Our journey to Financial Independence

Category: Economic Concepts

business paper finance decision

Why I Invest But I Don’t Trade

Investing and Trading use similar tools but are extremely different. Neither is inherently better than the other. Both of them work by buying assets on the stock market with the goal of a Return on Investment.

The big difference is the approach. When it comes to investing, you buy assets and hold them for years. You bet on the future of a company and how well you believe it will do in the long run. It sounds boring, right? Well, my strategy is boring. I focus on the long-term returns, not the thrill.

On the other hand, a trader focuses on short-term appreciation to make gains. The objective is to maximize returns on a daily, weekly, or monthly basis. Some would call it speculation and gambling. At the end of the day, both investors and traders are betting on the future of a company whether it’s short or long term.

Morgan Housel puts it beautifully when he says:

“Every investor is making bets on the future. It’s only called speculation when you disagree with someone else’s bet.”

Morgan Housel

His article “When Everyone’s a Genius (a Few Thoughts On Speculation)” is a gold mine. It showcases the importance of storytelling when it comes to investing. 

It’s time to dive into why I focus on investing for more than 80% of my portfolio. As I see myself as a Sheriff when it comes to investing. I’m open to some risk but want controlled exposure for a long-term return.

Different kind of traders and investors

When it comes to investing or trading your wealth there are a plethora of styles.

Investors 

shallow focus of clear hourglass
Photo by Jordan Benton on Pexels.com

Investors tend to focus on real-estate, equity, bonds, or angel investing. The majority of casual investors, myself included, focus on index funds and ETFs. These particular tools allow me to diversify my investment and bet on the market and not specific companies. 

A real estate investor will look at purchasing multiple properties with the objective of flipping them or renting them out. The problem of real estate investing is it takes considerable initial investment. It’s, therefore, less accessible and takes more time to get rolling. Yet it remains one of my diversification goals. Currently, I stick to REITs (Real Estate Investment Trusts) as they allow me to tiptoe into space before my first property. 

As for Angel Investing, it is a whole other can of worms. It takes substantial capital and is a long-term bet on start-ups. The goal of an angel investor is to bring expertise and finances to a burgeoning company with the hopes of a high return in the long run.

Traders

alarm clock lying on multicolored surface
Photo by Black ice on Pexels.com

I personally don’t trade anything that I cannot afford to lose. My total trades in the past year amount to less than $500 dollars. I’ll simply stick to summing up what each type of trader does. 

  • Day Trader: seeks to make profits on short trades throughout the day. They hardly hold any funds overnight.
  • Scalp Traders: only holds their position over a few minutes/seconds and never overnight.
  • Swing Trader: surfs on trends and looks at making a profit on trades over a few weeks/days. 
  • Position Trader holds positions for months to years but always has the goal to sell for a profit.

The style of trading you decide to follow depends on the time you will hold the stocks or options. Recently with the GME short squeeze, we saw retail traders become position traders and hold with the hope to swing the price. 

Overall whether you are trading or investing your decisions will depend on your risk tolerance, knowledge, and time you have at hand. Time is key as being a hobbyist day trader isn’t possible.

Success rate for Traders and Investors

When researching investing at first, I kept bumping into day trading gurus. They were selling a magical system to make millions day-trading. As always, I was cautious about things that sounded too good to be true.

It’s not to say that you can be successful day-trading it is a job in itself. My eyebrows simply rose… why would you need to sell me a course if you made that much money? Recently in a discussion with Coffeezil (Youtuber), Jason Calacanis an angel investor. Explored the fact that successful entrepreneurs and investors share their knowledge for free with retail traders. They don’t need your $300 dollars to make a profit.

Learn more in the video below.

First of all, there are 2 ways to start trading either you go professional or head out solo. When you join a financial firm, your salary itself is set but additionally, you can expect a 10%-30% bonus on the profits you realize. Of course, the returns are capped. But the losses do not impact your wealth.

On the other hand, most traders go out solo. Not only is the capital small at first but you have no safety net. Learning about charts and signals is a step. The only problem? On average successful day-traders will make an annualised return of 10%… Even with a starting fund of $30k you would only be making $3k a year…

Stock options then become a tempting idea as they allow you to swing bigger wins. The only problem is it’s a double-edged sword. As you are exposed to higher losses. 

pen business money research
Photo by Anna Nekrashevich on Pexels.com

In a study by the University of Sao Paolo and the Sao Paolo School of Economics, it was found that it’s virtually impossible to make a living day trading. When analyzing all traders that began day-trading between 2013 and 2015 they found 97% lost money when trading more than 300 days. 

Additionally, despite the high risk, only 1.1% earned minimum wage. Only 0.5% earned the equivalent of an entry-level bank teller. 

In Taiwan, day treaders were studied for 15 years from 1992 to 2006. The results were only marginally better. With only 1% achieving what they refer to as abnormal results. 

What about investors?

ETFs and Index funds have consistently outperformed day traders. Not only is it easier to get started as you are able to bet on the overall market. For example, using the VUSA, Vanguard’s ETF tracks the S&P500. As long as the S&P 500 rises so will your portfolio. 

photo of person holding ceramic mug
Photo by Anna Nekrashevich on Pexels.com

Over the last 100 years, the S&P500 has returned an annualized return of 10%. Don’t get me wrong investing in index funds is boring. Yet, I much rather prefer boring to terrifying. It also is a terrible place to put your money in the short term. Not one year is guaranteed to be positive. Yet the S&P 500 has never had a negative return in any 20 year period. 

You can learn more about my portfolio and investing mindset here. If you haven’t started investing with Trading 212 yet. Today is the day – if you invest as little as £1/$1 using my link, we will both receive a share worth up to £100. 

Why do I Invest and not Trade?

I acknowledge that I don’t know enough. That I’m not good enough to beat the market. My objective is not to be rich tomorrow or even next week. Actually, I’ve set my target at 25 years from now. Yes, you read that right. 25 years. 

It might be faster if luck strikes and I’m able to pick some good real estate investments or funds. But overall I’m in no rush, I would rather a consistent 10% return that compounds to my benefit. Then going out every day to risk my wealth on some options. 

If any of you decide to go the trading route. I wish you every success and hope that you will be in the 0.5%. On my side, I will stick to my 85% index fund strategy.

Universal Basic Income could it be THE Answer?

What if the government covered your living cost? Would you still go to work? What even is Universal Basic Income? Could it work?

2020 was the biggest challenge our social systems have seen in a long time. It forced countries to become creative and find new solutions. One of these solutions was Universal Basic Income or UBI. Whilst it’s not a new concept it bounced to the forefront of our attention. We saw different examples last year from the American stimulus checks to the travel grants in Japan. 

The first hurdle the policy faces is its definition. Some call for a replacement of welfare by UBI and others for an addition. The longest-standing “experiment” of UBI is the Alaskan “oil dividend”. Which sees any permanent resident of Alaska receiving an annual monetary stipend.

Oil Dividend Alaska Monthly Stipend

This monetary stipend has not had an impact on employment or wealth imbalance in the area. It has seen an increase in part-time work and “evening” studies. We will explore this more later.

I believe that UBI could open the doors to Financial Independence to many as well as giving more time for meaningful work. Less risk of living paycheck to paycheck and higher chance to make a valuable contribution. This ties in with the ideas I explore in “Financial Goals: I was wrong“.

So today let’s explore what Universal Basic Income is, what it means for the economy, and the pros and cons.

What is Universal Basic Income?

Universal Basic Income is quite easy to define it’s the idea that every adult should get a monthly stipend. Although, it sounds utopic and simple. It’s far from easy to put in place. There are many different takes on it from a no questions asked to check to a restricted special use debit card.

This concept has been around since the 16th century and is back with a vengeance currently. Tough economic situations suggest a radical solution. UBI is one of the options. The perfect amount is not a matter of economics but politics. The one rule the policy would abide by is that no matter who you are, what you do, or what you believe you are entitled to it.

Additionally UBI is not a plea to make people work less. It’s the power to enable them to a job that matters. It not only means an increased chance to work according to your values. It empowers workers in less enviable positions as they gain leverage to request higher working conditions. 

Implementing it could be as a supplement to the welfare offered by the state which would increase the overall cost and tax at higher incomes. Or replace it partially/fully and become a new and fairer approach that has diminishing returns as you go up the income ladder. All in all, it is an effort to bridge the wealth gap. But can it work?

How could UBI Work?

Negative taxation?

At the end of the day, UBI starts with tax reform and implementing a negative income tax (yet another name for UBI. To help you visualize the situation in table 1. You can see the impact on your taxes and net income. The data is based on the European Average tax level in 2019 39% and the global average of 31%. As well as a £1000 per month income or £12000pa.

Universal Basic Income Breakdown

If you are more of a visual thinker the curb looks like this :

Universal Basic Income Gross Income vs Net Tax Rate

As you can see with a negative income tax as the basis for UBI taxes would normalize fast. Instead of creating an inflationary situation it would lead to the redistribution of wealth whilst giving an equal footing to all.

Regional Currency?

Gyeonggi province in Korea has had a basic income for under 24-year-olds for some time now. The idea was that they get a quarterly stipend of 100’000won or 85USD which they had to spend in local business with a revenue of under 830,000USD. (article link

The program has now been expanded to the whole of the adult population since the start of COVID-19. It allows the state to subsidize small businesses whilst empowering and protecting its people. With the spending restricted and limited to certain regions.

By directing the cashflow via local spenders and increasing the regional GDP – the population is also enabled to invest. Not only in stocks but in themselves. It empowers workers to focus on their education and retrain new skills. This is particularly important in a country with a strong increase in automation.

Why not check out the video below from the Wall Street Journal which visited a recipient of this variant of UBI.

Replacing Welfare?

Welfare can often feel like a trap. With clear thresholds that are arbitrarily set and rarely updated. By generalizing aid and removing constraints you give a chance to recipients to use the funds as growth support. Supporters of the cause call for this to be funded by existing welfare funds as well as with saved administrative costs. The OECD (Organisation for Economic Co-operation and Development) says its members spend on average 20% of their GDP on welfare. Or 8700USD per capita in 2019 raising to 22.7k for Luxemburg.

Social Welfare Cost OECD

This data excludes 2020 were due to COVID-19 relief efforts the value is certain to raise. It also excludes the cost of administration for such efforts.

What are the risks of Universal Basic Income?

In this category, it’s essential to differentiate perceived risks and risk themselves. In this case, I will explore the biggest perceived risks and whether or not studies see them as founded or not.

People will stop working

A big if not the biggest sociological fear around UBI is that people will stop working. The idea that UBI which causes higher taxes and a stronger base for a living will incentivize people to stop working. 

Evidence shows that indeed working rates significantly decrease when focusing on child labor. Although it only made it disappear in 8/19 studies it did show a decrease in hours worked in all studies! Which in turn led to an increase in school attendance and literacy.

As for the adult workforce, cash transfers did lead to a slight decrease among the elderly and those that care for dependants.

People will misuse the funds

But wouldn’t people just use the money on booze and cigarettes? A 2017 University of Chicago study on “Cash Transfer and Temptation Goods” has shown that when offered a basic income or subsidy the expenditure has a significant negative effect with a -0.18 standard dev. Studies have therefore been showing that concerns around tobacco and alcohol consumption are not applicable! 

Indeed the research paper also points out that temptation goods are subject to high substitution effects When one unlocks the fund for more valuable substitutes they tend to gravitate towards them. These alternatives include a higher education with uptake in reskilling as well as health-based replacements such as nutritious foods or exercise equipment.

How about inflation?

The worry of inflation is linked to the decrease of work in relation to the income earned. As seen above UBI doesn’t lead to a significant decrease in working hours and thus should only mildly impact inflation. 

Seeing it as a general raise is correct. A great example being Alaska’s oil dividend once more. Prices in Alaska although inflated rank 41st in the country despite supplementing income far from the likes of California, DC, or New York. 

Additionally, an approach in line with Gyeonggi pay would make sure UBI would be redirected and consumed within the region. Boosting the local economy in turn. In a study by the Roosevelt Institute on the Macroeconomic Effects of UBI, they point out a potential uplift of the GDP by 12.56% over 8 years.

They also conclude that there was as of 2017 no empirical data that such a program would lead to an inflationary economy.

Why Do We Need Universal Basic Income?

It often feels like the status quo is fine. It’s comfortable and easy as we know how it works. The goal of this article is to challenge your understanding and try and give you an alternative point of view. We grew up with our social system in place but go back 70 or 80 years and Paid Time Off was unimaginable. 

The strength of humanity is its constant evolution. With 2020 in the rear mirror and 2021 looking just as bad, the question stands are we doing enough?

The Wealth Gap

UBI inequality growth
Graph by David Leonhardt - NY Times Aug 7, 2017

This graph shows the striking difference in income growth between 1980 and 2014. We seem to think that the rich get richer was always true. Yet a measly 30/40 years ago the trend was reversed. With a wealth gap that was shrinking.

Of course, it would be delusional to think we could go back to the economic growth of the past. Yet redistributing the cards at the top of the range would make a large difference. Systemic poverty is engrained and not moving as the wealth gap increases.

An egalitarian UBI would give the chance to the 98% to bridge the gap and start working towards a greener future. Currently juggling multiple jobs with a constant fear of losing them leaves no space for hope or betterment.

Often when working towards Financial Independence we forget that the deck was stacked in our favor. Of course, there are exceptions and inspiring stories. Yet recognizing my privilege and looking to help others grow is equally important.

A security net

If COVID-19 has taught us anything, we can’t be prepared for everything. With 40% of British people between 22 and 29 having no savings at all. Many have found themselves in dire situations as the age group was the hardest hit. 

With no social security net or protection in place in the United Kingdom, the jump below the poverty line is very fast. 

Not only does the crisis happen but it’s foreseen that 1 in 4 Americans will lose their job to automation in the next 12 years. UBI would allow peace of mind whilst these workers retrain for newly profitable jobs. 

Of course, it would be easy to say prepare in advance but when living paycheck to paycheck that is an option many can’t sustain.

Entrepreneurial Boost

Entrepreneurial Take Off thanks to UBI

With the rise of platforms like Patreon we see an increasing amount of creators relying on donations from their followers to live. This is no different than a basic income provided by self taxation. UBI is no different and would allow the extension of such principles to a bigger share of the population.

By paying, a consistent stipend and delivering what is effectively an income floor. Residents are empowered to take more calculated risks and create their own path. In turn, creating employment and boosting the economy. 

Ask yourself, how often do you hear people wish they could afford to start a company. But it’s just too risky they might lose everything. The impact knowing one can feed his family has on ambition is astounding.

Conclusion

My goal here wasn’t to convince you we need to adopt UBI. It was to dispel preconceived notions of economic downfall. Of course, just like every societal revolution, there will be repercussions and tradeoffs. 

Yet it doesn’t mean we will be taxed to all hell. Of course, we can expect an increase in taxation in the short term. Yet the chance of creating opportunities for everyone equally is worth it in my eyes. UBI, when tested, has led to an increase in GDP, education, and morale. 

As studies have shown an increase in mental health across the board!

I would love to hear your thoughts and ideas around this issue! How would you reform societal help?

Sources

Powered by WordPress & Theme by Anders Norén