A while back, Luke showed a snapshot of his existing portfolio.
Sharing a portfolio is something rarely done by Financial Consultants. You may be thinking, why is this the norm? It exposes you to public scrutinies and potentially criticism, but I would trade a handful of haters for integrity and credibility every day. It can be very reassuring to people to know that not only do you invest in what you tell clients to invest in, but you are the guinea pig for their future success - you have skin in the game, and you already have a track record of success.
That's why I had no problems buying over the blog, or promoting to my consultant's benefit. After all, I have benefited tremendously too.
I had some questions from the public about it (and even some other Financial Consultants).
After pressing the OG Money Maverick a bit more, he did briefly show me his excel sheet listing his assets and liabilities.
Out of respect for his privacy, I can't talk too much about his assets - let's just say the guy saves A LOT and I don't even want to think about it back in the day when I was super impressed by saving $100k before Age 30...
But Luke has always added a little 'Maverick' in his personal life.
Who buys a plot of land and builds a house on it, not knowing if you'll get to keep it unless you get married to the local whose name you bought it under?
Like how much excess money would you have had to save/invest to consider that a REASONABLE idea?
But I'm not very different, since I followed his style. In fact, I might be worse - the only thing I followed successfully was:
i) A good CAR (Capital Aggregate Ratio) - in a nutshell, both of us ensure that our net worth is at least 2 and a half times larger than any liabilities or leverage due in any given year
ii) The investment plan I'm doing with him.
My property, my business, even my crypto - many of those assets aren't extremely liquid.
In English, this means that if I were somehow forced to pay back all my liabilities overnight - I'd have to redeem outside of my current assets - which would likely skew the value of those assets.
This led to me asking him a lot of questions about leverage and liabilities.
When is a liability good to have, given our circumstances? And could any of it be applied to the general public?
The first step to ensuring a liability is good is if it can be leveraged or creates arbitrage.
Arbitrage is technically the risk free difference in interest - but in our case, its not risk free. Yet, the excess return between returns and interest charged creates a lot of time and money.
If you've looked at the Money Maverick article: 'Which Level Of The 10 Levels of Investing Are You At? Consider An Investment Specialist.' you'll notice 'Uses Leverage Effectively' as Level 10 - the highest level to date. By his own admission, its the current level he's reached that he doesn't consider having mastered. I think that's quite expected for someone who practices primarily on his own portfolio: he wouldn't pick up a lot of skills outside of that.
But I always wondered why Luke thought so. It's an opinion article, so it's very subjective.
As a business owner first and investor second, I've prepared myself for a life of leverage . You have to pay employees, pay bondholders, pay shareholders (sort of) - all so that they'll keep leaving money with you or giving you more money to make a ridiculous excess.
For example, if I have $100,000 and I compound that at 7.2% across a 10 year period, it'd be like this:
Net Return: $200,423
But if I borrowed another $100,000 at a 2% rate, it would look like this:
Total Gross Return: $400,846.27
Total Interest payable: $21,899.44
Capital to Return: $100,000
Net Return: $278946
That might not seem like a lot, but its actually about 179% gain compared to the 100.4% gain on capital.
If I were trying to reach a retirement goal [e.g $2.3mil] on this alone (which is insane),
With Leverage: 37 years
Without Leverage: Between 45 and 46 years
It's lot of years of my life!
This is of course, on the basis that your interest made on investments is higher than that of the interest you're paying on your loans.
You basically take advantage of the difference between the 7.2% return on your investments and the 2% interest charge.
Liabilities in Life - an Examination of the OG Money Maverick's Expenses
[Original Draft by Luke]
I guess because I'm still trying to have full financial freedom (a pretty FATfire considering Singapore and Thailand) before the age of 36, I also tried this thing where I totaled my future liabilities in advance.
...which I'm not sure is such a good idea, because it made me want to puke a bit.
The total I would pay off for everything above is $2,043,000 over the next 6 and a half years.
What a total nightmare.
I did some rough projections for inflation and forex risk, increments - I could have missed out something, but it's hard to imagine I might have.
Anyone notice the scary part about this list yet? Take a couple more moments to look...
There's no home in Singapore. I haven't even added the potential cost of a home in Singapore, and it's already like that - pretty brutal.
Additionally, leverage is always tricky business - I absolutely do not recommend it just because I'm speaking from my own experience, and you should really discuss formal financial advice with me through a proper consultation its an option you're considering. But personally, even though it's something that I'm doing to take the most advantage of long term investment returns and my reasonably youthful age, it's still incredibly stressful to manage and know that I'm potentially in 'debt'. [NOTE: At time of this writing, I have never taken a formal loan. All investments which have any form of leverage are largely informal. Leverage limits are also not proportionally high.] You might say 'Luke, that's really exaggerated' because my existing net worth is much higher than my existing liabilities - but I've done enough financial planning to see how Mezzanine/Distressed investments can go, where your assumed net worth is very different from when you sell an asset needing quick liquidity.
You cannot assume that a net worth on paper will safely get executed perfectly when it comes to paying off those liabilities, in life or in death.
The Plus Side - Saving 4 to 6 years of Work
Out of the list of 18, only about 5 of them are really full expense paying (maybe 6, if you count my old savings plan as a kid and its negligible yield which just got cut further), or maybe 4 if you consider employees an investment (which I kind of do).
Naturally, Taxes and paying for employees are the largest bulk of where my money basically will be going to over the next 6 years. Assuming a 10% increment yearly, salary for my employees will be between $350,000 and $400,000.
Thankfully, if I can 'pay off' the many investments and have existing investments roll according to schedule and projected returns, they will help in trying to accumulate somewhere between 4.4 and 5.2 million while holding on to most those liabilities or leveraging on them.
This would be higher than the non-leveraged and liquid plan projections of about 4 years of savings. Additionally, there are other ways to 'leverage'.
For example, paying taxes can be split across monthly instalments without any kind of interest.
While such sizeable monthly contributions can be very daunting, ultimately it's always good to know that your assets are working hard whenever I'm not at my best.
Some Takeaways From This Exercise
I think $2,043,000 is obviously a lot and even with the help of my entire staff - I'm not completely confident. Of course, these are all just projections and some of them are proportional (e.g. taxes won't be as high if income isn't high). But there are some obvious lessons:
1) You are the Golden Goose: Let's look at some (arguably ) unfavorable scenarios where you start with the median salary at the age of 25 and only receive a 2.5% increment (proportional to CPF and a little lower than HDB Loans) for the rest of your life.
Rounding down to $48,000 a year (including CPF) to begin with, you still would have earned income of over $2,927 million dollars in 40 years of work before retirement.