I do not remember how I found this blog but I got hooked for several reasons. The writer lives in Switzerland and I am curious to see how another person approaches a country that has multiple idiosyncratic aspects, like headline negative inflation but everything that costs triple compared to any other European country.
He is passionate about finance but comes from a different field. I studied engineering and like most of my pals, I knew the basics of coding and could assemble a pc; like most of them, I did not mayor in Computer Science because at the time CS meant to be at best an IT assistant in a corporation or Christian Slater in Mr Robot. A career that led to no money at all. At the time, hardware was as much important as software, I read books about Kevin Mitnick and then moved on.
He writes about learning and how to learn, he offers more interesting doors to open to someone like me that devotes his time like: 60% finance, 35% NBA, 5% art.
He reached (or almost reached, depending on the day he writes) financial independence, but it did the ‘real way’, living in one of the most expensive cities in the world with a daughter, not like those guys that are at best in a couple and live in a forest. He is not a spreadsheet (but he uses them a lot). He is not a financial guru blog post. He is a real person with real emotions.
How to manage your burn
“What’s the definition of rich? The definition of rich is having passive income that’s greater than your burn,” says prof Galloway. Your burn are your expenses. RIP is obviously aware that having big savings is as important as not having big expenses, especially recurrent ones. He is also the first FIREr I read that is facing the massive bill of childcare. Before having a daughter, I always considered people sending their kids to private school as an unnecessary luxury, to put it in a politically correct form. If you ask me now, and she is only 1.5 years old, I am not that sure. Michael Lewis podcast about coaching definitely did not help. At least these are not proper lifestyle expenses, you can even see them as investments in your children, and they will disappear at a certain point.
In 2021, by the third of each month, after rent, utilities, health insurance, and child care have been paid, we’ll be down by 4.7-4.8k CHF. I don’t like it. I really don’t like it.
This is what real life looks like
Like it or not, you can manage your burn up to a certain point, especially if you have a family. Living in London might have lot of disadvantages (i.e. cost of real estate) but at least I do not have to pay for a car; for a fraction of the cost, I have my personal driver (Uber) always ready, I do not have to find a parking spot and I feel not that bad when my daughter vomits in the car (I clean and leave a tip).
700 CHF in restaurants, take away, and eating out. WTF! Well, we hosted the in-laws in early July and we celebrated Mrs RIP Birthday with a restaurant lunch, which accounts for more or less half the budget. We also had few (cheap) restaurants visits with friends. It seems everyone was waiting for restaurants to reopen and invite us. We passed on a few invitations but… we can’t hide in a cave forever.
This is the aspect, common to a lot of FIRErs, that drives me crazy the most. One thing is not-splurging, one thing is punishing your social life unnecessarily. What’s the point of earning +200k/year if you are pissed to pay 350 for birthday date with your wife? I lived 4 years in Switzerland, I know well enough how irritating is spending CHF 100 for two pizzas, the bare minimum for a visit to any restaurant…but what do you do? You will become the ‘friend for a walk in the park/forest’?
You do not have to go heli-skiing every weekend simply because you can afford it. I do not see the point of not doing it every now and then if you can (and you love it, obv). While watching Nicole Kidman’s father in The Undoing I thought about it: what’s the point of being rich if you do not have anyone to enjoy your money and freedom with? Would you sacrifice seeing your friends while you save like a maniac so that you can retire early and…not see you friends because they have a job and you are at home? You do not know what curveballs life will throw at you, be responsible but make sure you enjoy the ride. That said, everyone is free to do whatever they want with their life, these are just my 2 cents.
Do not time the market
It is easy to read that if you try to time the market you will end up with less money compared to the situation where you did not. It is bit harder when you have some savings, think the market is overvalued and maybe a crash is coming. It is a lot harder when you have more than a million saved and your retirement depends on that.
I lived through many bear markets. Never once I had a million on the line (well, I had billions but it was not my money 😉 ). I do not remember who said you only have to get rich once, the way you invest to get there is different from the way you do to stay there. The unfortunate world where we live right now is of zero/negative yields, you have to take risk or…risk to outlive your saving pot.
RIP blog is interesting because he explains his feelings while he is doing it. One of the main issue to de-risk your portfolio is that is harder to jump back in:
- if the market continues to go up instead of down, you do not want to buy at 120 something you sold at 100.
- if the market goes down, there is always more way to go. And if it rebounds, you can always buy when it will re-test the lows.
RIP had the balls to sell at the beginning of the year and buy back when the market crashed, but as the WWE said when I was a kid: do not try this at home. If it is not process-driven, if you do not have a clear plan (and the guts to follow it when you are supposed to), you might get lucky once and then pay the lesson in the future. The main point here is, if you already have a retire-ready pot, you can let it grow at a % rate that is lower compared to a person that is still saving to get there. RIP can play defence while you have to attack head down; his strategy might be sub-optimal in a vacuum and still be the right one for him.
When you think about market timing, the majority of investors try it to enhance returns, which is very different from doing it to reduce risk.
Passive earnings in USD, expenses in CHF
This is the angle that interest me the most. I was living in Switzerland when the Central Bank removed the floor to the EUR/CHF rate (little explanation for the people out there who did not spent the last two decades trading fx, in short the rate could not go lower than 1.20): I gathered with a group of colleagues in front of a Bloomberg screen to see the currency crater (from the EUR point of view) like we were watching the Moon landing. That day, we kinda got a 20% salary increase on the spot, there were queues outside banks with people wanting to sell their CHF. Do not ask me why they did it but in retrospect, they nailed the bottom so, joke on us.
The beauty of working in Switzerland is that you can easily spend your salary outside Switzerland. Aside from the above notable event, the CHF appreciated against the EUR since 2007; it is not something structural but after 13 years you start to feel that is (I still remember when it was 1.60…as I remember when GBP was at 0.6 compared to today 0.9, thank you Brexit). You get paid to afford a CHF 20 pizza but then you can drive a couple of hours and have an Italian one at EUR 10: during weekends, Geneva is transforming into the set of I Am Legend, because who would not want to double their salary, even if it is just for a few days?
Now imagine the reverse: your revenues are in USD and/or EUR and your costs are in CHF. For an American saver, investing in foreign assets feels like an option; if you live outside the US, investing in USD is a must. At this point you have two options:
- you do not currency hedge, and hope that in the long run the fx fluctuations will dampen out; it might work but it will expose you to big short term swings. This makes it a viable solution if you are in the growing phase of your pot, those swings represent buying opportunities.
- you hedge your holdings (the best that you can, because for a private investor without an ISDA is not that easy) and pay the additional costs.
If you are retired in Switzerland and your assets are in foreign currency, you have to stomach frequent 10%+ swings in the value of your holdings. Add to them the normal stock market cycles and…did you retire because you wanted a stress-free environment, right?
The universe of investable assets in CHF is very limited. With the highest negative rates in the world, the bond market is a tax. The stock market is tiny and concentrated in few sectors / big names. I used to invest in a local p2p platform, Cashare, which again is nice but small. The only game in town, and the one I think of the most when I read RIP, is the real estate market. Which brings me to my final observation.
The earlier you decide WHERE you want to retire, the better it is
When I moved to Switzerland, I did not change the currency allocation of my portfolio and I continued to invest in non-CHF assets because I had no plan to retire in Switzerland. Same when I moved here in London…which is an additional complication because my corporate pension scheme is designed for people that are happy to spend their retirement under a perennial rain, i.e. 85% of the options are GBP-hedged or FTSE-focused. I do not know where I am going to retire but I am pretty sure I will spend EUR when I will (I hope I will not have to spend Bitcoins!).
Here I am using again RIP as an example, I am not interested AT ALL in what the actual guy does; there are so many preferences that contributes to what is the optimal choice that covering all will be beyond the point of this post. From what I read on his blog, he is still not sure if he wants to retire in Switzerland or Europe / Italy. It is nice to keep your options open but that flexibility has a cost. Illiquidity premium anyone? This is how I imagine the convo:
Sorry, I love this meme.
Owning the place where you live is the best possible hedge against rising inflation and living costs. When you work, your risk is lower because if renting costs are rising, there is a fair chance your salary will as well; if you are living out of passive income generate somewhere else in the world, your local circumstances might easily turn into an unmanageable situation. You can be the Swiss farmer who could be a millionaire or a teacher in San Francisco who was renting and now has to move somewhere else (latest season of Last Chance U on Netflix explain this situation quite well). The argument about the cost of a house where you plan to live is…useless? Either is too high for you, and then you have to live somewhere else, either you think it is high now but will be lower in the future, in that case you are a pro at market timing and can become rich out of that skill (but we know the real odds of this scenario, right?). In simple terms, if you buy the house where you are going to die, the fact that house price will move from now to then will have almost zero effect on your life.
Rending is the optimal solution when you are not sure where you are going to live. You have to be aware of the risk that sometimes the market decides for you, you want to be flexible and suddenly one of the options is priced away from you.
What I am reading now:
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1 Comment
Mr RIP · December 16, 2020 at 9:25 pm
Amazing post! I can’t thank you enough for this “view from above” analysis 🙂
Such a post deserves a longer-than-I-have-time-for answer, but I’ll do my best:
– Yes, my burn rate is very high, and it’s growing over time. But I hope to shrink it after child care is gone, which should happen in ~May/June 2022, still 1.5 years to go. I recommend to those who dream about FIRE and want to consider having kids to seriously overestimate their expected monthly expenses in “retirement”
– And Yes, I’ve not come to terms with this yet. I see you commented on my 700 CHF restaurants expenses with “one thing is punishing your social life unnecessarily. What’s the point of earning +200k/year if you are pissed to pay 350 for birthday date with your wife”… well, I do want to become the ‘friend for a walk in the park/forest’! I’m NOT the person my current spending pattern describe. I don’t feel comfortable with spending 7k per month, and if we decide to remove the “moving back to Italy” option I’d go nuts. I can’t keep spending so much for so long. I don’t see money as spending opportunity, I see it as runaway, as “how many months of expenses are covered?” Before coming to Switzerland I was extremely frugal, and I felt free. Much more free than today, with 30x the principal (but 10% of the energy and willingness to work for the man, and 10x the expense level). If you want to achieve unconventional results (like early retirement in your 30s or 40s – 40s for me, I started this game too late) you need unconventional actions and desires
– About Market timing: well… I’m not properly trying to time the market, I’m aware that it’s silly. I’m trying to minimize future regrets. I felt scared by the new all-time high in August 2020, few months after one of the largest recession in my lifetime begun (with no end in sight), I’d regret for the rest of my life not having liquidated my positions in case the market would have dropped again. I wasn’t sleeping comfortably, and you perfectly described it “if you already have a retire-ready pot, you can let it grow at a % rate that is lower compared to a person that is still saving to get there.”
The problem is that NO, I don’t like my strategy and it doesn’t feel “mine”. Of course this is due to how the history unfolded from August to December. But this is outcome based reasoning, not decision based reasoning… as you can see I have a mix of greed, regret, a bit of overconfidence (I timed it right once, so I’m a genius! Wrong!), and a lot of fear.
So… I’m in a messy status right now. And I wouldn’t judge my strategy bad (holding essentially only US bonds as a way to park my money while I think of a better strategy) if the USD weren’t sinking like the Titanic… Which brings us to:
– The USD/CHF problem. I was there as well when the Swiss Central Bank unpegged the CHF to the EUR, and I also got the 20% instant raise 🙂 I started investing few months after, in February 2016, after a crappy 2015 market (crappier if measured in CHF). So.. perfect timing!
Today though… I sold most of my stocks in July/August, and since then the USD lost almost 10% vs both EUR and CHF. And I’m biting my fingers every day. I feel stupid! But I also know how “stupider” it is to change strategy after having received a punch in the face. But what if in 10 years 1 USD will be worth 0.5 CHF?
Hedging is expensive, holding CHF is a tax (as you rightfully pointed out), holding CHF or EUR bonds yields negative results.
The only thing I disagree with you on this section is the nominal addition of the 10% currency swings and the normal stock market cycles. I think the two are slightly anti-correlated if you invest in the global market. A USD that loses 10% kind of implies that multinational companies earnings are up 11% on their non-US market, all other things being equal. This is true for large cap stocks stocks, not for other assets though. Especially not for my bonds 🙁
– Where to Retire.
I agree that the earlier you decide “where” the better it is. I also agree that one should own their primary residence if they think they’re going to live there for “at least N years”, with N being the break-even point, which varies a lot by country, personal opportunity cost, property tax, fixed unrecoverable purchase/resale costs and so on.
I think in Switzerland N is very high. Rents are cheap compared to prices, and compared to unrecoverable monthly costs for a homeowner. But still, if we were 100% sure we’d be retiring here I’d start lookin around for flats.
Am I paying a “flexibility tax” by not purchasing a flat right now? I’m not sure. maybe, but it’s something we can put a final YES/NO in 10 years from now at least.
Is it another form of market timing? Maybe. I like to think of it as risk management.
Everyone I know around me is buying a flat/house. I mean people who are living here for more than 4-5 years, with a salary comparable to mine. Flat prices in my neighborhood starts at 1.5M. If you want a decent flat, better than the one I live in today, your seven-digits-bill doesn’t start with a 1.
With current mortgage rates and Swiss mortgage philosophy (you don’t repay the principal, you only pay the interests), you’re betting a lot on the “interests rate won’t rise” card. If they go +1% your mortgage more than doubles… If they go from 0.6% to 3% your mortgage quintuples. And house prices will drop by A LOT. And you might get a margin call on your house, since the bank is not willing to have a larger credit than 80% of the value of your house. You see what I mean? Yes, it doesn’t seem likely that mortgage rates would go up to 3% from current 0.6-0.8%, but history loves to fool us 🙂
Buying a flat at this prices is like playing a reverse insurance. It works well most of the times, but if it doesn’t…
And we really don’t know yet if we’ll be retiring in Switzerland on in Italy. My current model is “let’s try to stay in Switzerland for a while, experiment a different work/life setup, and if it goes well let’s continue. It it doesn’t go well – i.e. if the amount of pain to maintain a 7-8k CHF/Month lifestyle becomes unacceptable – move back to Italy before the nest egg deteriorates.
If you ask me, I guess we’re moving back to Italy in two years. But that’s because I’m a pessimist, and I think I’m unable to work for anyone anymore. And yes, I can try to make money via other means, like monetizing my blog (and I will try), but we’re talking of 7-8k burnout rate, after tax! I don’t think Switzerland is the best geo-arbitrage option for a location independent wannabe Entrepreneur 🙂
Time will tell 🙂
P.S. I recommend you this amazing Rational Reminder Podcast Episode with William Bernstein, where they talk about asset allocation based on age and career capital. It seems very close to what you said in the “do not time the market” section
https://www.youtube.com/watch?v=haLGx8KlFvk
Thank you again!
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