Hello there everyone! It only felt like yesterday where I posted the 2023 review post, but we’re already half a year into 2024! It’s time again to take a look at how things at the FIRE-Path Lion household has been going – so let’s jump right into it!

(For those who’s new here, you can check out all the yearly review posts in chronological order by Starting Here – My Journey)

Life Milestone Update

First let’s get the life updates out of the way.

Aside from moving into a new home in January of this year, we’ve also recently just welcomed our very first baby! So things have been super hectic around here so if this post is not as coherent as my previous ones, you know why!

I’m expecting expenses to increase (it has already been quite expensive just delivering the little dude and taking care of him the first several weeks.) Luckily we have already taken children-related expenses into account in my FIRE number and updated it recently to ensure that we are able support the lifestyle as well as standard of care that we want for our child.

That doesn’t make it feel less painful as I watch my monthly expenses shoot up though, haha.

Financial Milestone Update

On to the financial status updates! Let’s just say that this year the market has been performing spectacularly well. I guess I have uncle Jensen Huang to thank for that, lol, and I’m only half joking!

The amazing market performance so far this year has been fueled largely by the hype behind AI and the expectation for U.S. rate cuts – and I’m certainly not complaining!

Investment Portfolio

First let’s take a look at just the investment portfolio. Here’s the summary:

Here’s what the portfolio value chart looks like as of today:

And the capital injection vs market growth chart as of today:

Table format:

Several amazing things to note here – and especially mind-blowing and motivating to me:

1. The portfolio increased by more than S$500,000 in just 6 months.
2. The market gain in the last 6 months is more than the market gain in the first 6 years combined (2016 to 2021.)
3. The market gain in the last 6 months is more than the portfolio value at the end of 2019, about 3.5 years into my investing journey.
4. The market gain in the last 6 months is already more than the market gain of my next best year ever (last year.)
5. The market gain in the last 6 months is about the same as the amount of capital injections in the first 5 years combined.
6. I estimate that I can save & invest about S$150,000 consistently each year. So this means that the market gain alone is roughly 3x of what I would be able to invest each year on my own. And this is just 6 months in! I imagine this as having 6 additional clones of myself working and saving into my portfolio on my behalf.

Plus all of this is happening while I sleep! It’s absolutely insane. The compounding effects is in full force here – and it’s only going to get more powerful from here on out.

When I first started working years ago, having S$1 million was a dream that I thought I’d never be able to accomplish – but now I just blew past S$2 million. It’s absolutely amazing and I’m extremely grateful that I started investing consistently years ago.

Portfolio breakdown (and leverage position)

So all of this investment portfolio is spread across 3 different accounts: normal brokerage, CPF-IS (via Endowus), and SRS investment (via Endowus.)

Here’s the value of each holding and the leverage positions that has allowed this level of returns:

So several things to note here:

1. 90% of the portfolio holding is broad-based index funds (more heavily weighted towards developed markets – but some exposure to developing markets via a decent holding in VWRA and Amundi World.)
2. The leverage ratio is ~154% (basically I borrowed 54% of my own portfolio value to invest further.) To calculate this just take the total assets and divide it by the Net Value.
3. I’ve been slowly adding leverage as the market has gone up and portfolio increased in value in order to maintain the leverage ratio at around 150% which is my target leverage ratio. I will likely keep it around this band +/-10%.
4. This is going to be a little bit of a simplification, but due to the leverage ratio, if the returns on all assets is 10%, the total returns of the portfolio will be 15.4%. However, if the holdings go down 10% instead, the loss will also be 15.4% instead.

Obligatory Warning: Using leverage for investing is extremely risky and can wipe out your portfolio if you do not know what you are doing. This post is not intended to be a recommendation for anyone to use leverage. If you are considering to use leverage, ensure you are fully informed about the risks and have a clear plan before jumping in.

On this note, I only use leverage for my own portion of the investment portfolios. While I also invest for my wife, her portfolio is invested in similar global index but is leverage-free (and is thus lower risk.)

On the down-side: If the market drops by 50% from here:

• Total Assets will be S$1.765M
• Total Loans will remain at S$1.24M
• Net Value will drop to just S$525,000 – Less than a quarter of where we are now!

That’s the risk we will have to also consider – both the down side and the up side of using leverage.

So far given the market has been going up significantly this year, the leverage position has been extremely beneficial for my portfolio. However, due to the massive run-up, it is giving me a lot to think about regarding this leverage position.

As you can see, by using leverage and wanting to maintain the leverage ratio at 150% I will be forced to buy more stocks when the market goes up and sell (or inject more capital) when the market goes down – which is not ideal. In a volatile market this rebalancing effect can reduce returns. However luckily since I’m managing the portfolio myself I can be a bit more flexible about when I rebalance.

At the moment I tend to only add leverage only on days the market has a pullback – and if the market drops and cause my leverage ratio to go above 160% (my +/-10% ceiling) I can choose to, instead, wait to see if the market recovers and also wait for my continued contributions to bring the leverage ratio back down to reasonable levels. This will not work if the market experiences any sudden crashes however. I’ll hit on this more in my parting thoughts.

If you’d like to understand my thought process around investing with leverage, you can read my previous posts on this subject below:

1. The Risky Investment Experiment – Leverage & Lifecycle Investing Strategy
2. H12023 Update – Lifecycle Investing Update
3. 2023 Full Year Update – Leverage

Performance (Gains and Returns)

So what does the returns on the portfolio look like so far?

Current snapshot of the portfolio performance:

While a 17% p.a. return over 8.2 years is absolutely impressive, it is also a signal for me to readjust my expectation of future returns. Given that we have seen a huge run-up in 2023 and the first half of this year, I would expect the future returns in the second half of 2024 and in 2025 to be lower.

FIRE Milestone

I highlighted in the previous update that I have now increased my FIRE number and have a way to track my milestones based on what my portfolio allows me to afford on a monthly basis.

Let’s take a look at the chart that I use to track my progress now (the left axis is monthly income the portfolio can generate based on 3.25% safe withdrawal rate):

As you can see, we basically blew past the amount I’d need to be able to support 2 kids, and right through the “Travel FI” – basically giving me an additional S$1,000 in each month’s budget for travel.

Now the next milestone is about S$3,000 more which would allow me to support my share of the mortgage payments each month in perpetuity. That’s going to take a while more yet, haha.

Net Worth

So with all of this impressive performance of the investment portfolio, what does this mean for my net worth?

This is net of all loans and leverage usage – basically it’s what’s left over after all the loans and leverage position has already been deducted.

The majority of the increase in net worth came from the increase in investment portfolio (~S$529,000) and the rest was in the slight increase in our new home equity (~S$50,000.)

What’s very clear is that the timing of the sale of my previous home, the purchase of the new one, and the shifting of the net proceeds from the sale into the stock market last November happened at just the right time to capture the stock market’s rise this year. An unintentional and extremely lucky coincidence.

Parting Thoughts

Given all the above performance and my current positions, there are several thoughts going through my mind:

1. This has been an impressive last 6 months, it’s very unlikely that this level of performance will continue into the future.
2. There’s going to be a crash at some point – that much is certain – however nobody knows when that will happen. It could be within this year, a year from now, or 5 years from now… nobody knows.
3. In terms of the market trends there are several things that are on the horizon:
   • The U.S. Fed is probably done raising interest rates – it’s now a matter of how long will they keep rates at this level and when rates will start lowering.
   • Other advanced economies are already starting to lower rates, the Swiss Central Bank and Canadian Central Bank are the first few to lead the move. UK, European, and the U.S. will likely follow soon.
   • The market has already reacted by anticipating the rate cuts since late last year by rallying with any positive indication that inflation is slowing. You can see this with every announcements of PPI, CPI, and unemployment numbers. They all seem to suggest that inflation is slowly cooling while the economy is still good. The Fed may be able to stick a soft landing – good news all around.
   • The stock market is often a prediction machine and will move based on probability of future events – so we are already seeing rate cuts being priced in.
   • Those who has been sitting on the sidelines waiting for a rate cut before getting back in are missing the majority of the market increase.
   • When the U.S. Fed actually begin cutting rates it’s unlikely that we will see the market rally too much as the cuts would have already been priced in by that point.
   • On the other hand, the majority of the S&P 500 increase this year has been driven by large cap growth stocks (dubbed the Magnificent Seven) due to the AI hype with the rest of the constituents either relatively flat or moderately positive. This is to be expected, which is why index investing is so powerful – the majority of market returns are often driven by a small subset of the market – we just never know which subset will be the winner so we buy them all.
   • While this could be scary if the AI hype ends up not panning out, but it also means there is still room for other segments of the market to be next to outperform.
4. Given the above, it’s likely the market will continue to go up until the U.S. Fed actually announce a rate cut.
5. Of course none of this changes or affects my “stay the course” investment philosophy that has served me very well so far. I intend to continue to invest as much as I can as soon as I can into the market this year regardless of the news.

So in terms of the remaining salary coming in for the year, they will also go straight into VWRA as per usual.

However, given that I have a sizable leverage position, you might also want to know how I’m thinking about that specifically.

Specifically on the leverage position

This is going to be a long section, so if you’re not interested on my thoughts on leverage, you can skip this last part!

Repeat Obligatory Warning (Just in Case You Missed It): Using leverage for investing is extremely risky and can wipe out your portfolio if you do not know what you are doing. This post is not intended to be a recommendation for anyone to use leverage. If you are considering to use leverage, ensure you are fully informed about the risks and have a clear plan before jumping in.

On this note, I only use leverage for my own portion of the investment portfolios. While I also invest for my wife, her portfolio is invested in similar global index but is leverage-free (and is thus lower risk.)

Of course, with leverage in play, I do have further considerations – should I keep the leverage ratio where it is or lower my leverage given the above macro conditions?

This is an important consideration because with leverage it amplifies all market movements – I would want to reduce leverage before any market crash and get in right after before the market rallies. In other words, it doubly incentivizes market-timing.

I will probably write a full post just on leverage in the future as there’s a lot to consider, but I’ll outline some of my thoughts for the next 6 months here before we reconvene at the end of the year.

Here are my (extremely long – but I-hope-still-coherent) thoughts around my use of leverage:

Positive Short-Term Sentiments

Given the above macro economic conditions, it’s likely that the market will continue to rise over the short term into the end of the year. This alone means that I should hold onto my leverage position at the current ratio into the end of the year (probably up until the election results and the first rate cut is announced.)

Positive Long-Term Returns of Stocks

The long-term average real returns of the global stock market is 5% to 7% depending on the periods we consider. Also if the hype behind AI pans out even a little bit, this could be the next step change in productivity growth across all industries.

While we don’t know what would happen to median income as works gets displaced, I still believe this would bring a net positive to future net cash flow for companies over the long term. Thus I’m quite optimistic about the long-term returns of the stock market going forward.

Keep Cost of Borrowing Low & Ensure Ability to Stay Invested

However, I still must ensure that the interest rate on my loans is significantly lower than the expected returns of stocks. This is to ensure that we can withstand the volatility of stock returns (returns are never smooth) over a long period without getting margin called.

Since loan interests are guaranteed and stock returns are not over the short term, we need to ensure we can outlast the volatility to allow the returns to smooth out over the long-term.

So if we can take a loan with real interest rates that is lower than 2-3% and be able to stay invested with a long enough investment horizons then we should come out ahead.

Here’s how my loans are structured to give me confidence that I can maintain it for a very long time:

1. My current loan is sitting at about 1% real interest rate – which is very decent.
   • This gives me higher margin between stock returns and cost of borrowing.
   • This also means my monthly payments can be quite low (which I’ll touch on in the next point.)
2. The loan does not have a fixed repayment schedule. I can make payment with any amount I want, whenever I want.
   • The caveat is that the interest will keep accruing on the outstanding loan amount. So if I never make any payment, the interest will just keep piling up and added onto the outstanding balance.
   • As long as the outstanding balance does not hit the credit limit, I can keep accruing the interest for as long as I want.
   • This makes the loan extremely favorable. Of course, I won’t let the loan accrue in this way, in the normal scenario I can choose to pay just the interest portion only so that the loan does not compound – while the investments are left to compound in the market.
   • In the worst case scenario and I am laid off, I can stop payments for a while and let the interest accrue until I have cash flow to pay into the loan again. However, given that the real interest rate on the loan is much lower than the expected real returns of the investments – theoretically (but I’m not counting on this) we should be able to maintain this loan position forever as long as we don’t get wiped out by a black swan event. (Thus onto the next point.)
3. I maintain a significant crash buffer.
   • Of course we could be greedy and leverage up 2x, 3x or even 4x of our own cash to try to juice the returns as much as possible – however that would be very foolish and the risk of getting wiped out just due to market volatility is extremely high. I definitely am not that crazy.
   • While the book Lifecycle Investing advocates and recommends a maximum leverage of 2x or 200% for young investors – I feel like my risk tolerance is not that high, I’m not that young, and also my target retirement date is much earlier than assumed in the book. So I’m sticking with just 1.5x or 150% leverage to get leverage benefits, but not take on too much risk.
   • I am also ensuring that I have at least a 50% crash buffer – so even if the market crashes 50% from here, I will still not be margin called. Which I believe to be quite safe – especially I can continue to add more funds over time.

So with the above set up, I believe I can weather the storms to maintain my leveraged positions safely over a long time horizon to let the long-term returns to kick in.

Aside from reading the Lifecycle Investing book linked above, Ben Felix’s video on Investing with Leverage is a must watch as well.

Interest Rate Cuts Is a Matter of Time & Is Great for Leverage Positions

As mentioned earlier, at this point the U.S. Fed will likely no longer raise rates given that, by all measures, inflation has peaked and is cooling. It’s just a matter of how long the Fed will hold rates at this level before cutting – but a cut is pretty much a certainty.

Some say that the Fed has no reasons to cut rates unless the economy does badly and that’s not completely true. The Fed wants to see inflation move definitively towards 2% but does not want to over-correct either.

Why the Fed wouldn’t want to hold rates higher for longer than they have to

At the moment the U.S. housing market and banking institutions are also under strain due to the higher interest rates:

1. Home owners who had low rates don’t want to sell their house to move to a new one because they don’t want to get a new mortgage at a higher rate. This lowers housing supply.
2. Buyers can’t find a house to buy even with interest rates are high. Prices keep soaring because the supply of those willing to sell are low.
3. Banks hold a lot of mortgages on their books that are fixed at a lower interest rates, however their deposits interest rates are much higher now, putting them in a really precarious positions financially.

So if inflation does make clear moves towards 2%, the Fed will have no other incentive to hold the rates up at such a high level.

But it doesn’t mean it will go to 0%

Of course, I don’t think we will see 0% interest rates either – there’s no reason to go that low. The Fed still want to have rates as high as they can get away with (maintain 2% inflation without screwing up any part of the economy.)

This is so when there is a recession or economic turmoil, they have enough ammo in their arsenal to combat a downturn. Lowering interest rate is one tool that they have aside from QE – so lowering interest rates when there’s no real need is not something they should do if they know what they are doing.

However, all this is to say, interest rates will come down eventually. And once it does my leverage positions would be cheaper and stocks will likely rise more due to cheaper supply of loans in the market.

This is a positive for having leverage.

No Capital Gains Tax is a Huge Advantage

In other advanced markets where most Financial Independence and investing advice content comes from, they often have to be very mindful of the high capital gains tax that is levied on all forms of investments – including stocks.

However, one insane benefit of investing as a Singapore tax resident is that this is a complete non-issue. We do not have to pay capital gains tax on our stocks, crypto, or real estate investments at any time.

In markets where capital gains are charged, it needs to be accounted for as a drag on expected returns – so if your returns are 10% but tax is 10% on gains, your post-tax returns are only 9% – so you need to ensure that post-tax returns are higher than your cost of borrowing – increasing the risk.

In our case, we don’t need to worry about that at all and I believe this makes a very difference to the viability and effectiveness of a leverage strategy.

Taking worst case scenarios into account & having a contingency plan

Another thing to consider when thinking about whether I’ve managed all the potential risks is looking at all the possible worst case scenarios and see whether I have at least thought them through. This is to ensure that I’ve thought about and are comfortable with any of these scenarios playing out – and thought through how likely they are:

Worst Case Scenario 1

Stock market drops more than 50% in 1 day, I have no time to react, and I get margin called. With today’s circuit breakers and trading halts to prevent large drops, it’s unlikely that this scenario would be possible. The 2007 GFC had a peak to trough decline of the S&P500 of more than 50% but that took almost 2 years to bottom out – more than enough time for course corrections and adjustments to the leverage position. Plus in that scenario interest rates went to 0% so maintaining the loan would be extremely cheap. Even the most recent rapid decline was the COVID crash of 2020 which saw a drawdown of over 30% within a month – this also resulted in extremely low interest rate to stimulate the economy and the market rebounded sharply thereafter. So being completely wiped out with more than 50% crash buffer is unlikely.

Worst Case Scenario 2

Stock goes down as interest rates rise. Our portfolio goes down and the loan interest rate keeps going up – double whammy! We actually just went through this in 2022 didn’t we? Which as you can see if we stayed the course and kept investing as the market went down – once the interest rate stopped going up and market rebounds, we will be in a good place. Also… since we just went through that, it’s unlikely we’ll be in a situation where rates can go up much further from here as inflation seems under control.

Worst Case Scenario 3

The market crashes and I lose my job. In this case I can choose to pause any payments to the loan and let the interest accrue. In the scenario where the market crashes to this extent, it’s likely to also be accompanied by interest rate cuts in order to stimulate the economy – which should also reduce the interest on these loans thus reducing the amount of interest that will be charged or accrued until the economy and market recovers.

Best Case Scenario

The market drops or crashes while I stay employed. The interest rate will likely be lowered to stimulate the economy which will also lower the interest rate on the loans. I will also be able to choose between using my cash flow to pay down leverage or buying more stocks when the markets are down – both of which will lower my leverage ratio. As long as I am still employed and I have enough crash buffer, I can sustain this strategy for the long term and actually come through a crash better off than before.

Handling of Leverage Before Retirement

I will definitely need to lower my leverage use before I start drawing down from my portfolio – there’s no point carrying this risk into the retirement phase. Retirement should be about wealth preservation and portfolio longevity rather than maximizing returns.

Thus I will need to work out a strategy to lower my leverage between now and the time I hit my FIRE number. I will likely dedicate a separate post on my current thoughts on this strategy.

However, even at my currently optimistic projections, I am still about 5 years out from reaching my FIRE number, so while my time horizon is not long, I still has some ways to go for adjusting my strategy.

Wrapping up on leverage

Given all of the above, as well as my sense that the market will continue to rise into the U.S. elections as well as the first Fed rate cuts, I am going to continue to maintain my 150% leverage ratio for now and give you another update on how that goes at the end of this year.

I hope that makes sense! Let me know if you have any questions in the comment section below!

Wish me luck and until next time!
FPL