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Category: Financial Opinions

Lazy Portfolios; Simplest Way to Invest In Stocks

Stocks are often misunderstood, especially in Pakistan. I haven’t met many people who are comfortable investing in them. Stocks make Pakistanis so uncomfortable that less than 1% Pakistanis invest in stocks compared to over 50% Americans.

Personally, I also never understood stocks until recently when I realized how easily Americans are pouring in part of their earnings every month in stocks without having to pick and choose, re-balance, trade etc. They would simply build what is known as a “Lazy Portfolio”.

Lazy portfolio generally comprises of 2-3 funds. But it can even have as little as 1.

There are 2 reasons in my opinion why this kind of investment works.

Firstly, you pay close to nothing in management fee. Such funds have low operating costs as there is no human intervention and the fund only tracks a particular index such as the S&P500 Index. You buy one fund, and your money goes into 500 largest publicly traded US companies automatically in the same ratio as their market capitalization.

Secondly, since you’re not picking stocks yourself, you’re not exposed to the risk of each individual company. Instead your only bet is that collectively largest 500 publicly traded US companies will be larger in size tomorrow than they were yesterday.

To learn, what basket options you can buy, check out this. To learn more about investing in stocks, read this and this.

Disclaimer: The information provided is for informational purposes only. It should not be considered legal or financial advice. To the maximum extent permitted by law, I disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

How Can You Be Wealthy?

Each person looks at this term differently. Probably for some, it means being able to afford Lamborghinis without a second thought. Or being able to stay in presidential suite in Las Vegas. Not for me. I don’t think of wealth like that. Because if you do think of it like that, then there’s always going to be someone ahead of you, there are always going to be things you can’t afford and this is a never ending cycle.

I define wealthy differently. For me, it’s the ability to pay all your bills on an automated basis, without working. In bills I generally include the unavoidable bills including rent, utilities, grocery, school, medical etc and some leeway for vacations, gifts, shopping etc.

I recommend you to find this numerical figure. It’s extremely important to do so. For example, you have calculated that your annual expense end to end is Rs 2 million. This means Rs 165,000 per month or approximately $1079 per month. If you can create a way to generate Rs 165,000 a month without working, you’re wealthy. You are financially free. You can actually retire, regardless of your age.

The second step is finding a way to acquire assets that generate $1079 a month. The mistake that most people make is they don’t wait to spend on luxuries. I want to spend on luxuries too, and I feel everyone should be able to do it. But not without following the right framework.

The right framework requires earning money, saving it, acquiring assets, generating income and spending that income. What most people do is earn money and spend it. Doing what most people do is a perfect way to work until you die. Doing what I recommend you to do is a perfect setup to retire between 5-15 years.

To generate $1079 per month, you can acquire (or build) SaaS/Blog/App for $32,370 (at 30X monthly multiple). If you’re more into “real assets” you can acquire property that does 5% per year for $258,960 or you could invest in stocks that generate annualized average 8% per year by investing $161,850 in stocks. Or you could do a mix of these things by diversifying and invest a total of $100,000 to generate $1079 per month.

It may sound tough, but it really isn’t. Especially if you’re young and have the ability to save more. All you have to do is have a clear goal: A) the numerical figure that you need every month, and B) the numerical figure required to invest to generate ‘A’ every month. Once you have these numbers, you need to see how much can you save each month, and calculate the number of months it’s going to take you to save until you’ve hit ‘B’. By doing so, you’ll have a set date for you to become wealthy.

I recommend you to read the book “Rich Dad, Poor Dad” by Robert Kiyosaki. It’s not the best finance book to read, but it is the best first finance book you should read.

The Power of Compounding When Investing

Yesterday, I wrote a bit about importance of investing. I showed the returns of S&P 500 Index for 10 years from Jan 2009, to Jan 2019. I mentioned that your returns would be over 200% in 10 years in USD. I further mentioned, that if you re-invest your dividends, you would have a return of 270% in the same period. See the additional 70%? This is where all the magic happens.

Let me explain this with an example. Suppose you receive a sum of Rs 100,000 at your graduation at the age of 22. You invest this money at an average rate of return of 10% per year and you keep this money invested for 40 years until your retirement at 62. During this investment, you have two options; you can either withdraw your returns every year at Rs 10,000 per year or you could re-invest your profit. Let’s discuss in detail what happens in both cases.

If you withdraw profits every year, after 40 years you would have Rs 400,000 (40 x 10,000) profit and Rs 100,000 principal. Giving you a total of Rs 500,000 after 40 years. Not so interesting, is it?

But if you re-invested Rs 10,000 profit every year, you would have Rs 4,525,925 after 40 years. A bit more interesting, isn’t it?

You invested the same amount of money, your rate of return was identical, and with the first option your capital stood at 5X while with the second option it stands at a whooping 45X. Here’s a compounding calculator for you to test all sorts of cases.

Is Cash Really Trash?

If you’re like me, born and raised in a Pakistani middle class family, you would have to earn your financial freedom. You weren’t born with it and you have to work your way up. Thankfully, unlike the previous generations, it’s easier for us to do so. With access to global markets, and a potential reach of 3.2 billion, you’ll make it even if you get fraction of the market.

But what happens once you achieve your financial goals? You earn a certain amount of money, and you stash your banks with cash and you feel it’s going to last for a certain period of time. But along the way, you also realize its running short faster than you thought.

There are 2 reasons why that could be happening. You may be over-spending and not keeping track of your finances. And that the inflationary financial system is not designed with you in mind. It is eroding your purchasing power, and pushing you two step backwards as you try to take a step forward.

This is especially true for Pakistan where inflation is high as well as the PKR has only weakened against the USD since the inception of the country. But it is also true for US where inflation at average is 2% per year for the last 10 years. Bitcoin on the contrary has only increased purchasing power in its life cycle and hence can be categorized as a deflationary currency, although some disagree.

But how do you solve this crisis? By not keeping the majority of your savings as cash. Cash can be bad, especially if it’s PKR you’re holding onto. Over 50% Americans invest in stocks for the long-term to preserve and grow their wealth while 0.125% Pakistanis do the same in comparison.

If you had held on to S&P 500 index for 10 years starting from Jan 2009 to Jan 2019, you’d have had a return of over 200%. It would have been over 250% if you re-invested dividends and this would be in USD, of course making additional money for you if your base currency was PKR.

Even if you invested in 2007 at the market peak and went through the financial crunch of 2008, you’d still be up over 100%, and 150% if you re-invested dividends.

If stocks isn’t your thing, and it wasn’t my thing too, you could invest your money anywhere you like. But it is absolutely necessary to do so. Because at the very minimum, you have to preserve your purchasing power, even if you’re not trying to increase your wealth with aggressive investing strategies.

It is still a good idea to hold on to some kind of cash. It’s great to have it in emergencies, and it’s what you need to survive. Having access to cash is also great when things are trading at a discount and markets are in turmoil. At the same time cash is the only asset that is guaranteed to lose value, other assets may or may not. And the only point I’m actually trying to make is cash isn’t as safe as I originally thought or as most people probably think.

Disclaimer: The information provided is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. I do not make any guarantee or other promise as to any results that may be obtained from using my content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. To the maximum extent permitted by law, I disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

An Unexpected Financial Advice That Changed My Life

In 2011, during my final year at university, I was constantly calculating my options. I was confused about what career am I going to pursue after I graduate. I was graduating with a Computer Science degree, but was also running some profitable online ventures before my graduation.

In hindsight, this was an overly simple decision. I should have simply went ahead with my online ventures. And of course I did. But back then, it was confusing because I was much younger, I was constantly getting wrong advice from all the places, my teachers were telling me to get a job, and my mother had mixed feelings. This happens to pretty much all the Pakistanis and the reason why I’m writing this is because it’s going to happen to many other students when they are faced with similar circumstances.

During this I received a very unconventional advice, that came from an unexpected place. I say that because it was given by one of my teachers, Sir Waqar, and it was very untraditional. I also think it was unexpected and untraditional because it was completely different from what other teachers said. I also liked it more because it was not a generalized advice.

What he said was something like this. He said if you’re able to save Rs 50,000 every month with your job, and you keep doing that month over month for 30 years, you’re going to save in the entirety of your career a total of Rs 18,000,000. This is Rs 1.8 crore or Rs 18 million or on today’s exchange rate $116,000. This figure was $216,000 when he first gave me this advice. It has come down to $116,000 in 8 years due to exchange rate. In another 10 years, it may be $70,000. He added, if you like this number for your retirement and can save Rs 50,000 every month from salary, go ahead and get a job and if not then do what you love to do.

I love it how he kept it real simple. He didn’t add jargons like inflation and other things, because clearly no one at that age has the ability to understand finance like that. He did not give me an absolute advice where I was told what to do. He just explained my options to me with a simple numerical figure.

I’ve kept this advice close to my heart for over 8 years. I have shared it with every student I meet who asks me this question and I hope others find value in it the way I did.

How Digital Nomads Live the Millionaire Lifestyle

Money is a really strange concept. A lot of people do not understand it very well. I’m actually willing to bet that there are more people in the world who don’t understand money than those who do. Unfortunately, they don’t teach you money in schools, certainly not the way I want to talk about it.

I often encourage everyone in the developing and emerging markets to work on the internet, reach a global market and earn a foreign exchange. I go on to the point where I believe and preach that it’s often even better for you to be positioned in an emerging market to unleash and hack the full power of money. Here’s what I mean.

It is ten times easier to live on $3000 in Pakistan, Indonesia, Thailand, Vietnam, Turkey, Bulgaria, and so on than it is in US, Canada, Australia etc. It all comes down to purchasing power in the end. With internet, for the first time in the history every individual has been given an opportunity to hack money in a way that you can absolutely earn an equivalent of what you can earn in US, without physically being in US. The equivalent might be equal in the number, but it’s even more valuable. Which brings me to my point, that money needs to be measured in the purchasing power terms.

Some of you might argue that the quality of life is not good in these emerging countries. I’m again willing to bet that there are dozens of countries with better quality of life than in US, that are 10 times cheaper, with lesser taxes, often complete tax waivers on exports and foreign exchange, and allow you to earn (online) an equivalent of what you’d make physically in US.

Great entrepreneurs not only work on yielding high gross revenues, but also on cutting expenses. For bootstrappers, reduction in expenses is the survival game. So use this opportunity to set up your company anywhere in the world with the right infrastructure and ecosystem while positioning yourself anywhere else in the world where you have the best and most affordable lifestyle and have a distributed team to run your business.

In the end it’s your choice whether you want to to live like a millionaire, or be a millionaire, or both. I’d go for both.

Integrity Vs Intellect

As part of angel investing, I get to meet many interesting entrepreneurs. My general investment mantra is that I need to understand the line of work, I need to have some sort of experience in it and the founders that I’m investing in offer talent which is miles ahead of our own team, of course.

If they have shown the ability to execute that business before and failed for whatever circumstances, that’s even better. I try to help them avoid the circumstances and let them execute the business again. I have had some sort of success with this strategy so far and I have been able to meet my investment goals with it.

In addition, one important quality that all founders should have is integrity. Lack of integrity, even if only outside the work, is a stage set for disaster. As a general rule, I would avoid investment in a team with lack of integrity even if they fit all other investing criteria making integrity a more attractive attribute over intellect.

Financial Freedom & Spreadsheets

I have met few people who are financially literate and do not use spreadsheets frequently both in their personal and professional lives. I love spreadsheets and use them to track my day to day expenses, taxes, donations and just about everything.

Just as you can’t run a business without tracking revenue, costs and making projections, I feel it’s reckless not to do the same in your personal life. Because in the end the fundamentals of money are the same. If the expense is higher than the revenue, whether its business or your personal life, the result will be the same.

I recommend everyone to create spreadsheets for their household expenses. This will help you project what your annual spending is going to be like. Once you have your annual expense projection, you can set your income goals accordingly. You can plan savings, project wealth generation and eventually plan retirement. It all starts with a spreadsheet.

My monthly expense sheet layout is very basic and does the job for me.

Financial freedom is often misunderstood as people equate it to really high salaries. Most middle class people who start working by 25 can retire by the latest at 40. I’m not kidding. It is the only truth I know, and without any generalization. For now, how about you simply track and ensure that you’re earning more and spending less and once you’ve done that, you can head over to MMM to learn how the rest works.