized income in 9 years? This is a classical risk-reward problem: the more risk you take on, the higher your potential reward.

If we use the benchmark Canadian Couch Potato Returns from the Couch Potato website, the balanced portfolio has a 10 year CAGR of 5.38%. $49,000 in passive income at 4% yield is $1,225,000 in capital required. At 5.38% CAGR, that means we need $765,000 today, so that it compounds at 5.38% over nine years to result in capital of $1,225,000. Regrettably, I do not have $765,000 lying around.

Some other considerations:

  • I am gainfully employed at the moment at a major Canadian company; assuming I continue to be employed, my salary will go up each year (which I can redirect to investing), and I can continue to participate in the company’s employee share ownership plan.
    • The plan gives me an instant 50% through the company’s match (i.e. for ever $1.00 the company kicks in $0.50), so I am making huge gains.
  • Who knows where the housing market will be in 9 years? We may sell off our property and become renters: even after paying rent, $100,000 in pre-tax income will be more than enough, assuming that the relationship between $100,000 in pre-tax income and rents remains constant. I.e. if I were making $100,000 right now, I could still afford to rent. Assuming that the $100,000 inflation-adjusted in 9 years is enough to cover rent inflation-adjusted in 9 years, I would still be okay

So while I do not have the capital now, there are options available such that in 9 years I can fulfill my vision.

What are your thoughts? Knowing you require $49,000 annual income in 9 years time, what would you do?