When Can I Retire ?

When I started planning for my early retirement , I wanted to calculate when can I consider myself financially independent and found a website that helped me with the calculation.

Early Retirement Calculator 

If you would see that India has an saving percentage of one third of our income and we can strive to increase it to half

When you play around with the calculator you will understand that the key number that makes a lot of difference is the Saving rate hence in any retirement planning one should Focus On Saving to start with as that is in our control as against the market returns.

One of the drawback of the calculator was the it didn't take inflation into consideration as that would eat into the money over years hence I reduced my Annual Return of Investment by the rate of inflation, ie close to 2% for Sweden and may be 5-6 % for India.

Instead of the Withdrawal rate I have put in the average dividends rate across my portfolio that is given out as I would like to keep the principle amount constant and not dip into the stockpile that could reduce the ROI in the long run.

There is a 4% retirement withdrawal rule that was coined by William Bengen in 1994 (increased to 4.5 % ) which is being defaulted in the calculator, but as mentioned in the above the inflation as well as market return over a period of time would have an impact on this rule. Just imaging that if there would a market downturn during the starting years of retirement the money in the stockpile would get depleted quickly and hence the future withdrawal would take a hit. Hence instead of the safe withdrawal I would like to have a 4% dividend rule to start with that would increase over the period of earning life and hence could sustain a market down turn through dividends and the the withdrawal could be used for any emergency that could arise out of the longevity of lives we enjoy these days.

When I calculated the number it gave me was 14 years to retire and I then added five more years to it so that I can earn the needed moolah for any emergency expenses that could crop up.

Here is what Warren Buffett said during the weekend !!

Every year in May Berkshire Hathaway hosts their annual shareholders meeting in Omaha where 40K shareholders of Berkshire Hathaway descend to hear to what "Oracle of Omaha" Warren Buffett has to say and that was during the last weekend this year. I was lucky that I found time to hear to the live broadcast of Q&A where Warren Buffett, 89 along with Charlie Monger, 95 sit for more that 5 hours to take questions from shareholders and answer them with some humor. I was surprised about the energy both of them had at their age and wish I would have the same state of mind and energy when I turn that old . They could pass on the baton to the Indian origin Ajit Jain as his next successor.

Here are few points I noted

Buffett said to invest in areas that you know when deciding on what companies to invest in and he calls them as 'circle of competence' and also believes expanding your 'circle of competence' but to be cautious and patient when investing

Buffett thinks that stocks are ridiculously cheap if you believe that 3% on the 30-year bonds makes sense.

Buffett said, "You can invest small sums at much higher rates of return than you can large sums"

Charlie said "You don't need a portfolio of large stocks if you know what you are doing."

Buffett said,"It’s the two things you can’t buy: Time and Love." "I’ve been very, very, very lucky in life to be able to control my own time to an extreme degree."

"Charlie’s always valued that too. That’s why we really wanted to have money, so we could do what we damned pleased."

"I could do anything that money could buy, pretty much, and I’m having more fun doing what I do than doing anything else."

The last sentence he said is the reason I am trying to retire early and to do what I love to do. 

Which Konto to buy Stocks in AF or ISK or KF ?

When I started thinking about saving one thing that came to my mind was tax planning as we do in India where we have multiple avenues or sections that can be used to save on taxes by investing. It was hard for me to find those options as finding the right applicable taxation at the Skattaverkt website was hard and even if I found anything it was difficult to understand and interpret them using Google translator and Swedes try to avoid discussing financial things openly during a fika. I was super excited when I found ISK and KF for long term saving with minimum tax implications.

There are three types of accounts that can be used to trade in Sweden.

• Aktie & Fond konto (Stock and Fund Account)
• ISK - InvesteringsSparKonto
• KF - KapitalFörsäkring

Aktie & Fond konto (Stock and Fund Account) is a normal trading account and is taxed at 30% for all capital gains as well as dividends. You need to declare each and every stock transaction detail that is done during the year in the account when filing tax using a K4 form. The only positive point of this type of account is that you can offset the capital losses that you incur in the account against any capital gains during the financial year. For all dividends that are received in the account a preliminary tax of 30% is deducted.  I use the Aktie & Fond konto as a holding account for money before I transfer it to ISK or KF. As there is no interest on liquid funds that are in this account there are no tax implication if you place your buffer money in Aktie & Fond konto. The Aktie & Fond konto are covered under the deposit guarantee insurance which assures a compensation of upto 950 000 SEK in case the custodian bank goes bankrupt. I use this account to receive barn bidrag amount before I transfer them to their respective accounts for investment.

At the end of the blog I have detiled out the steps to open the accounts

ISK - InvesteringsSparKonto is a trading account which was introduced to support long term investing with better tax conditions .You can buy stocks aswell as mutual funds. The taxation is based on the size or the capital base in the account and not on the capital gains or losses that happen. You will have to pay a quarterly tax based on capital base .The rate of tax is based on the government loan rate that is on November 30 of the year plus 1% and the minimum rate was set to 1.25% considering currently we have very low interest rates.

In the above example I started the year with 50K in the account and added another 50K during this year.
Capital base is calculated as (292000+50000) / 4 = 85500
Then it is multiplied by Government loan rate (2018 rate was 1.51% ) : 85500 * 1.51% = 1291.05
I will pay 30% of the amount as tax 1291.05 * 30%  = 387.31

If I would have had the same type of transaction in Aktie & Fond konto and considering a 8% ROI I would have paid 100000 * 8% = 8000 * 30%  = 2400 . Hence saving in ISK is tax efficient than the Aktie & Fond konto 

It is beneficial to buy only Swedish Stocks in ISK as the dividends are not taxed and for Non-Swedish dividends are taxed at 15% to 27% based on the company and can be automatically claimed back in the tax declaration against interest expenses but the ceiling is set to SEK 500 , hence I buy only Swedish , Non-Dividend paying Foreign stocks and Mutual funds in ISK.

KF - Kapital Försäkring  or Capital Insurance is similar to ISK but you can nominate some one else as the nominee other then immediate family as its beneficiary for example you can nominate the account to kids from your previous marriage and they will inherit it when they turn 18 . In case of your untimely death the nominee would receive an additional 1%.

Regarding the taxation its a little bit different than ISK on how its calculated. Deposits during the first half of the year are counted as 100%, while deposits during the second half are calculated as 50%.

Capital base is calculated as 50000 +15000 +21000 + (50% * (5000 + 9000 ) = 93000
Then it is multiplied by Government loan rate (2018 rate was 1.51% ) : 93000 * 1.51% = 1404.3
I will pay 30% of the amount as tax 1404.3 * 30%  = 421.29

Swedish Dividends are tax free similar to ISK but its beneficial to buy Foreign Stocks in KF as the Stock broker is the custodian of this type of account and will take the responsibility to get the withholding tax back without an upper limit. Usually they take a couple of years to get back your withholding taxes, hence I buy only Dividend paying Foreign stocks in KF.

Don't move money in and out too frequently from ISK or KF as it would increase your tax liability. 

How to open an Aktie and Fond Konto

One of the brokers I use is Avanza, who is currently giving free Stock Trading in the main Stockholm stock exchange across all type of accounts for new customers until your savings reachs SEK 50,000 or 500 trades within a period of 12 months. You could use the below link to open an account and get the free trading, all you need is a personal number aswell as Bank ID to open a new account. Opening of any type of accounts are free of cost.

Open New Account with Avanza 

I will write another blog with comparison of different Stock Brokers and their fee structure. 

How Stefan's decision impacts us !!

If you are wondering who Stefan is he is our Riksbank governor his full name is Stefan Ingves he decides on the repo rate . He has been trying for a very long time to normalize the interest rate but the CPI figures haven't been supportive of his wishes :)

If you are wondering how the repo rate impacts us here are a few

• Interest rate on Mortgages (which has a huge impact on monthly finances)
• Interest rates on Saving which is currently non-existent in majority of the banks other than a few niche banks that give 1%  interest per annum.
• Exchange rate with INR as the interest rates decides on how strong the SEK is and that will have an impact on our remittances back home.
• Our Yearly salary increment rates that are negotiated by the unions.
• Most importantly it makes sense to take risk and invest in Stock market as against the safer government bond or debt instruments.

Inflation or CPI numbers have a direct relation to the interest rates aswell as GDP and the health of the economy and the employment numbers too.

There has been discussion that if the interest rates increases there would be a major impact on the housing prices and many of us who already own our homes have been concerned about development.The people who are planning of buying homes have put forward their purchase decision based on the hope that interest rates will increase during the spring and could help is getting a home at a lower price than in the beginning of the year ,but sadly the forecast for the repo rate has been revised down and indicates that the next increase will occur towards the end of the year or at the beginning of next year.

As you know in Sweden when we take Mortgage loans we can bind or fix the duration of the loans to different maturity levels between floating 3 months and upto fixed 5 years. You might have seen that the 3 months interest rates are more expensive than the 3 to 5 years fixed mortgages, you may wounder whatz the reason ? One of the reasons is that the probability of interest rates hikes in the medium term is expected to be low as there is recession fears in the next 3 to 5 years and because of that the real interest rates would be below what it is today as the growth is expected to go down so is the GDP.

Its a clever idea to divide the mortgage loans between different maturities to hedge against the impact of interest rate increases, but I haven't fixed any part of my mortgages and kept them at a 3 months floating even though I know that I would be paying less if I fixed it to 3 or 5 years. One of the reason being I have burnt my fingers in 2011 when the interest rate were increasing and in order to hedge I fixed half of the amount for 3 years and within a span of 6 months the interest rates went down and I was struck with a high interest rate for 3 years and was expensive to break it to a floating rate and was forced to pay almost 2% more than the floating for almost 2 years.

Regarding the inflation or CPI numbers the forecast says that during 2019, the rate of increase in energy prices is expected to be lower, which will contribute to a fall in inflation, with a lowest point of almost 1.5 per cent this autumn.

The interest rates in Sweden can't be seen in a isolation as the interest rates decisions by Mr.Draghi at ECB aswell as Mr.Powell at the US Fed has an impact on Stefan's decision.

In the below two graphs that compare interest rate policies of April 2016 and April 2019 you can see the interest rate trajectory is similar to what it was 3 years back which in a way is helpful as the interest on home loans didn't go up.

One of the main reason as you can observe that the CPI too are almost similar between April 2016 and April 2019 and in 2016 they had projected 3% inflation and in 2019 its projected to 2%

Source : Sveriges Riksbank

Exchange rate between SEK/INR :Normally when the interest rates aren't raised the currency becomes weak that is what happened between SEK and INR on the 25th April because of the rate decision.

We will see how the CPI and GDP numbers will impact on the next collective agreement negotiations.

The more dovish Powell , Dragi and Stefan are the better for the stock market !!

My First 100K SEK

Thank you for the continuous feedback on the blog, one of them was how did I invest my first 100K once I was able to save :) Did I invest in Marijuana stocks ? Hell NO !!
The thumb rule is to invest your first 100K in Index funds and that is what I did as well and invested my first 100K in an Index Fund. To start with I configured my bank account to automatically transfer 10K every month on the salary day so that it could be regular and I could systematically invest, also I would transfer what ever was left at the end of the month to the stock broker account to invest.

I had opened up an Aktie and Fond Konto to start with then moved the money to ISK to invest in mutual funds. There are three types of accounts that you can use to trade in Sweden.

• Aktie & Fond konto (Stock and Fund Account)
• ISK - InvesteringsSparKonto
• KF - Kapital Försäkring

I will explain the difference between them later in one of my blogs this month with their advantages and disadvantages.

Allocation and Diversification

Allocation and Diversification can be achieved in multiple ways

• Asset Classes (Equities or Debt)
• Market Capitalization (Small, Mid and Large)
• Performance (Growth,Value and Blended)
• Geographical (Sweden, Nordics, US, Latin America, Japan, China, Emerging Markets, ect)
• Industry (Technology, Bio-Tech, Real-Estate, Energy, Financials, FMCG, ect)

As the investments were for long term and I was young I could take more risk be aggressive and hence invested 100% into equities and distributed them across growth and blend.Started diversifying geographically and later started diversifying by industry.

Things I consider when I invest in a Mutual Funds

Management Fees - The lower the management fees the better the ROI, I have seen average management fees from 0.05%  to 3% in Sweden. In India when I started investing in mutual funds I remember seeing management fees as high at 5% ..really 5% !!??. One of the reasons I stopped investing in mutual funds in India was the management fees. Also I realized that the friendly neighborhood investment 'uncle' who used to have the UTI mutual fund form available and was to happy to help you fill up the form used to get a cut every year , yes EVERY YEAR for rest of his life a percentage from my investment , which wasn't too transparent until you knew exactly how the mutual fund commissions work. Now a days you have direct funds available after people have understood the -ve impact on the overall return that they have started to give a close attention to the management fees.

Performance wrt the Index in Short, Medium and Long-term alias 'Alpha' (the deviation from index is called 'Alpha')
Checked how the Mutual fund was doing wrt to index fund or any benchmark index that the fund claim to follow to see what was the performance . I normally measure Alpha between one month to 36 month performance and hopefully its a +ve one. Will explain how even a + 1% a year Alpha could have long term impact on the performance of a Mutual fund in one of the blogs , its a very interesting observation I made when I was comparing the performances of mutual funds.

Here you can find the mutual funds that I invested in and have updated with new ones that and available in the market.

Geography	%	Suggestive Funds	Management Fees
USA	25	SPP Aktiefond USA	0.22%
Sweden	20	Avanza Zero	ZERO
Emerging Market	15	Avanza Emerging Markets	0.29%
EU	15	SPP Aktiefond Europa	0.24%
Japan	5	Länsförsäkringar Japan Indexnära	0.21%
SE Small& Medium	5	AMF Aktiefond Småbolag	0.44%
Latin America	5	Nordea 1 - Latin American Equity BP	2.60%
USA Small & Mediu	5	Handelsbanken Amerika Småbl Tema A	1.53%
Russia	5	SEB Rysslandfond C EUR - Lux	2.39%

Geographic Diversification Chart

Feel free to leave a comment below if you have a different opinion on the diversification and what has worked for you.

Marijuana Stocks - Part-2

Since my last post Canopy Growth (WEED) decided to get aggressive in their global expansion and bough options last week to purchase Acreage Holdings, Inc. (ACRGF) which is one of the major players in the US. This move gave rise to speculation that US may be 'close' to legalizing cannabis on a Federal level, 'close' could be 90 months away as is the validity of the options. The stock reacted positively for the news by gaining close to 10% at opening.

Continuing with cannabis stocks in my portfolio one of them is a company next door in Denmark called Stenocare (STENO)  who are also into distribution and growing of medical cannabis and has license as part of a experimental scheme in Denmark that started in the beginning of 2018. For sourcing aswell as for Know-How they have a tie-up with CannTrust (TRST) which is one of the leading manufactures for medical cannabis in Canada.

It IPO'ed at the end of  October 2018 and since then has been on a good run and gave a return of almost 200% . Its a bet on legalization of Marijuana in the Nordic aswell as European market. Germany legalized medical marijuana in 2017 and is expected to have $1.6B in sales by 2022 and some estimates show Europe to be a $10 Billion market by end of the decade if its legalized.

The other bet is on the Infrastructure provider named Innovative Industrial Properties, Inc. (IIPR). They are the leading provider of real estate capital for the medical-use cannabis industry. It had a very impressive growth rate so far and has a forward PE of 26 .Currently they have 100% of their properties on long term leases that are 10 to 20 years long with an annual rent increases between 3 to 4.5% , which gives a very stable cash flow outlook. Year-over-Year growth has been good so far with  111 % Revenue, 720% Net Income and 344% AFFO Growth for Q4, 2018  which was driven by acquisitions. Hope they continue.

I have invested three times so far and plan to invest more if there is a pullback. They wasn't affected much during the December meltdown.  One of the plus point is that it has a dividend yield of 2.2 % that is given out quarterly.

As I said the valuations for Marijuana Stocks are frothy and I have included them to spice up my portfolio and they together don't exceed more than 2% of my portfolio. I am not going to get into ethical aspect  of cannabis as there are valid points of either side of the spectrum.

Canopy Growth (WEED)

Stenocare (STENO)

CannTrust (TRST)

Innovative Industrial Properties, Inc. (IIPR)

I have now enabled anonymous commenting option on the blog to see if there are going to be any feedback.

Marijuana Stocks - Part-1

I first thought about investing in legal marijuana during an animated discussion with my friend when we were at a 'coffee' shop in Amsterdam in late 2013. As we all know this used to be an unorganized sector which used to grow the weed based on need basis for recreation purposes. In order to get rid of the opioid menace, few of the countries made it legal both for recreational aswell as medical use.

Marijuana stocks caught my attention during 2014 as it was one of the much talked about sector considering that many states and countries were planning to legalize.
The stocks in the sector are considered as high risk but also high growth.I started researching on them as an investment during 2014-15 and saw that there were too may penny or small cap stocks that had weeded the sector and hence the volatility associated with them. Majority of the stocks were listed in Canada and were more suitable to make a quick buck trading and not by investing in them longterm.

The companies in marijuana sector can you spread across three categories
-Growers
-Service providers to the marijuana industry
-Biotech

As these are high growth stocks I had to keep my value investment criteria aside as it doesn't make sense for value investing in marijuana stocks as valuation are done mostly on sales growth rather than on earnings.

My first marijuana investment play was in 2016 in a Swedish service provider to the industry called Heliospectra (HELIO) who were into Vertical Farming Solutions with LED grow lights and solutions for commercial greenhouse growers & horticulture producers which didn't go too well and I did an timely exit with a 7% annual return early this year.

By 2018 I had learnt some more on the industry and decided to go global and decided to make my first global investment in large cap in a company called Canopy Growth (WEED) which is the biggest marijuana grower in terms of market cap .Their quarterly revenues were growing good at an YoY rate of  214%.

Canopy Growth is the first marijuana company to be included in Canadian large-cap index . Constellation Brand's invested in the company for diversification has supported the stock very well since their investment. Constellation Brands (STZ) the makers of Corona Beer is also one of my holding and will talk of about it in later posts.
My investment in Canopy have given me good return of 122%

Current estimates says they will for the first time make an operating profit in 2021 which will give them an PE of 200+.
Canopy growth might be one of the safer and stable bet in the sector.

I did my second investment in second biggest but half by market capitalization called Aurora Cannabis (ACB). It is expected to make a operating profit next year with a PE of 300+ and will reduce to 60+ by 2021. Year to date it has gone up by 75%  as compared to 57% of Canopy.
Both companies are sold off during a broader market sell-off and I could consider putting some more into them.

The investment in Aurora has gone good at 45%  but not as good as the Canopy

Heliospectra (HELIO)

Canopy Growth (WEED)

Constellation Brands (STZ)

Aurora Cannabis (ACB).