$1,000,000 by 60? Yes, You Can!

 

Photo by Pixabay on Pexels.com

In 2013, I wrote this piece ($100,000 before 30) that highlighted an article written in The Straits Times on how realistic it is for someone in Singapore to amass $100,000 before turning 30.

More than a few people in Singapore have already proven that $100,000 by 30 is more than possible (for example, see here). What I thought I’d explore is the possibility of that same person reaching $1,000,000 by 60.

Why 60? Because that’s slightly before the official retirement age in most countries. In fact, the official retirement age is probably going to be 67 or 70 for someone in my generation. However, most people feel that they don’t have enough money to retire on even after working for a lifetime.

I want to show that’s not true.

Of course, a million dollars will not be the same in 30 years as it is today but I think for many people, a million dollars is still a sum that seems unachievable even after a lifetime of work. We’ll also look at the scenario where purchasing power is retained.

Anyway, I want to look at the possibility of a 60-year-old obtaining $1,000,000 because  $1,000,000 for a 60-year-old is kind of the same mental block that $100,000 might be for a 30-year-old.

Starting assumptions

Using the numbers from the “$100,000 by 30” article, I’m assuming the following:

Starting sum at age 30: $122,919
Savings per year: $22,805
Years to compound: 30

The article assumed that the hypothetical person saves 50% of his/her income. For the sake of easy calculation and to be conservative, I’m going to assume that the amount of savings will not change. i.e. the hypothetical person continues to save only $22,805 per year from age 30-60.

Scenario 1: $1,000,000 by 60

Using a trusty financial calculator, I found that with the above assumptions, one only needs a rate of 1.24% p.a. to reach a million dollars by the age of 60.

1.24% per annum for the next 30 years.

Let that sink in. That is a seriously low bar to cross. As I write this, the 30-year Singapore government bond has a 2.88% yield. Assuming rates don’t change much, the latest issue of the Singapore Savings Bonds which everyone loves will also get you there if you keep your money in it for 10 years and repeat the process another two times.

Scenario 2: Retaining purchasing power

Of course, those worried about losing purchasing power to inflation will point out that $1,000,000 today is not the same as $1,000,000 thirty years later. Well, historically speaking, inflation has been roughly 2.5-3% per year. This means that our 1.24% p.a. needs to be something more like 3.74 – 4.24% p.a.

Scenario 3: Becoming an actual ‘millionaire’

In order to retain the purchasing power of a millionaire today, that rate of return needs to be higher. Assuming an inflation rate of 2.5% p.a., $1,000,000 today will be equivalent to about $2,097,567.58 in 30 years. In order to become the equivalent of a millionaire in 30 years time, our $100,000 by 30 person will need a rate of return of 5.12% p.a.

Keep Calm and Continue the Process

Of course, scenarios 2 and 3 are the goals we should be aiming for and that’s not going to be achieved with government bonds but neither is it an unrealistic rate of return. The $100,000 by 30 article assumed investing in a 60/40 stock/bond portfolio which should easily give us 5% p.a. It may not get you to scenario 3 but it won’t be far off.

My point is, for many people, being a millionaire seems like a pipe dream. It isn’t. Not in both nominal or real terms.

If you’re one of those that already hit $100,000 by 30, this post of mine is to provide some comfort to keep doing what you’ve been doing. What you’ve been doing is right, and you’ll be just fine. In fact, if you can bump up the savings rate or get higher returns, you can get there is fewer years.

Now, if you can’t even amass $100,000 before 30, then what are you waiting for?

Are You Financially Literate Enough to Know What’s Right or Wrong?

If so, you won’t take kindly some of the points made in Exhibit A below.

I recently came across this article* aimed at complete beginners on investing and it’s just downright terrible. The sad part is that I’ve seen many people share this on social media like it’s good advice to take.

I hope you didn’t take too much of it seriously because there’s plenty that’s wrong with it and any financial blogger worth his/her salt should be able to point out what’s wrong with it.

Let’s take a look at what’s wrong with it.

 

Exhibit A – a community-sourced article which has gone viral

The whole article gives you four different options but doesn’t highlight the proper risks and rewards or evidence to back up its claims. In other words, it’s shit.

What Exhibit A gets right

Exhibit A starts off on the right note by asking people to invest monthly. It correctly states that for all investors, inflation is one of the things we need to beat and that by putting your money in a savings account, you won’t be able to beat inflation. In other words, people who save money in their bank account is going to see their savings buy them fewer things in the future.

 

What Exhibit A gets wrong or ignores

#1 DCA may not be the answer

While the article makes some attempt to tell us NOT to time the market, it’s recommended solution is to dollar-cost average (DCA) into the asset class. Where this goes wrong is that the market, on average, goes up more times than it goes down. What this means is that as your DCA into the market, you end up paying a higher price, on average, for the asset.

Now, being in cash runs the risk of losing out on returns from dividends, coupons or capital gains but DCA-ing into a higher price doesn’t strike me as particularly intelligent behaviour either. I don’t have the data so I don’t have a definite opinion on this but the risk of DCA should be pointed out instead of being hailed as an optimal solution to the problem.

#2 How do you define risk?

The article then classifies the different recommended “ways to invest” according to risk levels.

The problem is: what is ‘Risk’? Is it fluctuations in price levels? Or is it a permanent loss of capital?

Unless you define risk properly, the classification is unnecessarily arbitrary.

Investors with a long time horizon shouldn’t be worried about fluctuations in prices and be more concerned with the long-term returns from the various asset classes. In fact, studies have shown that over a sufficiently long period (such as 15-20 years), stocks have delivered only positive returns.

Of course, investors had to live with the volatility of prices going up and down but with a sufficiently long period, returns were both positive and higher than any other asset class. On the other hand, bonds returned less than inflation over the same period.

So which is riskier? Stocks or bonds?**

#3 Fees matter and funds underperform

The article also suggests that funds are riskier than the global ETF that the three robo-advisors invest in.

Why? Once again, no mention of that.

I’ll tell you why. The biggest reason is that actively-managed funds then to charge higher fees and end up failing to beat their benchmarks. Check out this statistic that from research that was published last year.

Over the last 15 years, 92.2% of large-cap funds lagged a simple S&P 500 index fund. The percentages of mid-cap and small-cap funds lagging their benchmarks were even higher: 95.4% and 93.2%, respectively.

Source: MarketWatch

Once again, no mention of this even though this was one of the recommended steps.

 

Exhibit A sucks

Yes, I understand that the article is for beginners but beyond telling them to save money and giving them the steps to start investing, the article doesn’t help much.

In fact, if I were to tell beginners something, it would be to understand compound interest, gets a sense of market history, and understand valuations. If you aren’t prepared to do all that, you won’t have an idea what to do when you see your portfolio fall by 30-40% or your losses (on paper) go into six-figures.

Exhibit A is that the kind of stuff that fulfils the adage of how knowing a little can do a lot of damage. Go do yourself a favour and actually read up on proper investing before you do anything.

 

Notes:

*Not providing a link to Exhibit A because it’s rubbish that you’re better off not reading it. If you’re really interested, go google the headline.

**Astute readers will also point out that the question depends on whether you are an older person without a job and a need for income to meet daily expenses or a young person with a relatively stable income and expected extra years of life (and thus, investment horizon) of possibly 40-60 years.

 

So, who still wants to buy bitcoin?

Photo by Pixabay on Pexels.com

 

Today, a friend brought to my attention my calls on bitcoin.

To be fair, I didn’t call anything. It’s not like I had a price target on bitcoin or a specified timeframe for the collapse in prices but I did say that it was a mania and the whole damn thing was overhyped as an asset class.

When I began writing about bitcoin (see here and here) in November of last year, bitcoin was approximately US$7000. As of today, bitcoin is roughly US$6,400. In the span of just a few months, Bitcoin has reached a high of US$20,000 and fallen back to slightly less than when I started writing about it.

I don’t know if bitcoin and other cryptos will continue to fall but I’m pretty sure the naive, retail investors aren’t really in the thing any longer. The good news is that unlike the US housing market, I don’t think the institutions are levered up to their eyeballs with derivatives related to crypto. It’s too soon for another financial crisis and crypto seems unlikely to be the kind of asset class that would lead us to one.

I wrote a whole bunch of stuff on crypto which you can read as well.

If the value of a thing can vary so widely in just a few months, can you really use it as money? Can it hold value? Was the fervour speculative?

I think the answer to those questions is pretty obvious.

I’m pretty sure all the students and common folk in South Korea who put their life savings in crypto are regretting it now. They regret their folly which was fueled by greed.

It’s sad that people who obviously don’t know what they’re getting into, lose money on things like this. It’s not much different from those ‘investors’ who bought into structured products during the GFC.

Unfortunately, these things are as old as the hills. We would be wise to know the difference between investing and speculation.

Are you diversifying or deworsifying your portfolio?

Should you have more baskets to store your eggs? Is more always better?

You’ve probably heard the saying “Don’t put all your eggs in one basket”. The wisdom goes that at least if you drop the basket, you won’t have to worry about losing all your eggs.

In the investing world, the same logic can apply. Having a portfolio of many stocks means that if one company fails, bringing the value of its stock down with it, an investor’s portfolio should not be affected to a large degree. In the finance literature, this is known as eliminating non-systemic risk.

In general, portfolios with 10 or more stocks reduce the amount of volatility dramatically relative to the market and once the portfolio reaches 30 or more stocks, volatility is reduced to barely above a percentage point. (see here)

Unfortunately, there are a few problems with just having a larger number of stocks in your portfolio.

 

Industry-specific Risk

It doesn’t matter if you have many stocks if they all belong to the same industry and that industry is currently in the midst of a cyclical decline or the various players in the industry were all engaged in unsavoury practices.

In 2008-2009, the financial industry was hit by the downturn in the U.S. housing market. This led to credit being frozen in the banking sector and once the dominoes fell, even the better-capitalised banks felt some pain.

More recently, many Singapore-listed firms in the oil & gas sector were also hit when oil prices fell from over a hundred US dollars to a low of 30 US dollars. The bigger players such as Keppel Corp and SembCorp saw their share prices fall to multi-year lows and haven’t recovered much despite oil prices climbing up to about 70 US dollars.

Smaller companies that provided services to the offshore gas industry suddenly found demand for their services dry up and those that were up to their eyeballs in debt have been in serious trouble for some years now.

In short, having a large number of stocks doesn’t matter if a large number of them all depend on the same economic factors for profit.

 

Geographic or Location Risk

The same goes for companies that all depend on a certain location for profit. It’s also well-known that investors tend to have a home-bias. This means that investors tend to put a huge chunk of their portfolio in their home country.

If the country has a huge domestic economy and many of the companies are dependent on that country for business, then when the economy goes south, the fortunes of those companies will all be affected.

Similarly for the stock market, having all your stocks in a single market could mean terrible returns. from 1999-2009, investors in the S&P 500 would have made less than 0% returns p.a. This is the “lost decade” that many investment books talk about.

What those books neglect to mention is that the “lost decade” happened for the S&P 500. Other asset classes within the U.S., as well as markets outside the U.S., fared much better. For example, the MSCI EM Emerging Markets (Net) Index returned 9.78% in annual total returns for the same period.

 

Where Conventional Diversification Fails

So, if you diversified across a number of stocks, industries, and markets, you should be fine right?

Not so fast.

Research has shown that when a crisis hits, many asset classes that seem uncorrelated start seeing their correlations move to one:

But it has been well documented that correlations tend to increase in down markets, especially during crashes (i.e., “left-tail events”). Studies have shown this effect to be pervasive for a large variety of financial assets, including individual stocks, country equity markets, global equity industries, hedge funds, currencies, and international bond markets.

To make matters worse, research also finds that:

Not only did correlations increase on the downside, but they also significantly decreased on the upside. This asymmetry is the opposite of what investors want. Indeed, who wants diversification on the upside? Upside unification (or antidiversification) would be preferable. During good times, we should seek to reduce the return drag from diversifiers.

In other words, different asset classes may move out of step in bull markets while they all seem to move in the same direction when the bear bites. This results in diversification that causes a drag on returns in bull markets while offering little protection from the bear.

However, the article also finds that the two asset classes that are useful for diversification are a mix of Stocks and Bonds. Specifically, the study used Treasuries in the bond mix which suggests that Treasuries go up when Stocks go down due to a flight to safety.

 

Main Takeaways

The main lessons from this are to be aware that while diversification is necessary within the asset class, we don’t want to add too many asset classes to the mix thinking that that will be the solution to preventing the entire portfolio from tanking at the same time. The bigger lesson would be to have a sense of whether valuations are rich or cheap as well as to rebalance the portfolio towards the optimal mix.

Alternatively, you can take Andrew Carnegie’s advice to “put all eggs in one basket and watch that basket” but I wouldn’t recommend it; It’s too much work. Furthermore, it’s hubris to think that you are better than many of the people who analyse companies for a living. This may work for investors like Warren Buffett* but unless you think that you’re that good, you should spread your investments.

Just don’t spread them too thin.

 

Notes:

*Actually, even Warren Buffett had his share of mistakes like Dexter’s Shoes so imagine if all he owned was that shoe company.

More on profiting from your HDB flat

So, on the day I published my post on HDB flats, there was also this which I completely missed. TODAY, the free local newspaper published a really good article on HDB flats with some statistics and opinions solicited from some experts.

TODAY, 2 Jun 2018. Not a pretty headline.

From the headline, it’s pretty obvious that the newspaper is trying to help convince the general public that the official government stance of not helping existing owners cash out is not going to change soon.

What’s interesting to me is the anecdotal evidence that resale prices of older flats have dropped quite a fair bit.

Similarly, Mr Calvin Loh, 38, a hardware goods showroom manager, said he is also getting anxious about the value of his Commonwealth Close flat, which has 47 years of lease left.

He noted how a former neighbour sold his three-room unit for S$400,000 four years ago, but a similar unit in the same block changed hands for just S$280,000 a few months ago.

It’s also interesting that quite a few of those interviewed are owners that are relatively young. Two of the other owners of old HDB flats mentioned in the article was a 34-year-old guy and a couple in their 30s. The guy inherited the flat from his mother while the couple bought the flat.

I don’t really have anything much else to add except that I think the group that should be really worried would be those that bought an old flat with a mortgage that’s near the maximum allowable limit. In other words, those people that bought an expensive, old flat with a mortgage that’s around 25-30 years, and costs them practically all of their CPF contributions.

If you have an older flat that’s going to depreciate in value, there’s not going to be much equity you can extract from the flat even if you were to use HDB’s lease buyback scheme. Selling it on the resale market would be a problem because of the restrictions on the use of CPF or getting a bank loan.

If you’ve been servicing the mortgage using practically all of your CPF contributions, there’s not going to be much in there at the end of your working life. You can’t let compounding do its magic if there’s nothing to compound in the first place. Plus if you only finish paying off your mortgage at 55 or 60, how many years of working life do you have left?

These people are going to end up with a home that has little value and nothing much in their CPF or bank account.

Best Things I’ve Read All Week: 3 June 2018

Another week’s come and gone. Lots of finance/investing related reads this week. Also, a good look at Tesla and the world’s plastics problem.

How I save >$150k before 28 – updated tips (Simple Budget, Simple Life)

I like how young people living in a country with one of the highest costs of living still manage to achieve such high net worths relative to their age. She offers some tips in this post and throughout the rest of the blog. It’s a good read for those who can’t get over the mental block of saving enough money so that you have six figures in your bank account.

Having said that, this is like clearing level 1 of the video game called ‘Financial Independence’. if you stick to the same tips that the blogger provides, you’ll find yourself trapped in the hell called “work-save-spend”. Plus, tracking budgets and comparing tiny differences in savings account deposit rates are not really the smarter way of doing things.

 

Ignore the Millionaire Mindset; Try the Billionaire Behavior Set Instead (The Big Picture)

An awesome post. I’m going to print this out and stick it on the wall of my cubicle. There’s a saying that goes something like this, “If you reach for the stars, even if you fail, at least you’ll land on the moon.” So, if you’re trying to get wealthy, aim higher and at least if you don’t get there, you might not be too far off.

That aside, those seven points are things ANYONE should follow. I don’t know if these were the things that made billionaires their billions but I think these seven points are critical ingredients for living a good life.

 

Price Is What You Pay; Value Is What You Get – Nifty Fifty Edition (Fortune Financial)

This won’t come as a surprise for anyone who’s trained in the ways of fundamental investing. Having said that, it’s always nice to come across case studies of how valuation matters. The Nifty Fifty is something many new investors are probably unaware of but it goes to show that unbridled optimism pushing valuations high is an ever-lasting feature of financial markets.

My only quibble would be whether using P/E alone is a good measure of value. Also, the table seems to show that having a long holding period (see the 30- and 40-year returns in the post) mitigates the dangers of buying at high valuations. I guess the main thing would be whether most investors have that long a time horizon.

 

Why is Elon Musk raging at “big media”? Because he’s finally being called on his tall tales. (Vox)

Speaking of high valuations, Tesla and Elon Musk have been in the spotlight recently. Compared to a few years ago, things aren’t so positive this time. When Tesla IPO-ed, I remember reading about some investors who were planning to keep buying Tesla stock for the foreseeable future as there was so much hype surrounding Elon Must and all his various ventures.

In case you haven’t realised, Elon Musk is no Jeff Bezos who’s trying to upend something as simple as retail. Musk’s ventures are as capital intensive as it gets and if you’ve read Jeremy Siegel’s “The Future for Investors“, you’ll know that most companies with high CAPEX don’t tend to produce very good returns.

During times where credit is loose and things are rosy, companies like Tesla won’t have problems raising cash and blowing it on big dreams as they’ve done. In fact, for the last couple of years, there’s been a lot of money raised by startups.

These companies then race against time to prove themselves. It’s either they succeed in producing the outsized returns with a viable product that becomes widely adopted or investors lose patience and credit starts to tighten.

Good read all around especially if you’re a fan of Tesla and Musk.

 

The global plastic problem is even bigger than you think (AXIOS)

I’m no expert on the environment but I think if you’re human, then you ought to care. Recently, there’s been this fad about buying metal straws so that we can replace plastic straws and while I’m skeptical about fads, I believe the excessive use of plastics is going to a problem. After all, if plastics end up in the stomachs of the seafood that we eat, then that plastic is surely going to end up in our stomachs as well.

Singapore is a land-scarce and oil-scarce country so it makes even more sense to reduce our use of plastics so that we don’t have to find land to bury our plastic waste or contribute to the global demand for oil.

Will you really get rich from your HDB flat? One blogger doesn’t think so.

And I totally agree(d) with her.

In the fifth episode of her podcast, Vina Ip, or better known as the Singapore property investment blogger called ‘Property Soul’, shares her thoughts on why HDB flats should be treated as nothing more than a roof over your head.

Yes, there may have been those who benefited from the asset enhancement strategy that the government had in mind during the 90s but those days may be over. Unfortunately, it seems that many Singaporeans still seem to think of an HDB flat as a stepping stone to private property. This may be true for those who bought BTOs but as I’ve mentioned before, I’m not too sure about those who bought ECs or DBSS units. As for those in the resale market, you’re really stretching it.*

My biggest fear in all this is how most Singaporeans (going by those that I’ve talked to) don’t really have any assets other than their primary residence especially if they’ve bought a piece of property priced near the maximum amount of loan they qualified for. In Singapore, many property buyers are typically stretched on 30-year mortgages. If you’ve spent your entire working life paying for your house, then how on earth will you ever be able to stop working?

Anyway, if you’re into buying property in Singapore, I highly recommend you follow Property Soul’s blog and podcast and go read her book. In my opinion, she’s as good as it gets when it comes to property investment in Singapore. Good advice on investing in property is pretty rare in Singapore. Just like the financial advisory business, there are too many snake-oil salespeople with their own interests at heart.

Notes:

*After all, if you’ve managed to sell your flat for a decent profit, then private property in a similar neighbourhood must command an even greater premium. This means taking on more in terms of a mortgage.

Best Things I’ve Read All Week: 20 May 2018

Time to get a little smarter if you’ve been doing dumb things all week. Here are my reads for the week.

 

We Should Fail Better (The Big Picture)

Barry Ritholtz makes a compelling argument about how some institutions and systems learn better than others. He contrasts the aviation industry’s experience versus the U.S. public health care system. Off the top of my head, I suspect many institutions in Singapore could benefit from this sort of thinking as well.

 

What The 200 Day Moving Average Does & Does Not Tell You (A Wealth of Common Sense)

This is for the investment people. I don’t really believe in reading charts but there’s some value in using some of the indicators as a quick check on things. Personally, I would use the 200-day exponential moving average (EMA) as a guide to investor sentiment. The other thing is also to use it as a rough guide rather than a precise signal of when to enter or exit the market.

 

The 9.9 Percent Is the New American Aristocracy (The Atlantic)

It’s a very long read but I can’t recommend it enough. The article really describes what the upper middle class in America are going through and its impact on inequality — Children’s education, median starting salaries across the top decile universities versus other universities, the tax code benefitting the rich. It’s an insight and a reflection of the privileged class and its impact on society.

As a Singaporean, I found a lot to agree with and I wonder why academics in Singapore don’t focus on these sort of things. Inequality is an issue in many developed countries and it’s no different in Singapore.

 

How To Tell If You’re Rich Even If You Think You Aren’t (Financial Samurai)

An easier read compared to the one above but no less illuminating on whether a person should consider him/herself rich. Once again, U.S. context but general principles probably apply elsewhere.

 

Young Retirement Savers Scorned (A Wealth of Common Sense)

Another practical read. Ben Carlson comments on a piece that touched some raw nerves because the piece suggested how much net worth a person should have obtained by a different age. He adds on some calculations how the savings rate and rates of return you’ll need to hit those sums. This article is perfect for younger people or people who need some vision on how to save. If you don’t have a problem accumulating savings, then don’t worry, you can skip this.

My paradigm shifts on investing and weight loss

 

 

Photo by Anthony DeRosa on Pexels.com

 

In my previous post, I mentioned that the biggest obstacle for a young adult in getting to a $100,000 is probably the sheer thought of it. As the saying goes, “The first million is the hardest.”* You could get technical about it but from a psychological standpoint, it’s hard to fathom something that seems so far away and out of reach. Which is why, before you get your first million, you probably want to concentrate on your first $100,000. If you’re looking at your first $100,000, you probably want to focus on your first $10,000.

I also mentioned that you could get over the mental block by having a paradigm shift. So, what is a paradigm shift?

 

Sometimes the answer is already there. You just need to change your perspective to see it.

A paradigm shift works so well because sometimes we are trying to solve a problem by tackling the wrong areas or viewing the problem from the wrong angle. Here are two examples from my own experience.

 

Investing

“Rich Dad, Poor Dad” by Robert Kiyosaki has its detractors and after I’ve learnt more about finance and investing, I can safely say that the book isn’t very useful in teaching anything practical. The book won’t make you become a good investor or a successful business person. What “Rich Dad, Poor Dad” did for me was to help me question the whole idea of getting a job, spend some, save some, and then retiring.

It should have come to me more easily than others as my dad’s side of the family ran their own business but unfortunately it didn’t. For many years, I thought that the basic formula that most people subscribed to was the right one. I might have had my suspicions but I didn’t really question it or I couldn’t quite put my finger on what the problem was.

What the book did for me was to show me that there was a more efficient model than the “study, work, retire” model that most people have come to know. It presented me with two paths — be a business person, or be an investor. Once I picked the path of an investor, it was just a matter of setting up a system** that works for me and over the last 10+ years, it’s worked pretty well for me. All I needed to do was make tweaks to refine the system.

I’m not saying that the system I have now is perfect or will no longer need tweaks. What I’m saying is that I’m pretty sure I’ve got the main setup right in terms of approaching the problem.

The point is that this wouldn’t have been possible if I had never learnt of possibilities beyond the “study, work, retire” model. Getting rich this way is only possible for very few people who happen to earn outsized amounts relative to the average person. Even then, they must not fall into the trap of spending more than they earn or having their “lifestyle creep”***.

More recently, I’ve made a fantastic discovery on another topic altogether.

Weight Loss

For most people, weight issues don’t start until their 30s. That’s when the metabolism slows down and your lifestyle becomes less active due to work or having kids. And for most people, the logical solution to weight gain is either to (a) exercise more, and/or (b) eat less. So, when my weight ballooned to an all-time high relative to my height, I tried both methods.

Guess what? Unless you’re extremely disciplined, those don’t work.

Exercising more is the weaker strategy as studies have shown that diet is a bigger contributor to weight loss than exercise. Furthermore, dragging yourself to the gym regularly takes effort. This either involves waking up earlier or going after you’ve already exhausted most of your willpower at work. Grinding through a tough workout further depletes the willpower and that might actually lead you to eat more. “Alright, I worked out today. I deserve that extra slice of pizza.” That’s a pretty common thing we all say to ourselves after we work out. There’s also the type of exercise that you do but at this point, that’s more a matter of efficiency that effectiveness.

Trying to eat less also takes willpower. However, one other reason why it doesn’t work so well is that our metabolism slows down if we take in fewer calories than we normally do. If we normally consume 2,500 calories a day, our bodies see fewer calories as a sign that food is scarce and therefore we need to conserve calories by slowing or shutting down certain body functions. That’s why women stop having their periods if they eat fewer calories than needed for normal body functions.

So what’s the paradigm shift here? Fasting.

It sounds counter-intuitive. Besides, doesn’t eating fewer calories lead to a slowdown in metabolic function? So why would eating no calories work?

It turns out that once the glycogen stores in the liver are depleted, our body goes into a state called ketosis where it starts to burn fat as fuel instead of carbohydrates. It’s only by not eating that our bodies enter this state as the glycogen stores take about 12 hours to burn through. If we just eat fewer calories like some diets recommend, our bodies never enter this state as the breakfast-lunch-dinner cycle is evenly spaced over a 24-hour window.

There are variations on how to fast but the one I’ve done follows a 16-8 intermittent fasting cycle. Basically, you eat only within an 8-hour window. There are no restrictions on what you can eat but of course, this isn’t a license to eat as much as you want. You’ll also want to ensure that what you’re eating isn’t junk in order to get optimal nutrition. What I mean, of course, is that you can’t go on with this plan thinking that you can eat nothing but cheesecakes. A healthy, well-balanced diet is necessary for a good life.

Another thing is that I only eat this way on weekdays. Most days, I have only lunch and dinner while I have something for tea on some days where I feel a little more hungry. But it’s definitely not the lack of breakfast that is the major factor as I’ve never been one to have a heavy breakfast anyway so skipping breakfast shouldn’t make such a big difference in terms of the number of calories.

I’ve experienced amazing results with this. I’ve never been fat or obese, and the worse thing I had was probably early signs of a developing paunch. After going on this for about 6 months, I’ve lost about 10-12% of my body weight or approximately 20 pounds. I didn’t think it was that drastic but lots of people have noticed the weight loss. My weight is back to an optimal level and keeping it there has never been easier.

Apparently, fasting has lots of other health benefits as well but I can’t tell you if I’ve experienced any of those. The best way would have been to get a health checkup prior to starting the intermittent fasting program and then another checkup afterwards. However, the scientific evidence so far is quite convincing.

Word of caution. Weight loss is only for people who are overweight. It’s safe to say that being overweight is associated with many modern diseases such as diabetes, stroke and heart disease. However, I’ve had a number of colleagues who have no weight to lose asking me how I lost weight. These people are asking the wrong question. For them, it should be how to maintain an optimal weight or even bulk up. In fact, the next thing I need to work on is not losing any more weight but to get a regular exercise routine going for optimal health.

The paradigm shift here is away from the breakfast-lunch-dinner cycle to one that starts a little nearer to lunch. The funny thing is how we’ve all been told we need to eat 3 square meals a day since young but certain religions have been including regular fasts in their religious practices for thousands of years. There is a train of thought that the breakfast-lunch-dinner cycle is actually a relatively modern invention (thank you, Kellogg’s) and we’ve forgotten that our biology hasn’t evolved that much over the last few millennia.

The point I wanted to make is that sometimes, we need to question our assumptions and keep discovering if people have tried what seems like “impossible” solutions to the problems we have. Being experimenters and pioneers is something I’d rather leave to the scientists but if there’s convincing evidence that something works, we shouldn’t be afraid to try it out and see how it works for ourselves.

If you have experienced paradigm shifts in any other areas, feel free to let me know in the comments below.

 

Notes:

*If you’re a billionaire like T.Boone Pickens, then replace ‘million’ with ‘billion’. That’s the title of his book by the way.

**The system comprises of a few parts and is beyond the scope of this post but let’s just say that you don’t have to be a CFA charterholder to come up something similar.

***Lifestyle creep is the concept where your lifestyle creeps up to match any increases in your income. Most people aren’t consciously aware of this but it happens. Think of the type of holidays you took when you were a poor student compared to when you are working adult. Or the places you used to dine at versus the places you dine at now. Using a Singaporean example, chances are you went to Bangkok for holidays when you were a student and now the destination’s changed to Japan or Korea.

What a difference a half-percent makes

 

All these don’t come from nothing

 

Ben Carlson has just written another fantastic post on how compound interest works wonders even for very marginal increases in rates of return. His post was based on a quip made by Paul Merriman during a podcast with Med Faber about how a difference of just 0.5% makes a huge difference over longer periods of time.

You can check out some numbers he ran that shows what a 0.5% difference in rates of return can make over a long period of time. The point I want to make, which Ben kind of does as well, is how compounding does not help if there isn’t anything to compound in the first place.

$10,000 compounded at 6% over 30 years ends up becoming $57,434.91. To make things simple, let’s call it $57,500. To someone 30 years ago, $10,000 would have been a huge sum of money but if that’s all they had set aside for when they stopped working, they would be in serious trouble today.

Similarly, today if you are a working adult in your late 20s to early 30s, and if you think $100,000 is an impossibly huge sum to save in order to start compounding with, you might be in for a shock when you reach 60 years of age.

I’m not saying that $100,000 is a walk in the park to obtain. However, young adults who think that $100,000 is an impossibly huge sum to save up are NEVER going to reach that amount. That’s simply because of the huge mental block that comes with thinking that you’re never going to be able to achieve. It’s the same with anything else in life right? If you thought that you were never going to lose weight, then why would you even try? Or even if you “tried”, it would be that sort of half-assed attempt and you would give up at the first encounter of difficulty. But, seriously, it’s not so bad. This is how you can get started.

Of course, actually changing your habits so that you hit your goals takes a monumental effort. Personally, I find it easier to hit those goals if you have some sort of epiphany or paradigm shift about the problem. I’ll talk more about that in my next post.