Monthly Archives: March 2016

Breaking away from the 9 to 5 lifestyle

Alain and a little dog
Relaxing, watching a movie

There are three ways to build wealth:

  1. Working a regular job and investing the savings
  2. Real estate investment
  3. Creating a business

Today I will talk about having a regular job and investing the savings.

We are trained to be good employees

Most of us are trained to be employees, from the moment we go into grammar school to the moment we finish our university studies. The goal of our education  is to be able to get a job from a well established company, work for 40 years, save enough to retire at 65 and enjoy life until we die at age 81.

We are taught to be dependent

We are never taught to be independent thinkers, we are never taught to take calculated risks, or crazy risks, how to go against the grain, how to depend on our own abilities. Instead we are taught to be dependent on big corporations and government.

We are at the mercy of employers

Because we are herded like cattle towards a life as employees and because any other possible way of making a living has been erased out of our imagination, competition for the few jobs that are available puts the employee at the mercy of the employer.

Many demands for little money

We are overqualified servants of the system and when we apply for a job we find that there are hundreds of people competing for the same job. The employer asks for a ridiculous level of competence; fluency in at least two languages, proficiency in several software, availability to work odd hours, four years of college education, five years of work experience, and so on. All that for the amazing pay of $14.50/h with the possibility of a $0.50 salary increase after the first year.

The price of safety nets

When a person finally gets their check, then they discover that the government safety net is not free. There are all kinds of deductions such as: unemployment insurance, corporate pension plan, health service, government pension plan, and a few others.

Taxes, taxes, taxes

When all the contributions towards our safety net have been deducted from our paychecks, then we pay the taxes: federal taxes, provincial taxes, city taxes, school taxes, sales taxes, cigarette taxes, alcohol taxes, gasoline taxes, and so on.

Financial advisers are illusionists

After all the safety net deductions and all the taxes, we get approached by a financial adviser who tells us that we should save at least 10% of our income for retirement, that we should save for our dream home, save for the education of our children. Eventually we believe all the lies spun by the financial adviser and we entrust our savings to him. Soon thereafter we discover that all the profits have been eaten away by management fees, service fees, trailer fees, commissions and so on.

We are original, like everybody else

If we succeed in having any discretionary income, this little amount becomes the battle field of advertisers, people who persuade us to spend our money buying their products and services. Advertisers tell us how to look sexy, how to become smarter, how to become independent, and how to be original like everybody else. And we fall for it to the extent that we end up borrowing and getting into debt to become the character described to us in the media.

How to break from the 9 to 5

The only way out is to start breaking away, little by little, or radically, from this indoctrination. To stop believing that there is a safety net provided by the government. To determine that we are on our own and that there is no one out there to help us. To become responsible for our future and not to trust the system.

Here are some suggestions to break away from the regular 9 to 5 lifestyle and discover something different.

  1. Build some cash reserves for emergencies. The bigger our cash reserve, the more thinking space we can have, the more independent we become from the regular day-to-day drudgery, the more possibilities we have to try new things.
  2. Start educating ourselves about investments. Sometimes we spend months planning our two week vacation, we read books, we do internet searches, we ask questions. But when it comes to our financial life, we blindly trust our future to someone else who doesn’t care about us, to someone else who is more concerned about his commission. We have to take responsibility and get a minimum of financial education.
  3. Create a radical plan to become financially independent in 10 years or less. This is quite possible.
  4. Start living life on our terms.

Most of the future articles in this blog will be focusing on how to increase our earning potential through investments.

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Why having bonds in your portfolio is dumb.

Issam. My college friend and real estate agent
Issam. My college friend and real estate agent

In most of the personal finance books I have read, the experts suggest a constant rebalancing of a portfolio of bonds and stocks. The idea is that as you grow older, you should have more bonds and fewer stocks.

I think that’s the dumbest idea I have ever read.

There are two main reasons why rebalancing is such a prevalent idea:

  1. Financial advisers need to cover their asses when the market goes down.
  2. People, in general, are more afraid to see their portfolio going down than happy when it goes up. The pain is bigger than the pleasure.

The objectives of the client

When people invest, their main purpose is to make money. When they go to a financial adviser and they tell the adviser: I want a low-risk investment, what they are really telling the adviser is: “I don’t want too much volatility.”

The risk element of 100% stock

A portfolio composed of 100% stocks is more volatile but it is NOT riskier. There has never been a 20 year time period in history in which the stock market has lost money.

What’s inside a portfolio

graph
The long term difference between bonds and stocks is impressive.

Most mutual funds are composed of either stocks or bonds. Few are a combination of stocks and funds and cash.

I believe that hold ding cash in a mutual fund is a dumb idea. Many of these mutual fund charge fees in excess of 2.5%.

No too long ago I saw a mutual fund with these holdings: Stocks 60%, Bonds 35%, Cash 15%. The client (my friend ) was paying the mutual fund manager a2.5% fee for holding his savings in cash. My friend can put his money in his refrigerator for free. Please read your prospectus and make sure you are not paying management fees to have cash in your mutual fund.

What is Rebalancing?

Some experts, including many who I respect and admire, suggest that you should always have a certain percentage of bonds and stocks in your portfolio. The purpose of this rebalancing is to diminish volatility and risk.

For example, John Bogle, the founder of Vanguard Mutual Funds ( The biggest mutual fund company in the US) recommends having your age in bonds. This means that if your are 30 years old, 30% of your portfolio should be in bonds. If you are 60 years old, 60% of your portfolio should be in bonds.

Why rebalancing doesn’t make sense

Let’s imagine that you are 65 years old. You arrived at your retirement age. Your $1 million portfolio is now 65% bonds and 35% stocks (as suggested by John Bogle). Let’s assume that the return on bonds is 2% and that the return on stocks is 8%. You will get $13,000 from your bonds and $28,000 from your stocks, for a total of $41,000. The following year, you are 66% in bonds and 34% in stocks. You will get less money from your portfolio while your expenses will be going up due to inflation. With this portfolio, your biggest risk is not market volatility, your biggest risk is to outlive your money.

What the other experts are saying

Warren Buffett has instructed his trustee to invest the money left to his wife this way: 90% in stocks (he specifies low-cost S&P 500 index) and 10% short-term government bonds. Assuming a $1 million dollar portfolio his wife will get $1,000 from  the government bonds and $72,000 from stocks for a total of $73,000. Warren Buffett is 85 years old; assuming that his wife is a similar age, his action totally contradicts John Bogle’s advice.

Ray Dalio: In his book “Money, Master The Game,” Tony Robbins, with a lot of fanfare, disclosed Ray Dalio’s magical “All Seasons” portfolio. I almost puked when I saw it. Here it is: 30% stocks, 55% bonds, and 15% gold and other commodities. If we assume to have $1 million portfolio and that gold and commodities will increase in value at the rate of inflation, this would be our average return: $38,000. To top it all off, he claimed that this portfolio outperformed a 100% stock portfolio. It’s funny, in a 650-page book, Tony Robbins didn’t have space for a footnote explaining how he got his numbers. In short, his numbers don’t make sense.

How I manage my portfolio

My portfolio is 100% stocks: 33% Canadian, 33% US., and 34% International and Emerging Markets.

How do I deal with the volatility? By playing a mental game. I think that the market will give me 8% return in the long run, but I make my retirement calculations based on a 6% rate of return. When I make more than 6%, I don’t consider that money as mine, I consider it as cushion money for when the market goes down.

For example, let’s consider a $10,000 investment and a 10 year time period. At 8% the return is $21,600. At 6% the return is $17,900. The difference is $3,700. I consider that $3,700 my cushion, money that is not mine. If my return drops from $21,600 to $17,900 I would not be disappointed. As the years pass, the margin of safety will grow bigger.

Hypothetical examples for the average person

In Canada, the contribution limit for the Tax-Free Savings Account (TFSA) is $5, 500. Let’s assume yearly contributions for the next 40 years at 8%, 6% and 4%. We will consider these to be High volatility, Moderate volatility, and Low volatility portfolios. For such a long term period we assume the risk to be the same for all portfolios. Here are the results: At 8% (100% stocks) we get $1,642,000. At 6% ( Let’s say 60% stocks, 40% bonds) we get $907,800. And at 4% (Let’s say 40% stocks and 60% bonds) we get $550,000. Wow, what a big price we are paying for having low volatility. More than a $1 million difference in returns.

The end decision is up to you, but you know my opinion. Having bonds in your portfolio is dumb and having cash in a mutual fund is dumber

Habits to become millionaire

Photo of 4 friends
The friendship of positive people keeps me motivated

I have always dreamt of becoming a millionaire, but a dream without action is just that, a dream. Only during the last four years, have I taken steps to achieve my goal.

More than once I have been told that my goals are too selfish or self-centric. Instead, I should be thinking about how to help the poor, how to save the environment, how to discover my inner self, and so on… But to that, I always answer: What’s wrong with having financial ambitions? Don’t we all have some kind of ambition? How am I different from the pianist who practices his scales? From the golfer who practices his swing? From the dancer who practices his technique? From the monk who meditates every day?

It’s more than becoming a millionaire

I don’t want to become a millionaire just to possess a million dollars. I want to become a millionaire to prove to myself that I am the kind of person who can create wealth. I want to proof to myself that I have the discipline, the intelligence, the determination, the character of a person who can accumulate a million dollars. After I reach my goal I might give it all away but I would have gained the intellectual capacity and the virtue to create wealth at that scale.

After a certain point having more money becomes worthless. Mark Zuckerberg donated 99% of his wealth ( $45 billion ). He has no personal use for that money and the act of giving the money away was more valuable to him than holding on to it. Bill Gates, Warren Buffet and 141 other millionaires have pledged to give most of their money away. This is a testament that for many millionaires, having more money is not their ultimate motivation.

6 Habits to Become Millionaire

In order to become a millionaire, I have adopted some habits which should help me in my pursuit. Here they are:

  • Continuous education. According to a research by Thomas Corley  (author of  Rich Habits) one pastime rich people have in common is reading for educational purposes. Reading is practically free, you can borrow books from the library or buy them at reduced prices.  One of my daily priorities is to read. I have been reading for the past 20 years. In the past, I have read for entertainment but for the past 5 years, I have been reading to increase my knowledge.
  • Take risks.  Most people live the social script: They go to university for 4 years and then work for 40 years, and then retire (if they can afford it). Those are the people who play it safe. Most millionaires have declined the security of a steady job and have started businesses from nothing. They have taken risks. Many have failed but those who succeeded have been rewarded handsomely. Me too, I am taking risks. I am borrowing money to invest in real estate and so far, I am beginning to see some return on my investments.
  • Create time to self-reflect. It is difficult to create a sense of direction if you are too busy. Millionaires need the space to be with their thoughts and find a sense of direction. At one time I was working 10 hours a day, seven days a week. Finally, at a given moment I burned out. I was not able to continue. After my burn-out, I took a year off, to self-reflect. Since then I feel that I have a better sense of direction.
  • Spend less than you earn. This habit is so simple yet so difficult to implement. Most North Americans live from paycheck to paycheck, and of course, when they reach the age of 65, they have nothing and they require the help of the government. Millionaires are careful not to spend more than they earn. I have accumulated my capital by being frugal, by spending less than I earn, now it gives me pleasure to see my capital working for me.
  • Staying motivated. Most people have goals, many do nothing about their goals, others get started but give up too quickly. Millionaires stay motivated in the face of hardship. To stay motivated it is necessary to stay away from negative people and seek the companionship of positive people. I stay motivated by reading and listening to podcasts, by seeking the company of positive people, like my dear friends and family, like my McGill Toastmasters club.
  • Making the best of one’s time. In North America, we  spend a lot of time in front of their TVs. Millionaires spend less time watching tv and doing better things with their time. I haven’t owned a TV for over 20 years, but unfortunately, I spend too much time on Facebook. One of my personal goals is to spend less time in Facebook.
It’s not easy, but it isn’t impossible to become a millionaire

I don’t expect my road to a million dollars will be easy, but also, I don’t expect it to be difficult. I believe that with a combination of daily tasks, habits, and principles, I or anybody else can become a millionaire. It is all about having a positive mindset, about being optimistic, about having the perseverance. I want my journey to be public so that anyone can say, “hey, if Alain did it, I can do it too.” And remember, it is not about the million dollars, it is about the person you become while you are accumulating a million dollars.

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