2023
November 2023
As we approach the closing chapter of this whirlwind year, it feels like time is sprinting ahead, leaving less hair on my head and a trail of unforgettable events in its wake!
We’ve witnessed the emergence of new global conflicts, a reminder of the ever-shifting geopolitical landscape. Amidst this turmoil, a high-stakes dialogue unfolds between President (Dictator?) Xi and President Biden. Their efforts to smooth the ruffled feathers of international relations reflect the timeless adage: the more things change, the more they stay the same.
The financial markets have been a rollercoaster, reacting with to every news and noise item that we encounter.
With inflation now rolling over and on a declining trend, investors are looking forward to the end of the unprecedented rate hikes and possibly even some rate cuts next year. It seems we might have hit an inflection point wherein investors are now expecting that central banks will achieve a soft-landing for the economy, meaning that we avoid a painful economic recession.
With that in mind, we decided it was time to take a look at the recommendations we made through the multiple corrections in 2022 as to what ETFs would be suitable to pick-up (See posts on Twitter here and here).
Take a look at the quick table I compiled in Excel.
Aside from the bonds, which have had a nasty time overall, our picks did really well!
For context, if you had held these ETFs from the start of 2022 to today, you would still be down in absolute terms. So picking the time to buy matters. Even on the bond indices (AGG and ILTB), the losses are limited to single digits – which is very manageable!
There are a couple of points I wanted to highlight here:
1. Effective picking of beat-up sectors/stocks matters. It was just around this time my friends were coming to me and saying that please suggest anything other than tech. Guess what outperformed the most? Tech!
2. Selectively buying the dip helps. Buy & hold works in the long-term. What works even better is buying when the market is down.
3. Not panicking and not selling your portfolio in a down-market is crucial. Of course not all stocks recovery equally, so you need to know what you own.
As 2023 rolls to a close, we’re looking forward to an interesting next year. The future is unknowable, but with a reasonable investment strategy and a stable mind, you can certainly make a lot of money!
If you want more breakdowns like this throughout the year, shoot us a message on Twitter or drop an email. Your feedback helps us zero in on the content you find most valuable.
What We’ve Been Working On
We have developed numerous calculators on our site and our goal is to really become a one-stop resource for your financial needs. Please check these out and let us know if there’s anything specific you’d like to see.
 |
UK Income Percentile Calculator
Use this calculator to check how your income compares with others in the US. Also get some great stats on average and median incomes by age, location, and industry sector.
 |
Coast FIRE Calculator
Interested in retiring early and being financially independent? Check out our Coast FIRE calculator to help you plan out your journey.
 |
What is your magic number? Everyone’s thought about it right? Use this calculator to figure out how big your portfolio needs to be TODAY, so that you never ever have to show up to the office again.
How Much Money To Never Work Again Calculator
What is your magic number? Everyone’s thought about it right? Use this calculator to figure out how big your portfolio needs to be TODAY, so that you never ever have to show up to the office again
Thanks for reading! If you loved it, tell your friends to subscribe.
December 2023
Happy Holidays!
I hope this email finds you well and ready to unravel some investing truths that often fly under the radar. Here are a few thoughts that I thought I would share with you as they have crossed my mind recently:
1. The Intriguing World of Leveraged ETFs – Tread with Caution!
As the market inches up each day to make new records, many of us will be drawn to the high returns of leveraged ETFs. But beware, these instruments carry a unique set of risks.
A recent chat with a friend revealed a common misunderstanding about these products, especially concerning the 3x leveraged ETFs. Here are few points I listed out in a more detailed thread on X:
Volatility: A Double-Edged Sword: High returns come hand-in-hand with high risks. Volatility in these ETFs doesn’t just boost gains; it can significantly erode your returns over time.
A Short-Term Affair: Leveraged ETFs are akin to a summer fling – exciting but not for the long haul. Their design favors short-term strategies over a buy-and-hold approach. Unlike most of my other investment advice, do not hold these ETFs for the long run!
The Cost of Leverage: Remember, there’s no such thing as a free lunch in finance. Leveraged investing involves costs that, especially in volatile times, can eat into your returns.
Warren Buffett’s wisdom rings true here: “Risk comes from not knowing what you’re doing.” Make sure you’re fully informed before diving into these complex instruments.
2. The Grace of Patience in Long-Term Investing
The art of ‘buy and hold’ isn’t a one-size-fits-all, but when done right, it’s powerful. This approach shines at an index level, beautifully diversifying away individual company risks. In 2023, buy-and-hold turned out to be the best strategy – even better than all the technical analysis that is often hyped up.
Ironically however, investors find simple buy-and-hold investing to be tough!
A Morningstar study from mid-2023 showed that over a 10-year period ending in 2022, investors earned 6% on average compared to 7.7% returns that their respective funds generated over the same period. According to the study, “inopportunely timed purchases and sales cost investors about 22% of the return they otherwise could have earned had they bought and held.”
The study account for the timing of investor money inflows and outflows, so this is a more realistic portrayal of investor returns rather than simple theoretical calculations.
Just to make things doubly-ironic (is that a valid phrase?), according to the same study, investors in actively managed funds outperformed those in passively managed funds. While there are some uncontrollable factors that lead to this (timing of investors moving from active to passive), some of this is also down to investors trading in-and-out of positions or chasing returns.
As the famous saying goes, “Sometimes, the hardest thing to do is to do nothing.” This is the essence of strategic long-term investing, echoed by the likes of Howard Marks and Charlie Munger.
If you’ve got an advisor who helps you “do nothing” (i.e. not sell) through a downturn, he or she is likely earning their fees!
3. Zoom’s Nasdaq Exit – A Reality Check
Zoom was bumped from the Nasdaq 100 index as of this Monday (December 18, 2023). Zoom’s departure is a stark reminder that not all that glitters is gold. Once a market darling with sky-high valuations, its story raises important questions about sustainability and competitive advantage in a crowded market.
At its peak, Zoom traded at an obscene valuation (> 100x forward P/E). The valuation implied that Zoom would basically take over all forms of communication! Even without the benefit of hindsight, it was obvious that this wouldn’t be the case.
Additionally, even if the world were to remain in pandemic-induced lockdowns forever, Zoom’s offering was merely a “feature” instead of being a “product”. This feature was quickly incorporated by Microsoft in Teams and is available in other tools like Google Meet or through Discord and Slack.
The moral here is that valuations matter. Zoom could be a great investment if you bought it at 10x P/E, but at over 100x P/E, you’re very likely to lose your money!
Final Thoughts
Investing isn’t as easy as it seems. Balancing data analytics, news inflows, and emotional states is not an easy task! Or as Munger’s would quip: “It’s not supposed to be easy. Anyone who finds it easy is stupid.”
Your thoughts and questions are always welcome. Reply to this email, and let’s discuss!
Dive deeper into these topics with these hand-picked reads:
What We’ve Been Working On
Die With Zero Calculator
 |
For many, the idea of accumulating wealth is to leave a legacy for their loved ones. But what if you could strike a balance between enjoying your life to the fullest and ensuring financial stability? Enter the “Die With Zero” concept.
US Household Income Percentile Calculator
 |
Help benchmark your household income against data generated by the US Census Bureau to help understand how you stack up. See more.
The Tax Puzzle: Understanding Your Fully-Loaded Marginal Income Tax Rate
 |
You most likely pay state and federal income taxes. Isn’t it important to know what your fully loaded tax bracket is? We’ve crunched the data for you and we’ve got tables for most states. See the article for further explanation on the topic and for the data tables for your state.
Thanks for reading! If you loved it, tell your friends to subscribe.
2024
January 2024
We’ve been hard at work building investment focused tools for you. The one I’d like to highlight today is the total returns calculator. Conceptually the same as dividend reinvestment calculator, it helps you understand realistically speaking what returns you can get from your investments.
Why am I so excited about this? Well it’s because there are essentially no FREE tools out there that let you do this analysis using real stock market data at a global scale!
This is a long email, but I think it’s vitally important for investors to understand this concept. Let’s dive in through two examples why you should really be paying attention to total returns:
JP Morgan v/s Berkshire Hathaway
If you pick up any simple stock charting tool (say on CNBC or Yahoo! Finance), and make a historical 10-year comparison chart to see which of the two companies had higher returns, you would come away with the WRONG conclusion.
 CNBC chart wrongly shows BRK.B outperformed over the last 10 years |
Just looking at the chart you’d see that BRK.B delivered 216% whereas JPM delivered 194%. It’s respectable for Jamie Dimon but nobody can beat the literal granddaddy of finance, Mr. Buffet, right?
Well, you’re missing about 33% of the picture!
 PFF correctly shows that JPM has outperformed on the basis of total returns |
Most charting tools show you price return only, but not TOTAL returns. Total returns are what you really get when you factor back in the dividends that were paid out. It’s the same as doing dividend reinvestment analysis.
Take a look at the above chart with the total proper returns.
With total returns factored, you now see that JPM has actually handily outperformed BRK.B. From Jan 1, 2014 to Jan 10, 2024 (a little over 10y), JPM’s total return was 287% to BRK.B’s 212%. The missing piece is the dividend reinvestment.
Warren Buffett’s Berkshire Hathaway doesn’t pay dividends, focusing on reinvesting profits. JPMorgan, on the other hand, rewards its investors with dividends. Even after accounting for a 15% dividend income tax (our calculator has this option), JPM delivered an impressive 271%. Far outpacing BRK-B’s return.
This might all seem like a great theoretical exercise until we start putting some dollar values to the numbers. How much would $10k invested on Jan 1st, 2014 be worth today? With JPM you’d have $38.2k to $30.8k in BRK.B. That’s a huge difference!
 $10k invested in JPM in 2014 is worth $38.2k today |
Looking at simple price comparison charts on most popular websites would have led you to the wrong conclusion. That entire orange bit in the previous chart is what you get from dividend accretion.
The chart below shows how your invested share count increases due to the reinvestment.
 The yellow stack shows your share count increasing due to reinvestment. |
SPY v/s SPYD
I can hear some of you thinking, “Of course, dividend-paying stocks always do better! Duh!” Well, with the help of our total returns calculator, let’s break that myth too!
SPY is the ETF that tracks the S&P 500 whereas SPYD is the ETF that tracks the high dividend payers in the S&P 500. Which one do you think outperformed?
 SPY v/s SPYD over the last 5 years |
The above chart shows the massive difference between the two – SPY has handily outperformed over the last 5 years. Even if you play around with different time periods (last 10 years, 5 years ending in 2020, etc.), the message is the same – SPY outperforms! The magnitude of outperformance does vary, but the conclusion does not change.
Over the last 5 years (from Jan 1st 2019), you would have made 110% in cumulative total returns in the SPY, compared to just 45% in the SPYD. $10k invested on Jan 1st, 2019 in the SPY would be worth a total of $21,070 today. This includes dividend reinvestment. With the SPYD, you’d have only $14,528 today. That’s a massive difference!
 $10k invested in SPY in 2019 would be worth $21k today. |
 $10k invested in SPYD in 2019 would be worth only $14.5k today |
You can see in the second chart that a greater proportion of the portfolio value is generated from reinvestment of dividends (the orange area) as naturally SPYD pays out more in dividends.
Even though the SPYD has 4.67% dividend yield compared to 1.4% for the SPY, it dramatically underperformed because of that overriding focus on high-yielding stocks.
Empowering Investors with Tools for Better Analysis
As we’ve seen, investment insights cannot be generated by overly simple rules of thumb. Sometimes dividend payers can outperform and sometimes they can underperform.
Having the right knowledge and the right tools for the job are vital to reaching the correct conclusion when analyzing investment opportunities.
I hope I was able to convey the concept of total returns and its significance properly through this email. Please feel free to use our total returns calculator for your analytical needs! This free tool stands as a testament to our commitment to financial education and empowerment.
For those interested in delving deeper into the nuances of total returns and dividend reinvestment analysis, there are plenty of resources on our website – Project Financially Free . Our website offers more tools and calculators that you may find useful in your investment journey.
If you have any questions, please do feel free to reach out here or engage with us on Twitter/X.
Thanks for reading! If you loved it, tell your friends to subscribe.
March 2024
Spring is well and truly on its way, and for those of us who want to make the most of our savings, the ISA season is drawing to a close.
But! I’m getting in touch with you now so you still have time to make the most of the tax freedom available to you until midnight of April 5th.
If you’re a first-time saver or have never quite understood the buzz around ISA season, here’s what you need to know.
——-
The deadline for ISAs this year is midnight April 5th. Don’t forget to take advantage of the £20,000 allowance for the year! If you’re looking for a provider, do consider Nutmeg.
User this exclusive link to get 12 months of 0-fee investing!
——-
What is ISA season all about?
If you live and save money in the UK, you’re entitled to keep it in an Individual Savings Account, or ISA. This is, up to a point, a tax-free savings hold, where you won’t have to pay HM Revenue and Customs any duty on interest you earn on savings up to £20,000.
The government sets this saving limit per year, which runs from April 6th to April 5th (of the following year) —the British tax year, as it’s traditionally known. Beyond that point, any interest you make, you need to declare to HMRC and pay duty on.
Now – if you’re following me so far, you’ll realise – hopefully – that we only have a few days left until April 6th rolls around again. Where is the time going?
Therefore, now is the time to make the most of your £20,000 allowance.
That old saying “you snooze, you lose” absolutely applies here. It’s worth saving as much as you can up to that £20k threshold, as it resets as soon as midnight, April 6th turns over.
Is an ISA really the best option for my money?
That all depends on your saving needs. Certainly, I’d recommend making the most of your yearly ISA limit if you’re accruing a good amount of interest. They’re also highly flexible accounts compared to general savers, but again, your mileage may vary.
One of the key benefits of using a non-ISA, such as a standard savings account, is that there’s no yearly threshold. It’s not nearly as flexible as the ISA model in the long run, but you do still get a personal threshold.
Regardless of the type of savings account you choose, there’s always the threat of taxation, and should British interest extend beyond the interest rates you’re set to return, you could see loss of capital.
I’d recommend you take a closer look at my guide to ISAs vs. savings accounts if you’re unsure of the best route to take.
Why have ISAs been in the news lately?
As mentioned, ISA season is in its dying days for 2023/24, which is likely why you’re seeing a lot of buzz about savings across the financial web.
However, the Chancellor of the Exchequer, Jeremy Hunt, hinted via recent Budget news that he’s considering an extension to the standard ISA model.
Specifically, in addition to the £20k threshold for money savings, Hunt is thought to be considering introducing a “British ISA” plan, where savers can invest £5,000 each tax year in shares and avoid having to pay stamp duty, currently payable at a rate of 0.5%.
This is an incentive that’s been met with a few raised eyebrows – some commentators are concerned, while others see it as a welcome move. Others in the media feel it’s an incentive to try and sway voters ahead of the inevitable General Election in the UK, which will be announced before January 2025.
Regardless, ISAs are still highly popular. Polling suggests that just under half of British adults would still consider opening these accounts. Therefore, it’s not hard to imagine many people being opposed to further tax breaks.
That said, take these suggested claims of a “British ISA” and share taxation with a pinch of salt. Nothing’s set in stone just yet – it’ll remain to be seen how Hunt navigates this option over the coming months.
In the meantime, do make sure to get your savings in line before April 6th – and, for the next tax year, be sure to carefully research the different types of ISA to fit your needs.
In fact, I can help on that front. Read through my guide to the best stocks and shares ISAs for beginners and make the most of that tax relief!
Happy saving!
Leave a Reply