Creating Routes

Creating your own route of investments Part I

My grandparents went throughout their entire life working for the same company, as regular employees. They never learned how to invest. Instead, they were just worried to bring food to the table. For them, reaching 65 years old to start receiving the social benefits was a synonym of reaching freedom.

In other words, they put all their economic plan and hopes in one basket: The government social security.

Maybe my grandparents’ lack of financial literacy was related to a lack of formal education. But even with a higher level of education, my parent’s route was no different.

My family had a mindset of not learning how to invest. They always thought the government would take care of them once they grew old. This mindset was fed by the fact that Venezuela (my home country) was, from the 1950s to 1980s, the superpower of Latin America.

Sadly, as you know, right now Venezuela has the highest inflation in the world (more than 1000% annually).

Now, my parents and grandparents find themselves struggling economically. They are able to make ends meet thanks to the money they receive from their sons living abroad.

Personally, I don’t want to find myself in the same position as them. And I know neither do you.

Before I share with you some of what I do know, I want to talk with you about what I don’t know:

  • I don’t know what investment suits you best, but I do know that any smart investment is better than not investing at all.
  • I don’t know if the S&P 500 is going to drop or raise 500 points tomorrow, but I do know that, on average, it has had an annual return of about 8%.
  • I’m not a financial advisor, I’m just a recent MBA graduate interested in sharing with you some basic concepts about investing.

Educating ourselves first

One of the biggest pitfalls of school and universities is that they don’t teach us how to invest or how to pay taxes. So we have to start educating ourselves before it is too late.

Is by teaching, as I intend with this blog, that you really learn something. For instance, sharing useful information with you helps me to maintain the momentum of wanting to learn more about this world.

However, even if you study hard, there will be financial assessors that know better than you. Despite that, educate yourself first. Doing so helps you focusing your questions and assess that person’s competence.

Time value of money

Money today is worth much more than money tomorrow.

Let’s imagine that a company goes bankrupt and they have to liquidate their building. An asset that normally costs $1.000.000 today is available at $100.000, what a deal!

However, yesterday you decided to buy a really nice Porsche for $120.000, so you no longer have those $120.000 in cash in your bank. You have lost liquidity (important word in the investing world). And, with that, you have lost the biggest deal of your life.

When you choose an investing route, you let another go. The money that you could have earn if you had chosen the other route is known as opportunity cost: the loss of other alternatives when one alternative is chosen.

Having a big lump of money reposing in your checking account is pleasant because you know the money is going to be there when you need it, in other words, you have full liquidity.

However, with that money reposing in your bank account, you are losing many investment options out there, just for the sake of having liquidity. In this case, the opportunity cost is the money that you could have earned if you had invested.

With every day that passes, the opportunity cost grows higher. For instance, if you had invested in Facebook’s stock, you could already have earned some cents (neglecting the associated risk).

For that reason, the money today has more value than the money tomorrow.

You can use money to generate money. If you miss the chance of investing it, you are not capitalizing on the time value of money.

Getting to the nitty gritty

You can choose from tens of thousands of investments: stocks, bonds, mutual funds, exchange traded funds (ETFs), and other investments. To keep it simple, in this first blog post about investments we are going to cover stocks and bonds.

Companies finance themselves through bonds or stocks.

  • Stocks: The Company gives you a piece of ownership (equity) in exchange of money. Being a stockholder means owning a piece of a business.
  • Bonds: The Company issues debt. In this case you lend the company some money. In return, the company is obliged to pay you, in the future, the borrowed money plus an interest. Being a bondholder doesn’t mean owning a piece of a business.

With every investment, it comes an associated risk. Let’s see what happens if the company goes bankrupt:

  • For bondholders: The company wouldn’t be able to repay you the borrowed money.
  • For stockholders: Since the company would be worthless, your stock would cost $0.

Since the company is obliged to repay debt first (If the company had any money left), bondholders have less risk to assume, compared to stockholders. This is one of the reasons why stocks have, on average, a higher yield than bonds.

Another reason is that when you buy a bond, you already know when you’re getting back your money, and how much.

When you buy a stock, you don’t know at what price you will be able to resell it in the future.

Uncertainty about the future outcome makes also stocks riskier than bonds.

All things considered, the stock market have shown that, on average, those willing to take the risk on buying stocks are better rewarded (higher return) than bondholders.

In a nutshell, if you are willing to take risk, prefer stocks over bonds since, on average, it will bring a bigger return.

This investing route doesn’t stop here, this is just the beginning of our journey.

Stay tuned!

How to redefine your identity through your habits

Repetitive actions make your identity. In that way, little daily habits sum up in the long run, molding your identity.

For instance: If you wake up early every day, then you’re a morning person. If you work out regularly throughout the week, then you are an athletic person. If you yell at your kids every day, then you’re a bad parent.

In this article, I will share with you a frame of reference to raise your awareness of your own identity, and to mold it into what you want to be.

I encourage you to personally apply these guidelines in your own life, in your own way should you choose to.

Make your good habits overweight the bad ones

“Once a cheater, always a cheater” (Any “Friends” fan here?)

If you don’t go to the gym one week because you have the flu, it doesn’t mean that you no longer are an athletic person. (Although you probably are going to lose some muscle for being ill.)

That one week doesn’t tip the scale when weighed against all the workout weeks.

Every now and then there will be a more urgent and important task getting in the middle of your routine.

For instance, if your arrive home and find your dog choking with a toy that he found in your son’s room, I’m sure you are going to run to the veterinarian without even feeling guilty of skipping that one-hour meditation that you have planned. 

Even if you skipped a one-hour meditation session that time, you still are mentally healthy. And this can be told by weighting all the meditation sessions that you did against the ones that you skipped.

Don’t let random events define your identity

Improve every day by 1%

Atomic Habits from James Clear taught me that if you improve by 1% every single day, at the end of the year you will be 37 times better:

Giving every day your 101%

This is very hard to internalize because we tend to think the improvement is linear, but as the equation shows you: It’s exponential. This means that you won’t see the results in the short run because the increment is almost unnoticeable.

Image taken from the book Atomic Habits from James Clear

“Patience is bitter, but its fruit is sweet.” Aristotle

Improvement, even if not visible, is compounding just one percent at a time. When the time comes, when the new habits have molded your identity, you will embrace the beauty of delayed gratification.

Don’t rush it

Start with the end in mind

Let your better self in the future take the decisions for you. He/she is older and wiser, so he/she knows better.

Waking up late this Saturday, and spending an entire afternoon watching Netflix sounds like a pretty good deal to your current you. The one that has been locked 10 hours every day in the office last week. So, you think you totally deserve watching The Money Heist, from start to finish, because you worked your ass off.

But, would the future entrepreneur that you want to become, be happy with a decision like that? What would that entrepreneur do if he had 48 hours at his entire disposal? Maybe he would start that market research that he has been postponing because he knows that during the week he won’t be able to do it.

Do you remember when you used to have school/ university exams? What did you do if you wanted to pass the exam? You studied what was needed, just the basics. However, what if you wanted to get good grades? You studied even harder, you set aside non-important tasks to take some time to study.

With that good grade in mind, you were unstoppable and wiser to decide what was a waste of time or not.

I invite you to let your future-self decide what to do tomorrow. If you feel that you advanced towards your goals more than today, I invite you to do it for one entire week.

The decisions taken by your future-self doesn’t have to be life-changing. Even with a subtle 1% daily improvement, you’re going to start having the power to build your own identity.

Sentence to take home: Don’t let stochastic events define your identity, let your future-self define it.

Financial Independence: Investment or side hustle?

“Bip-Bip… Bip-Bip… BIP-BIP…” The soulless alarm indicates that is Monday again. Therefore, the work week starts over again.

But this time, it is different: You get to decide whether staying under the puffy blankets or getting up to take a shower. You know that you have the possibility to work where and how you want to because your investments are passively working for you; Generating enough passive cash flow to cover all your bills.

For me, this is being financially independent.

Being financially independent doesn’t mean that you no longer work as an employee, it means that you can decide whether to work or not. If you really love you job, and you wouldn’t change it, congratulations: You’re financially independent!

However, if you don’t see yourself having a regular 9 to 5 job by the age of 55, you should start looking to generate passive cash flows that allows you to reach financial independence.

WARNING: In case you live paycheck to paycheck, I recommend before you continue reading to:

  1. Restructure your finances.
  2. Save at least 3 to 6 months of your monthly expenses.

If you’re already there: Greetings! You have made the first step towards financial independence.

Although we are going to decide whether to focus our energy on investments or side hustles, it’s EXTREMELY important to highlight that the combination of both is the best.

Still, knowing what to prioritize (investment or side hustle) is going to help us towards our financial independence goal.

The magic 4% rule

Based on historical investment data, a financial rule of the thumb says that: By withdrawing just 4% of your entire investments each year in retirement, you won’t incur in a risk of running out of money. 

For instance, let’s suppose your annual expenses were $24.000 ($2.000 each month). If you managed to have a $600.000 investment portfolio, hypothetically, you could withdraw $24.000 (4% of $600.000) every year for the rest of your life.

Theoretically, you could count on the yearly 4% of your investment portfolio, forever.

Building cash flows towards your future

There are 3 options (usually they complement each other) for increasing the monthly available money for your retirement:

  1. Side Hustle: Leftover from your salary could not be enough. Capitalizing on side skills during your free time can be beneficial for your future.
  2. Higher yield: The bigger the interest rate of your investment, the better for your future cash flows. However, Be careful with the risk associated with greater yields though.
  3. Wait longer before start taking advantage of the 4%. In this case, you could amass a bigger lump of money.

Some considerations

  • The numbers shown in the graphs of the following section are realistic for someone living in Western Europe.

However, the goal is not to look at the numbers, but to identify where to focus your energy: Whether it is in side hustling or investing.

  • The yield of the investment studied herein is a hypothetical one. To make it realistic, the interest rate is based on the average yield that the S&P 500 has had throughout the years.
  • The values of disposable money highlighted in the graphs represent monthly cash flows that allow you to live comfortably in countries like Portugal, Panama, Ecuador, or Indonesia. (For more information related to cost of living

Running the numbers

John, our hypothetical average European worker, is 26 years old and works as a regular employee.

He is able to put aside $500 on average each month throughout the year. Then, he uses this money to invest in his investment portfolio with a 7% yield.

John knows how to capitalize on his language skills, so he teaches English 20 hours a month, producing a $200 extra cash flow.

From those $200, he spends $100 going out and saves the rest. Being able to save $1200 extra a year ($100 x 12 months) to later invest it in his investment portfolio.

In the end, John is able to invest $7200 each year.

Let’s take a look at the numbers, on a monthly basis.

If John is patient enough, he will be able to retire by his 58, taking advantage of his “eternal” monthly cash flow of $2.787 (4% of $836.088 divided by twelve months).

Savings from income don’t change throughout the years because as John’s salary increases so as well his expenses. 

But what happens if John studies how to invest better and is able to rise the interest rate from 7% to 8%?

The disposable monthly cash flow increases by $625 (22,4%), from $2.787 to $3.412. Not bad for just 1% yield increase.

Let’s suppose that John doesn’t want to study how to invest better. That is too much of a burden for him.

However, he would like to retire with an “eternal” $3.412 monthly cash flow. So, he wonders: -How much more money should I save from my side hustle to reach that figure?-

John would have to work 2.53 times harder on his side hustle to compensate the 1% yield increase.

He thinks that putting $253 aside from his side hustling is too much of a burden. Instead, he would rather wait a couple more years to let the money pool grow.

How much longer should John wait to compensate the 1% yield increase or $153 monthly extra saving?

Working 2 or 3 more years would translate in an “eternal” monthly cash flow of $3.240 or $3.491, respectively.

Drawing conclusions

In the last graph we can see how the phrase “Patience is bitter, but its fruit is sweet” from Aristotle comes in handy, financially speaking.

In case you really love your side hustle, or if it is scalable, focus on it and let the average market yield works on compounding your investment.

If you are uncertain about where focusing your energy, go for learning how to invest.

The second graph showed how powerful that 1% yield increased turned out to be. Imagine if you could rise it even higher, the sky’s the limit. However, remember that the higher the reward, the higher the risk.