DEV Community: Ilona Codes

Bitcoin Profit Calculator For Developers

Ilona Codes — Fri, 15 Jan 2021 09:18:09 +0000

What would your profit be today if you invested in Bitcoin years or a few months ago?

Bitcoin is on the rise right now, and many investors and venture capital firms are betting that it is here to stay. It's the first cryptocurrency that became the leading player in the crypto market.

A bitcoin investment is any investment carried out to make more bitcoin or more funds in return. You can learn more about investing for developers through my newsletters (+bonus: Top-15 Cash-Freeing Tips Cheat Sheet).

Bitcoin is a system for securely buying, storing, and using money digitally as a general concept. Once you have Bitcoins stored in a Bitcoin wallet, you can use them as currency or an asset like gold.

Bitcoin investment comes in various forms:

‣ Trading: buying at low prices and selling cryptos at higher prices. It involves learning skills like trading in forex, which helps inform you of bitcoin's next rising or falling moves.

‣ Buying and Holding. It's a famous approach with the bull run in 2017. It means buying Bitcoin for keeps and waiting to sell after an estimated time when the price must have gone above the region at which you purchased it.

‣ Mining. It's a method that deviates away from the traditional purchasing norm. Basically, it's solving mathematical transactional problems on the blockchain and getting paid in return for these services. You just need to provide a CPU or GPU to run these programs.

If you wonder how much amount of profit you would have made if you have invested in Bitcoins earlier, here is a calculator for that:

It works on a quite simple formula:

  const price = btcPrices[month];
  if (!price) {
    invalidMonthRange();
    return;
  }

  const lastPrice = btcPrices.lastMonth;

  console.log(`Price for month ${month} was ${price}`);
  console.log(`While the price for the last month was: ${lastPrice}`);

  const roi = (lastPrice - price) / price;
  const grossProfit = roi * amount;

  console.log(`Gross profit now would be: ${grossProfit}`);
  console.log(`ROI: ${roi}`);

  setGrossProfit(grossProfit);
  setROI(roi);

In the example of the future returns, you see the hypothetical growth of Bitcoin during 2021 and how your initial investment would be growing at the average growth percent per year based on the historic value of Bitcoin.

The Bitcoin annual growth is the highest form of speculation and may not be suitable for all. So, you should be careful and not bet a significant amount on such activities.

Bitcoin is a currency. Currencies store value. Bitcoin's stability as a currency is a whole other topic.

If you are up to trade Bitcoin, you can hedge or speculate on getting more returns. Such as was popular with gold or oil back then.

I have nothing against Bitcoin speculating or hedging if you are profitable in the end. That's why forex exists.

The problem today to consider Bitcoin as a valuable investment is that unlike stocks, there are no tied/tangible assets to it; Bitcoin doesn't pay dividends out. Yet, in 2021 there are no government or financial institutions behind it—no FDIC insurance.

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On the other hand, in some stock markets, you can trade-in "short-positions" and vice versa "long-positions." It means to sell first at a premium and then to buy at a lower price. This approach is mainly used in commodity trading (gold, oil, diamonds) on futures markets. Relating to the rising price of Bitcoin, now it's also possible to trade in the long term in the weeks to months, months to years. For example, buying at a bargain price for several prices and sell after the price increases.

In fact, its exchange rate against the dollar attracts potential investors and traders interested in cryptocurrency plays. Many investors believe that digital currency is the future. Those who endorse it think it facilitates a much faster, no-fee payment system for transactions worldwide.

Final Thoughts

Investing in Bitcoin is highly risky! Investors need to be aware of it before purchasing it. You can find more extensive information on the original cryptocurrency all over the web today.

It takes time and effort to understand how bitcoin works. Bitcoins are limited, and as time goes on, they become harder to mine. Anyone can send bitcoin from anywhere in the world. No bank can block or close your accounts and payments yet. That's why Bitcoin may be a great financial tool for "money" washing, that's illegal!

If you are interested in Bitcoin investing, the prudent approach is to do your research and discover whether you are willing to enter an emerging digital asset market with no precedent.

Making small investments is a great way to start and learn how to interact with bitcoin-wallets without overexposing yourself and your money to the market's volatility.

The general narrative around Bitcoin that has been molded over the years is that of digital gold. Its insurance rate is controlled by its mining difficulty and decentralized network, which gives advantages over fiat currencies, so your investments supposedly won't be diluted through inflation or devaluation.

Disclaimer: Author’s opinions are their own and do not constitute financial advice in any way whatsoever. Nothing published by the Author constitutes an investment recommendation, nor should any data or content published by the Author be relied upon for any investment activities.

_ Photo by Karolina Grabowska from Pexels_

How to Manage Your Investment Portfolio Like a Pro

Ilona Codes — Fri, 08 Jan 2021 10:31:03 +0000

Are you sure you need to hire a professional to manage your finances?

In 2021, I believe it's not necessary, especially for such tech-savvy and smart people like software developers and people in tech.

With digital tools and apps, the right amount of time, and some dedicated financial education, you could be able to do it yourself.

Suppose you are willing to spend 8-12 a month learning about investing and associated asset allocation. In that case, you will probably be beating most recommendations from financial advisers within a few years or even several months.

Nowadays, you as an investor can manage your personal finances and investments better than anyone else who you will pay a commission on that.

The best individual investors can gain lot of experience and spot the best moves in the world and local markets. Here are the best working tips for your investment portfolio management.

1. Build a margin of safety into your investments

Benjamin Graham, the father of modern security analysis, outlines in his investing philosophy the importance of the "margin of safety" to protect your investment portfolio.

"The margin of safety is dependent on the price paid. It will be large at one price, small at some other price, and nonexistent at some higher price."––Benjamin Graham, The Intelligent Investor

That means you have to ensure your long-term investment strategy by only investing in companies that you think are trading at 30-40% less than what they are worth: which are undervalued on the market at the current time according to your financial analysis.

It's critical to make sure you are getting a fair deal.

How much you are willing to pay depends on various factors, but that price will determine your return rate.

Good investors usually have a habit of extrapolating recent events into the future.

Here is an example 👇

The company announced that it cuts two thousand employees in the next months due to automation processes. It's hot news for day traders that can provoke speculation for the company stock in the following days/weeks. Day traders might start shorting stock shares in the market and lowering its price. In contrast, it would be an excellent opportunity for the individual investor to buy more stock shares at a low price. In the long run, investors understand that automation is good for business.

2. Think long and hard before selling

The majority of literature on finance and investment concerns answering the questions: "when to buy a stock and how to get its best deal." From the author's view, it is supposed that the "selling" time is self-explanatory by default. In reality, the right selling time is like that much important as the right timing for buying.

The key reasons why you might consider selling your assets:

‣ To adjust your portfolio: if it became unbalanced or inappropriate for your current or long-term investing goals. For example, you notice that your most capital invested in one sector and not diversified momentarily.

‣ To free up your capital - turn it into cash: usually, it happens when your need to finance a new business, mortgage down payments, or payout to yourself.

‣ To sell less - to buy more: mainly, when the market is going down during the crisis, you can sell your securities at a fair price, if you have forecasted the market crash, and then buy the same but at a lower cost and with a more amount. You can also do that if you insured your investment with an option contract.

In my opinion, the most significant losses come from holding securities and not continually looking at finding better alternatives or strategies to invest in or re-balance your portfolio.

However, if you react in only "selling" mode without a plan after a market panic or a bad quarter, you can damage your investment portfolio and face significant losses.

In this case, a bit of stoicism can strengthen your portfolio and your skills as an investor because "selling" is as vital as "buying"! Make sure it aligns with your investing strategy, due diligence research, and financial goals.

3. Do research before buying any securities

Analyzing securities like stocks helps individual investors find the best investment opportunities.

The goal is to find stocks trading for a discount to their current value–undervalued stocks, to capture market-beating returns in the future.

If you are interested in learning more about finance, investing, and analysis, you can join my readership and also get your free bonus: Top-15 tips to free more cash to start investing monthly.

Traditionally, professional portfolio managers perform specific steps in the following sequence:

‣ They perform their due diligence on several securities like stocks and put them on their watchlist.

‣ Then, they screen this stock list for certain features of their criteria–benchmark.

‣ Next, they rank the screened stocks by decreasing order according to their due diligence analysis.

‣ Also, they size portfolios by setting the diversification in terms of how many ranks they will include in portfolios.

‣ And they weight portfolios optimally to maximize treturns, minimize drawdowns or adjust reward/risk ratio, or to another investment objective.

‣ Finally, they optimize hedging to maximize investment objective and holding period to maximize investment objective.

Solid due diligence analysis can help you make smart decisions. Still, there is no 100% working way to analyze stocks. That's why you need to find companies that you believe are good values and might be great long-term businesses that will likely deliver strong returns in the future.

4. Minimize admin fees and taxes

Watch out for them while investing!

There are lots of fees to look out for, and many of them are just flat-out confusing.

Overlooking them was one of my mistakes I made earlier as I started my investing journey on my own.

More information on this topic you can find in my post: "Fatal Mistakes That Developers Should Avoid When Investing"

5. Look for opportunities

There are investment opportunities all around us.

Finding the right one for you depends on where you feel most comfortable putting your money.

Look at your risk tolerance, the amount you want to invest, and your timeline for investment. Also, keep your eye on trends that might be worth to invest today that would pay off in the future.

Start by investigating new investment opportunities all the time. Then you decide if in your existing portfolio a better alternative is available.

Bottom Line

If you choose to DIY investment management, be sure you understand investment concepts such as asset allocation, portfolio rebalancing, and risk preference.

Try to rebalance your investments at least once per year to ensure your investment portfolio has a mix you want.

It's helpful for beginner-investors to minimize the number of investment accounts and holdings, so it's easier to track what you own and monitor your cash flow.

Trade infrequently and be mindful of the fund, bank, brokerage management fees — lean towards lower-fee institutions.

Always seek ways to simplify your life and finances by investing in assets and securities, generating passive income for you first.

Disclaimer: Author’s opinions are their own and do not constitute financial advice in any way whatsoever. Nothing published by IlonaCodes constitutes an investment recommendation, nor should any data or content published by IlonaCodes be relied upon for any investment activities.

Affiliate Disclosure: As an Amazon Associate, I may earn commissions from qualifying purchases from Amazon.com.

Photo by Wiredsmart from Pexels

Time Value of Money in Finance and Investment For Software Developers

Ilona Codes — Sat, 02 Jan 2021 09:53:40 +0000

Benjamin Franklin once said: "Remember that time is money."

The Time Value of Money (TVM) just means that money in your hand right now is worth more than the same amount of money that you will receive in the future.

The idea is that money available at present is more worth than the same amount in the future. The core principle of finance:

‣ Invested capital can earn interest

‣ Any amount of money is worth more the sooner it's received.

The underlying fundamentals of the time value of money are often used to value investments like stocks, bonds, credits.

Let's search for equivalent amounts of money on time:

Would you prefer to get $1000 today or $1000 one year from now? – I bet that you would say $1000 today.

What about the choice between $1000 today or $1001 next year? – I am pretty sure that you would still prefer the $1000 today. Not the last reason is inflation because it will bring up that extra $1 or more. So you might be even worse off. It's better to take the $1000 now and not wait a year for just $1.

"A bird in the hand is worth 2 in the bush."–Proverb

Let us make other more common examples of cash flow value today vs. in the future.

If you receive $200 per year for the next six years, what is the net present value if the current inflation rate is 3%:

import pandas as pd
import numpy as np
import matplotlib.pyplot as plt

r = 0.03
cash_flow = pd.DataFrame({'Year': [1, 2, 3, 4, 5, 6],
  'Cash': [200, 200, 200, 200, 200, 200]})
# PV (Present Value) = Cash (at period 1) / (1 + r)^n
cash_flow['PV'] = cash_flow['Cash'] / (1.0 + r) ** cash_flow['Year']
npv = cash_flow['PV'].sum()
print(round(cash_flow))

Year	Cash	PV
1	200	194.0
2	200	189.0
3	200	183.0
4	200	178.0
5	200	173.0
6	200	167.0

The earned $ in the future will not be worth as much as one made in the present—this discount rate element of NPV (Net Present Value)–the difference between the present value of cash and PV (Present Value) over a period of time.

According to your expectation, in 6 years, you will get $1200, but their worth (NPV) at that time would be:

print('NPV is', + round(npv))

# NPV is 1083.0

As you see, $1200 in the present is $1083 in the six years with the discount (inflation rate in our case) of 3%.

We can also use the same approach to calculate the NPV of uneven cash flows yearly, receiving different cash amounts with the same discount (inflation) rate of 3%:

# Calculate NPV of uneven cash flows

cash_flow = pd.DataFrame({'Year': [1, 2, 3, 4, 5, 6],
  'Cash': [150, 200, 250, 350, 400, 450]})
print(cash_flow)

#	Year	Cash
0	1	150
1	2	200
2	3	250
3	4	300
4	5	350
5	6	400

Looking at the table, you are expecting to get $1800 in total in the six years. You are right, you will have this amount, but with the worth of:

r = 0.03
cash_flow['PV'] = cash_flow['Cash'] / (1 + r) ** cash_flow['Year']
npv = cash_flow['PV'].sum()
print('NPV is', + round(npv))

# NPV is 1596.0

Yes, your present $1800 will be $1596 in the near future of 6 years.

Let's consider other hands-on examples of the time-value of money:

Often we have to calculate the present value of equal payments during determined X years. A good example is a lottery jackpot––$1,000,000 payout. Usually, there are two options for how the winner can receive his money:

Receive five equal payments of $200,000 during the next five years
The lump sum of $940000 (because of 6% of the bank interest rate on the deposit)

At first glance, nobody wants to lose $60000 and would prefer to wait these years while receiving $200,000 yearly till the end of the payout period. After all, $1,000,000 is more than $940,000.

Precisely, we need to think of calculating the net present value to make the right decision. In the financial terminology, it would be called: calculating the present value of a finite annuity.

Let's see how much worth would be getting your $1,000,000 through 5 equal payments of $200,000 and five years from now with the bank interest rate on deposit of 6%:

payment = 200000
time = 5
rate = 0.06
cash_flow = pd.DataFrame({'Period': np.arange(1, 6),
 'PMT': payment})
print(cash_flow)

#	Period	PMT
0	1	200000
1	2	200000
2	3	200000
3	4	200000
4	5	200000

So far, we have created a cash_flow table as we did in the previous tables above to preview the cash flow better.

cash_flow['PV'] = cash_flow['PMT'] / (1 + rate) ** cash_flow['Period']
npv = cash_flow['PV'].sum()
print('NPV is ', + round(npv))

# NPV is 865895.0

$865,895 is the net present value of five equal payments and less than $960,000 offered. Therefore, it's better to take the lump sum payment of $960,000 and deposit it in the bank once.

As I mentioned before, in the finance world, the last calculation called: the present value of a finite annuity, the more advanced and often applicable concept to investors, especially to real estate investors, is the calculation of the present value of the finite growing annuity.

And here is an excellent example to consider for that:

Let's suppose you own a complex building with apartments. In your case, it means that the tenants pay you fixed rent monthly. To tackle higher inflation, you decide to increase the rent. Basically, the whole building from the finance side looks like an annuity payment that grows at the inflation rate. So that allows us to calculate the present value of those payments now:

Current rent payment is $800
Growth rate of payments 6%
Inflation rate of 3%
Period is 5 years

rent_payment = 800
time = 5
rent_growth = 0.06
inflation_rate = 0.03
cash_flow = pd.DataFrame({'Year': np.arange(1,6),
  'Cash': rent_payment})
print(cash_flow)

#	Year	Cash
0	1	800
1	2	800
2	3	800
3	4	800
4	5	800

The next step is to increase cash flow at the growth rate to beat the inflation:

cash_flow['Cash'] = rent_payment * (1 + rent_growth) ** (cash_flow['Year'] - 1)
print(round(cash_flow))

#	Year	Cash
0	1	800.0
1	2	848.0
2	3	899.0
3	4	853.0
4	5	1010.0

After increasing the rent payment, we need to calculate the present value of cash flow yearly by considering the inflation rate of 3%:

cash_flow['PV'] = cash_flow['Cash'] / (1 + inflation_rate) ** cash_flow['Year']
print(round(cash_flow))

#	Year	Cash	PV
0	1	800.0	777.0
1	2	848.0	799.0
2	3	899.0	823.0
3	4	953.0	847.0
4	5	1010.0	871.0

If the value of the "Cash" > "PV", then you did everything right as an investor: you beat the inflation rate and get "gross" returns from the rent payments. You earn money.

Bottom Line

Money has time value due to inflation, deflation, devaluation, etc.

The present value of money helps investors decide the amount they should invest today to receive a particular amount of money with "Gain" in the future.

Take the PV, NPV, and FV (future value) concepts to apply them to calculate the output from your investment opportunities and get the time value of money at any given time. Because a dollar you hold in your hand today is worth more than a dollar you expect to get tomorrow. Mainly because you could invest the dollar you are having now.

If you want to learn more about finance and investment opportunities in general and today's world, you can become a reader of my newsletter (+bonus: the cheat sheet on how to free extra monthly cash from your dev-salary for investment).

Learn to invest with confidence!

Photo by Morgan Housel on Unsplash

30 Things I Learned About Investing in 2020

Ilona Codes — Mon, 19 Oct 2020 07:46:43 +0000

Like most software developers and people in tech, I often experience imposter syndrome that reminds me of how little I actually know. For such imposters like me, it’s important to journal my reflections on what I am currently studying: finances and investments. That’s why I wrote my core “30 Things I learned about finance and investment in 2020.”

It’s always a great pleasure to publish such posts online, so not only can my readers find something useful and helpful in them, but also I can cheer myself up during autumn in rainy Berlin and keep myself accountable to learn about the markets and practice investment on-the-go with you.

“To know values is to know the meaning of the market.”—Charles Dow

If you are still here and curious, what are they about, you can check them below and share your opinion on them with me:

1. There is always something new to learn about the markets every day.

As long as you remember that, and stay up to date on their trends and understand them, chances are for better investment returns are high.

2. The stock market today is the place where the more the price of a stock’s share increases, the more people want to own it.

Even without the in-depth company stock analysis and just according to breaking news, most beginner investors are willing to buy it, ready to buy their market price or even higher.

3. Don’t pass on investor relations pages of public companies you are willing to invest in through buying their shares.

Instead, master a company quality research as well! Read, watch, study its public presentations and news from press releases.

4. Company market cap is too “loud” and overused metric to rely on it only when making an investment decision.

Price to Earnings (P/E) is the #1 fundamental measure that tops all other determining a company’s stock price movement.

Price to Earnings Ratio (P/E) = Stock Price / Earnings per Share (EPS).

A higher P/E ratio means investors are willing to pay more for each $ of annual earnings, so you can use this number to compare how investors are valuing other companies in the same business sector.

5. The business model of social media companies is making money by monetizing user’s time.

One of the main reasons I decided not to spend more than an hour on them per day. It just distracts me from my goals.

6. Free cash flow is what you should look for and evaluate first while reading a company’s financial statement for a quarter/year.

Basically, I will do some calculations by taking into account revenue, offerings, operating expenses, loan & debts, enterprise value, etc.

7. Value companies usually have more cash on hand.

If you are a value investor, you are interested in raising the interest rates of your investments. Cash performs best by earning the most interest via compounding interest.

8. Never think of buying anything immediately from anyone’s tip.

Instead, do your homework, so you can clearly understand what you are investing in. Please don’t buy anything without confirming it.

9. Consolidate and check your analysis research before investing.

If you studied financial management or finance at any university, the first course you likely take would be “Financial Decision Making.” It’s for a reason, of course. Always double-check, consolidate quality, and quantity analysis before buying/selling your assets.

10. Most of your investment losses are generally because of your low decision-making analysis.

11. If everybody is talking about a particular investment, it’s too late to invest in it.

Indeed, most smart investors have been already invested in it. Your job as an aspiring investor is looking for trends that might be popping up at least one year before it will happen.

12. The best investments are those you also use in your everyday life.

You are already an expert on that product/service and analyzing it every day while using it. So, having its shares, it’s a nice bonus.

13. Day trading is not investing; it’s a business.

If you want to become a retail day trader, you need to invest your money and time in education, starting capital, and tools for that. Treat day trading as a business in which you need to actively be working as a professional. It’s not a passive income.

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14. It’s good to automate everything related to an individual investment.

Fortunately, we are going through global digitalization, and there are lots of products and services we can use to ease investment activities.

15. Long-term individual investors don’t manage their investment portfolio from the phone.

You need to see the “full” picture of what you are owning. Usually, your assets and even sold assets will contain lots of information that you should track. It’s impossible to visualize and evaluate the whole portfolio from the smartphone’s display.

Thank you for reading! 🙏

If you enjoyed the first 15 things about investing in 2020, you could get the other 15 through my newsletter now! (+bonus: the cheat sheet on how to free extra monthly cash from your dev-salary for investment).

We often see investing harder than it should be.

Everyone approaches investment differently. The goal is not to lose your hard-earned money so you cannot recover from it.

The important message is to have a process that can mitigate the risk of loss in your investment portfolio.

Therefore, we can always learn to better manage our investment portfolios by reducing the number of costly mistakes we make while investing and moving closer to achieving our financial goals.

What Happens to My Options When The Start-up Gets Sold? — Equity Compensation

Ilona Codes — Tue, 15 Sep 2020 06:53:35 +0000

This article is part of the series “What startup equity compensation means for developers”

In the previous part, we've looked into the economic value of your options—how you should value them, and how dilution works.

In this post, I'm going to show you what happens when the start-up you hold options of, gets sold, and how you can realize your economic value in that scenario. Let's dive in!

💸 What happens when the company gets sold?

That depends highly on the deal between the buyer and the company. If the price is high enough, then your vested options and exercised stocks will be liquidated.

That means that you'll receive its price for each exercised stock based on the acquisition cost decided in the deal. For each vested option (not exercised), you'll receive the difference between the exercise price and its acquisition price.

There are, of course, alternative outcomes that could happen: buyer, instead of liquidating your position, could replace your stocks with its own (with an appropriate ratio), and they can decide to continue or discontinue the unvested part of your stock option plan.

Such a replacement is also an excellent economic compensation because soon (after the acquisition is over), you can liquidate them yourself. The bonus is that the acquirer will likely go up in price if it's a public company, or go up in valuation (if private) because it has acquired your start-up. And that increases the economic value of the new stocks/options you have received.

Let's go through a simple example: 3 years from now, you have vested most of your options (75%), and you have exercised all of them at the exercise price of 10 cents per share.

Also, because you're a loyal employee, you had gotten another 4-year stock option grant one year ago, and it's vested (25%) now—you haven't exercised that yet.

Also, you have already advanced in your role to an Engineering Manager position.

Your grant #1 (from 3 years ago):

Exercise price: 10 cents per share.
Vested options: 150 * 75% = 112 options.
Exercised options: 112 stocks for 10 cents each.
Unexercised options: 0 options.
Unvested options: 150 * 25% = 38 options.

Your grant #2 (from 1 year ago):

Exercise price: 10 dollars per share.
Vested options: 100 * 25% = 25 options.
Exercised options: 0 stocks.
Unexercised options: 25 options.
Unvested options: 100 * 75% = 75 options.

And now, let’s say that another tech giant is negotiating a deal with your start-up for acquisition. Here are the details of the agreement:

Start-up valuation (post-money): 20M.
Agreed acquisition price: 25M.
Total shares: 22.500 shares.
Price per share: ~1111 dollars/share.

And the deal specifies that all exercised shares will be liquidated directly at the acquisition price per share. All the vested (unexercised) options will be liquidated at the difference between the exercise and acquisition prices.

Additionally, for all the management roles and above (luckily, includes your Engineering Manager position), unvested option grants will be converted into the economically equivalent acquirer’s option grants.

Let’s see what you can get here with such a deal:

Liquidated stocks: 112 * (~1111,11 - 0,10) = ~124.433
Liquidated vested options: 25 * (~1111,11 - 10) = ~27.527

That’s a total of 151.960 dollars gained by you.

Of course, for the past three years, you’ve been investing about 20K/year in your “lost opportunity cost.” So let’s see what your return on that investment was:

Investment: 3 years * 20K/year = 60K
Payout: ~152K.
Return on Investment (ROI): ((152K - 60K) / 152K) / 3 years = 20% return per year.

20% yearly return. That’s not bad at all!

Of course, the devil is always in the details. First of all, taxes: the tax system may significantly cut this big payout. In some countries, this will be a capital gain (15-25%), and in some, it’ll be full-blown income tax within one of the highest tax brackets (35-45%). If you can, it’s recommended to hold your stock option grant with a corporation (that you own personally, or together as a couple), in most countries that will reduce the tax burden of realizing these gains considerably.

Another detail is that the deal above is excellent. Not all deals are great. If the start-up wasn’t doing too well, it could’ve been bought for the price lower than the valuation. Also, the acquirer could cancel vested and unvested options entirely—this will allow them to pay a higher price for a company. Thus, it is better for investors and for employees who have already exercised a lot of options.

So, to reduce the risk of losing your vested options, it’s best to exercise them earlier rather than later. Holding actual stock beats holding onto options in the scenario of acquisitions. Of course, this is a good strategy for options with exercise prices near zero (such as 10 cents), but it may not be such a good idea for options with a higher exercise price (such as 10 dollars).

The idea is that you’re competing against two possible bad outcomes:

1) losing your vested options due to an acquisition;
2) having your exercised shares go underwater because the market price (after IPO) or acquisition price is lower than your exercise price.

That’s why it’s a great idea to exercise as soon as you can when the exercise price is low, and “wait and see” when the exercise price is significantly higher.

Alright, that was it from the perspective of an acquisition. What happens if your company doesn’t exit via being sold, and instead goes public? You can read it in the next part.

What Startup Equity Compensation Means For Developers: Part I

Ilona Codes — Tue, 01 Sep 2020 07:32:21 +0000

It’s not a secret that most founders get most of the equity because they quit their jobs, fundraise money, or put on their own to start a venture.

In most cases, developers can get some stock options plans along with a paid salary, for example, if they are the early employees. Besides, if the company does well in the long run, these stock options can be worth thousands or millions of dollars.

Lucas Rizzotto

@_lucasrizzotto

@bolayer @geekydiego They are if you are a developer who stays loyal so the stock options don’t vest away (and you gain senior status).

Many of those can make between 200k to 350k a year.

08:35 AM - 13 Jan 2020

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Without a doubt, you won’t get filthy rich with the stock options unless the company is a new Google. However, it’s one of the opportunities to diversify your investments.

Many early age start-ups also do a mix of equity with base salary as the full compensation. Usually, it is not a significant % of equity shares for developers and rates around 0.1-1%. You can get an overview of how much companies offer on AngelList if you sign up for it and start looking for developers' open positions.

There are different ways on how developers can receive their full compensation:

Getting paid in cash only. Having the base salary (no equity or equity options) that will cover their total compensation.
Apart from the base salary, developers can also receive a bonus for their valuable work and goal accomplishments, for example, yearly. Depending on the company and the developer roles, the bonus can be from 5% to 20% of the developer’s base salary.
Another opportunity is to get total compensation along with the % of company equity. Compared to the fixed salary base, equity options have the potential for any big payout if the company becomes profitable or comes out with a successful initial public offering or by exercising those equity options by the owner and then selling them in the future. In this case, you will invest your income to generate additional returns.

If the fixed base salary and bonus compensations look straightforward to understand, let me focus on and explain more about the equity compensation.

There are different types of equity stocks, but the most popular are ISO (Incentive Stock Options) and NSO (Non-Qualified Stock Options). ISOs are only for employees, and NSOs are for employees, contractors, business partners, etc.

Other differences include whether the gap between the exercise price and the market price is treated as salaried income or capital gain for tax purposes. That depends on which country your tax residence is in. In general, the guideline is that ISOs are better from the tax perspective because the gap is treated as capital gain and not salary, which means, on average, a 15-25% tax rate instead of 35-45%. You have to hold the stocks for at least one year before selling them, usually to be recognized as a capital gain.

📊 How to understand the economic value of stock options?

Let’s begin with an example. Let’s say there’s a start-up called Acme Inc. You are offered a Senior Software Developer role with the following offer:

Fixed base salary: 120K/year.
Stock options (ISO): 1%.
Stock exercise price: 10 cents.

This information is not enough to understand whether this is a fair offer or not. Missing pieces are the current average compensation for this type of role in your city, the company’s current valuation (the post-money valuation from the previous funding round of the start-up), and vesting period:

Market average compensation: 140K/year.
Company valuation (post-money): 12M.
Vesting period: 4 years.

Now, for this offer to be fair, the stock options' economic value should be greater than how much “you’re losing” by taking the salary below the market average.

Minimum economic value needed: 140K - 120K = 20K/year.

To calculate the options' economic value, you have to take your full share of the company valuation and spread it over the vesting period:

Options' economic value: 12M * 1% / 4years = 30K/year.
Total compensation: 120K + 30K = 150K/year.

This compensation looks like a fair deal to me. Of course, the dilution of stocks is often a big concern.

💸 What happens to my stock options when there’s another funding round?

When the company needs to let more investors in, it may have to create more shares. Let’s continue the previous example:

Current shares count: 15.000 shares.
Your current shares count: 15.000 * 1% = 150 shares.
Company valuation (pre-money): 12M.
Fundraising target: 5M.

As you can see, the previous' funding round post-money valuation is the new funding round pre-money. Let’s also say that the company had some success in capturing a new market, and its valuation is higher now:

Up-to-date company valuation (pre-money): 15M.

If you do the math on how many shares of the company should new investors have after the fund target is reached, it’ll be:

New investors share: 5M / 15M = ~33,33%
New shares count: 15.000 / ~66,66% = 22.500 shares.
Your updates stock options share: 150 / 22.500 = ~0,66%.

That’s bad, isn’t it?! Your share has decreased from 1% down to ~0,66%.

Not so fast! Remember your economic value before? What if we calculated the current one after the funding round is closed?

Your current economic value: 12M * 1% / 4years = 30K/year.
New company valuation (post-money): 15M + 5M = 20M.

Your new economic value: 20M * ~0,66% / 4years = ~33K/year.

So, even though the %-share has gown down, the economic value has gone up. The most significant bit here is that any capital that comes in due to fundraising adds up to the company valuation. That’s the difference between “pre-money” and “post-money” valuations.

🤩 How can I realize the economic value of my options?

There are a few ways you can realize this value. The simplest one is when the company gets acquired by another business. That’s a classic way for founders, investors, and employees with stocks to realize their gains.

Another more challenging path is to wait until the company goes through an IPO. That is a bit riskier, as in general, employees are not allowed to sell their stocks during the first few quarters.

Of course, it can take years and years until either of the events above happens. Some companies may even decide not to have such an exit. What do you do then?

Well, then you can sell your exercised shares inside of your companies to other employees! (if you can convince them to buy). Or you can even buy them from others if you want to have a higher stake.

And still, what will happen when the company gets sold or when the company goes through an IPO? Or maybe, you would like to “exit” the company/startup quicker.

Answers to these questions I will provide in the next blog post, “What startup equity compensation means for developers: Part II."

If you want to get notified when Part II will be out, you can subscribe to my newsletter and get my top-15 tips on saving more cash monthly for investment as a bonus.

If you find any problems or mistakes in the calculations or logic, please don’t hesitate to reach out to me on Twitter.

Why Developers Should Invest in Stocks

Ilona Codes — Thu, 20 Aug 2020 05:57:08 +0000

Nowadays, many well-earning developers wonder whether or not investing in stocks is worth all the hassle.

Unfortunately, at the same time, most software developers still don’t know much about finance and investment in general, and the stock market specifically.

Even the developers, who joined early-stage start-ups or big tech companies and got proper compensation in stocks, don’t know how it will benefit them in the future.

When I started being interested in investment opportunities, I was terrified and intimated. I thought that this is only for financial experts and already wealthy people.

I was so wrong!

Of course, you should educate yourself first before you dive too deep into investing, but in reality, it’s not that hard as you think it is.

Especially if you begin with investing in the stock market.

💰 Stocks increasing your capital

Investing in stock is not gambling.

If you can save regularly and invest wisely over a long time, you can grow your capital enormously.

However, you shouldn’t invest if you are financially broke. Make sure before that your financial situation is in great shape, that you have an emergency fund to cover around three months of expenses in case of any emergency.

It can also be useful to learn how to free extra monthly cash from your dev-salary for investment, so you can spend less and invest more. For that, you can use my top-15 tips cheat sheet to save more cash monthly here.

Investing is very interesting, despite the capital growth, that gives you something intelligent to learn rather than playing video games or watching TV shows.

Most investors find long-term investments always beneficial for their capital.

For example, investing in high-growth new-on-the-market stocks may seem and certainly can be a great way to build wealth. Despite that, it’s wise to make an investment portfolio with the shares of established and grown companies.

“It is not necessary to do extraordinary things to get extraordinary results.”—Warren Buffett

The most convenient and unmistakable approach to growth capital in the stock market is to buy company shares with great businesses for reasonable prices; hold them as long as they remain doing great businesses.

Another impressive thing about stock investment, that your investment assets are liquid. You can sell them anytime and get your money back to your bank account.

📈 Stocks growing historically

It’s not a secret that there are bad and good times for stock investment.

This year, there was a stock market crash and have been market crashes, pullbacks, and periods of lousy performance before, and they will be in the market later in the future.

And still, the US S&P 500 has historically produced 10%-11% before inflation or 7%-8% after inflation, and you can easily access it through your online broker or bank account.

Overall, stocks tend to rise over the last 80-100 years! S&P 500 Index - 90 Year Historical Chart:

For example, if you had invested $100 in the S&P 500 index in the 2010s, it would have amounted to $344 on the 5th of December 2019.

Historically, small-cap investing has proved to be much more beneficial than in large caps. Some small-cap companies can become large and highly profitable companies in the long run, like in 10-20 years (along with the digitalization and tech startups, it can take even 5 years).

So if you decide to buy such stocks and hold them for a specific period, you might make a lot of money at the end after selling them or by keeping to collect dividends from them so far as the company decided to pay them off.

Tip: find and research around 100 small-cap companies; filter them down to the best 5-10, and decide to invest in the absolute 3-5 favorites out of these, based on your conviction and analysis.

💎 Stocks keeping investment value

You want the values of your stocks to increase because this is how your invested capital grows.

Value investing means focusing on companies that can grow and become great first.

The underlying value investing concept is quite straightforward:

You know the true value of the company stocks
You buy it on sale
You save a lot of money in this case
You hold it and benefit from it

Indeed, stock prices can change, for example, when the market is volatile, even when the actual company stock value has remained the same.

Because depending on the market and its demand, stocks go through higher and lower periods that lead to substantial price fluctuations.

But that doesn’t change the fact that you are getting for your money.

As an investor, you are willing to buy stock shares at that “discount” compared to how the market values them. So in return for buying and then holding these value stock shares for the long-term, you can be rewarded handsomely.

Learn more about finance and investment from my top-10 book list!

💸 Stocks paying off dividends

By definition, dividends are part of the company profit that generally pays to equity shareholders. Usually, dividends are a reasonable percentage of company earnings.

Often large companies pay more dividend than smaller.

Logically, stocks that pay dividends regularly are the ones that should be in your investment portfolio. It means that dividend-paying stocks are cash-rich—they have consistent cash flows and are not debt-ridden according to their quarterly and yearly financial statements.

Moreover, the dividend history of stock can play a vital role in making rational decisions. That will help you understand whether the company pays dividends consistently and correctly for the last years.

If a stock growth slows, a dividend is another way to ensure income. Because dividend-paying companies are typically more established, prominent, and stable.

％ Stocks compounding

Technically, company stocks offer no guarantee of income because their returns are based on market price volatility; moreover, they don’t really suppose to pay interest.

And still, there are two working ways on how the individual stock value of a particular company can rise along compounding your investments:

The company makes more profits so that investors are willing to pay for shares. Hence, the stock price per share tends to increase year over year at a rate that resembles compound interest. That means if the stock price goes up, there will be fewer shares outstanding to buy, but the total company value is not going down, and likely continue going up in the future.
If the company started performing and earning well, the company might consider issuing dividends that will behave like compound interest on your investment. Many good stock investments pay 3-6% per year in dividends, so compounding means taking yielded cash dividends and reinvesting them in more shares.

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The compound interest uses time as the most significant factor for growing your returns. As a result, compounding does work in the stock market only if you invest in the long term.

The idea is that the company you invest in makes or will make a profit and yield dividends to enable you to reinvest that profit into its business. Then, it is getting bigger and makes even more profit the following year. That is how the definition of compound interest works for stocks.

📊 Stocks diversifying your investment

Diversifying means investing across different stocks to mitigate loss risks.

“Don’t pull all eggs in one basket”—English Proverb

If you invest all your money in a single stock or depend on a particular sector or invest in specific assets, the chances are high that you might lose all your money if those stocks don’t perform well.

Reduce your risk when seeking returns.

To balance out the losses and continue to make money, you must diversify your investments in stocks and not only in them.

If you have an investment portfolio that is permanently diversified and regularly rebalanced, you will not have periods of high losses nor high gains. Instead, you will get more steady capital net growth over the long term.

The number of stocks you should hold linearly depends on the needs to meet your investment objectives and goals.

The Intelligent Investor, Benjamin Graham, said that the magic number is somewhere between 10 and 30. As opposed to Peter Lynch, the famous fund manager at Magellan Fund, who did hold around 1500 stock positions at one point in time.

Remember that diversified stock shares may have capital growth and pay regular cash dividends, which can be compounding and automatically reinvested.

Conclusion

If you are convinced and itching to start your investment journey soon, make sure you will take the time to learn about all the basics before putting your savings into the stock market.

It is crucial to keep an open mind, read different sources about stock investing, and get exposed to different investing opinions, either.

Buy stocks in companies that have a business you can understand.

Starting with a proven investment strategy for investing in the stock market for investor beginners is necessary.

The more you educate yourself, the better the investment decisions you will make that will coincide in the long run.

Still here? That’s amazing! Thank you so much for reading! If you are interested to learn more about your Developer-Investor Personality, you can try my quiz here.

And if you would like to invest more from your typical developer salary, check out my top-15 tips cheat sheet and save more cash monthly.

Build your best life,
Ilona Dee Codes

My Top-10 Finance And Investment Books For Developers

Ilona Codes — Fri, 14 Aug 2020 06:08:04 +0000

Besides podcasts, blogs, vlogs, etc. reading books is still something many software developers don’t want to miss.

Although I have read many good books covering software engineering and other things in tech, I’m currently studying finances and investments. I want to learn their “best practices” just like in programming.

Today there are hundreds (if not thousands) of books on wealth growth, and obviously, it’s impossible to skim all of them because the average person reads between 25 and 30 books per year. Hence, finding the ones worth reading in finance and investment to accomplish your financial goals like below is not that easy; at least it wasn’t for me.

Real Estate John 🏡

@john_moore7

Financial Goals To Start Now:

- Build an Emergency Fund of 10k

- Save / Invest 25-50% of Income Per Month

- Read 10 Books About Finance

- Find a New Side Hustle

- Pay Off Your Debt

- Track Your Expenses

- Monetize a New Skill

- Buy Real Estate

22:53 PM - 13 Jul 2020

25 103

However, there are evergreens available, books that are still relevant today, and often recommended by investors, financial experts, and people who are interested in investment in general.

Here are my top-10 books. I would recommend reading these for any software developer or person in tech, who is willing to become financially literate, set up their financial goals, reach financial independence and early retirement:

1. The Intelligent Investor

It’s the definitive book on value investing written by none other than Benjamin Graham, Warren Buffett’s tutor.

The author preaches diversification, prudence, and the importance of not getting caught up in bull markets—speculative investments during bull markets can lead to huge loss of principal investment.

Graham also pointed out that investors should look at the underlying value of a business before investing in any company business: there are no good or bad stocks; there are undervalued and overvalued ones.

Investing formula from the book: buy more shares when the market is low than when it is high, and it’ll likely end up with satisfactory overall pricing for your investor’s holdings.

There are three principles of intelligent investing:

An intelligent investor always analyzes the long-term evolution and management policies of a company before investing.
An intelligent investor always protects themselves from losses by diversifying investments.
An intelligent investor never looks for crazy returns but focuses on safe and steady profit.

In Buffett’s words:

Rule No. 1: Never lose money.
Rule No. 2: Never forget, Rule No. 1.

You can get this book here.

2. Common Stocks And Uncommon Profits

Fantastic if you are interested in what makes any business tick!

This is the only investment book I ever read and even studied that gave me a feeling of being “well-equipped” with the potential to become a successful investor.

Fisher’s guidelines are quite helpful, but they are mostly qualitative-based compared to those of Graham’s and Buffett’s, which are more quantitative, like how to research management and qualitative details of a company; R&D investments; what the company’s doing to improve margins, among other criteria.

In my own experience, I have tried to apply some of the few tricks and tips from the author, which helped me answer the questions while analyzing stocks because I know that the growth stock (when bought young) offers by far the highest possibility of gain.

Comprehensible and timeless investment classical book that should be read by anyone serious about achieving success in the stock market.

You can get this book here.

3. Unshakeable

If you understand mathematics, you will definitely understand money.

I am not a fan of Tony Robbins, but in his book, Tony provides the best explanation of why most people don’t make it in the markets, and the minority does. The main focus is on

core principles of investing
asset allocation
investor psychology
admin fees
tax laws

For instance, even though his book most US-centric on US tax law examples, while being a tax resident in Germany, I knew not much about tax laws in Germany. Still, the theory behind these principles is the same in the majority of developed and developing countries. That’s why always make sure you invest in a way that is the most tax-efficient, and you don’t get a hefty chunk of money removed from your profit when you come to withdraw.

The core lesson is to shape your mindset into unshakeable financially, which requires determination, integrity, smart working, knowledge, and forward-thinking!

You can get this book here.

4. Rich Dad Poor Dad

If you stop working today, how long can you survive?

No. 1 advice on how to make your assets work for you, so you can quit your job, enjoy life, and make money while having a dream life.

The truth that the rich dad focuses on generating income and assets, and the poor dad and middle-class dad view their liabilities as an asset.

This book is a must for everyone who is looking for financial independence. It will help you to grow your mindset towards money and shows you how people, in reality, are held back in terms of finance due to their upbringing.

Poor people work for money, while rich people make money work for them.

You can get this book here.

5. The Richest Man in Babylon

There’s nothing truly revolutionary in the book published in 1926, which is why I like it. It is a bit of a fiction, but the stories bring out important lessons.

I was lead to this book by “Rich Dad Poor Dad,” and this book further explains what Robert means by “pay myself first.”

The underlying message is to spend less than you make and save (invest) the rest.

Perhaps the most significant book takeaway is that wealth goes as quickly as it comes if in the hands of a negligent person, in other words, in the hands of a materialistic consumer.

If you haven’t read this book yet, you must do it. It’s a powerful read on wealth creation.

You can get this book here.

6. The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich

A bestseller should be read by those who want more from their working time and money-making assets and expand the time available for passions.

“Someday” is a disease that will take your dreams to the grave with you.”—Tim Ferriss

In short, try to eliminate as much as you can of your life, to travel lighter and faster.

Another question you have is how you can work 4 hours per week?

The receipt in a nutshell:

Don’t work too much for someone
Earn the same money for less amount of work

Tim Ferriss earns around $90000 per month with 4 hours of work per week. How does he do it exactly? More importantly, how can you do it, the answer you can find is by reading his book.

You can get this book here.

7. The Dhandho Investor: The Low-Risk Value Method to High Returns

Instead of unnecessary complexity, it’s well written and easy to read.

The author is an expert at finding undervalued company stocks. He explains a few of his investing ideas and thought processes behind stocks in a simple way.

The book is based on the philosophy of “Heads I win, tails I don’t lose much.” It mainly focuses on the stock market and gives you some basics, practical principles, and useful examples that you can apply in stock investments in general.

Just read, learn, and then earn by applying!

You can get this book here.

8. The Elements of Investing

This book is clear and to the point about how to be a long-term investor to pursue average market gains with minimal losses.

Though it is a heavy emphasis on sticking to your financial plan that fits your risk profile, asset class allocation, and investing in index funds and ETFs, keep it simple and passive as much as possible.

It’s an excellent overview of investing, especially when saving for retirement. The book is down-to-earth and straight to the point. It contains a lot of valuable advice for any new person who wants to start investing and understanding financial jargon.

Invest smart, invest early, invest often.

You can get this book here.

9. The Little Book of Common Sense Investing

Beginner investors will not go wrong, implementing the advice outlined by the author!

Because it is very applicable to the many individual investors today: investing in index funds is a great low-cost and low-maintenance way to profit and get the market’s return.

To provide more context to the reader, Bogle illustrates returns of various mutual funds and index funds through diagrams and charts. Also, he compares, based on how invested, your original investment, and how it would look after a particular time.

Moreover, I like the book format. It’s divided into short chapters along with useful data, and neat quotation sections at the end of each chapter.

“The greatest enemy of a good plan is the dream of a perfect plan. Stick to the good plan.”—John Bogle, founder of The Vanguard Group.

You can get this book here.

10. Think and Grow Rich

No doubt, this book’s principles can be used in any area of life, not just about monetary wealth, because richness means not only necessarily money. It measures not only in terms of financial gain and success but also in business ownership, development, intelligence, and working in general.

Richness has everything to do with investing in yourself!

Everything starts with how we think. We can achieve anything we want:

“Whatever the mind of man can conceive and believe, it can achieve.”—Napoleon Hill

The book contains success stories for 13 lessons from people who have made great strides in achieving unbelievable financial goals. Every story begins with the idea when the person has committed themselves, so the opportunities come, and they begin to prosper.

Perhaps, it’s the only book a person needs to read to learn how to grow rich because most of the other such books are either inspired, referenced, or paraphrased from this book.

Think, grow, be rich!

You can get this book here.

Conclusion

To sum this piece up: these are some of the must-have books on finance, investment, and growth mindset to read, in my opinion. I will try to keep this list in sync with new reading releases.

Finance and Investment, like Software Engineering, have always been challenging to understand and even more challenging to succeed in fully.

Nonetheless, there are real experts and enlightening books that can be instrumental in wealth accumulating success because such books are your best mentor in whatever you’re eager to learn.

Focus on those books that work for you first.

Which books have you already read from this list, and which ones do you still want to read? Don’t hesitate to share it on Twitter with me!

Affiliate Disclosure: As an Amazon Associate, I may earn commissions from qualifying purchases from Amazon.com.

Fatal Mistakes That Developers Should Avoid When Investing

Ilona Codes — Thu, 06 Aug 2020 07:29:07 +0000

When you just start investing, it is quite easy to make investment mistakes at the beginning.

Unfortunately, investor-beginners lose money in investing because they have no clear cut goals, risk definitions, strategies. Hence, they underperform over almost every other asset class in terms of returns over the short or long run.

As an individual developer-investor, you can minimize your investment risks and manage to get good returns through investment if you will avoid or learn from the predictable investment mistakes.

What are those mistakes first-time investors make?

🗒 Investing without plan

Investment without any plan can lead to deviating from your path where you might not get any profit.

“Risk comes from not knowing what you are doing."—Warren Buffett

For example, one crucial mistake you may make is to invest in stocks or commodities you don’t understand how much returns you can get in long or short terms.

As a developer-investor with strong analytical and logic skills in the background, you need to analyze a company stock and a company at all with the mindset of owning the company before investing in it.

When it comes to picking the best company stocks, you have to consider different metrics that investors usually use to analyze companies.

I have defined the top-10 most potent and useful metrics in investing through my extensive research and analysis: revenue/sales, earnings growth, cash flow, stock price, net profit margin, and more.

If you want to find more information about my top-10 favorite metrics I am looking for before investing in stock, you can read about them in my upcoming newsletter (+bonus cheat sheet on how developers can save more cash monthly in 15 easy ways).

Remember, not all shares that trade in the stock market are safe for investment.

Don’t trade, instead learn first then invest.

Always decide your goals and objectives and appropriate benchmarks for better results.

💸 Investing without diversification

Diversification is the key to reduce the risk when you invest.

For example, most developer-investors hold vast chunks of their employer’s stocks but little else. Or they own other handful stocks in the same industry like tech or IT.

In a nutshell, to reduce risk without compromising your returns, you should invest in at least 10-15 unrelated investments and diversify your investment portfolio based on your asset allocations.

Ian Cassel

@iancassel

Thoughts on diversification:

If you don’t have the time or ability to know your investments better than most, then you should be more diversified.

12:09 PM - 02 Aug 2020

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Asset allocation is basically the mix of investments in a portfolio.

It describes the proportion of cash, bonds, and stocks that make up any investment portfolio and maintain the right asset allocation—the most crucial decision long-term investors can make.

To determine which factors influence your investment portfolio, read my article on personal investment strategy for developers.

Investors often lose a lot of money by putting all of their investments in one place. Diversification helps you minimize the risk as the profit from one asset can neutralize the losses of another.

🏦 Not paying attention to the admin fees and taxes

Banks and brokerage fees can form a significant portion of your investments to eat your returns. For example, if a fund is returning 8%, but it had a 2% admin fee, your net gain would be 6%

And these fees will compound over time to a much more significant number along with the simple and compound interest.

On the other hand, every time you buy/sell/hold an asset, your broker or bank will get commissions for holding and executing the trade, that’s why you should trade as least as possible and find a broker or a bank, which will offer to open and maintain your security account with low-cost operational fees.

If you read “Thinking Fast and Slow” by Dan Kahneman, you know that automating investments means paying yourself first and achieving dollar-cost averaging. The last one means investing equal dollar amounts in the market at regular intervals while controlling market fluctuations and buying assets at different price points and the best timing. Moreover, investment automation will allow you to avoid order fees, so you will pay once to set up a monthly contribution.

Another fact that shorter you hold an asset, the more taxes you pay on it too. The tax rate on your income depends on your tax country residence. The bigger your capital is, the more you have insecurities and immobile assets, the fewer taxes you would pay for the specific period.

🎯 Having a short-term focus

The truth is that most investor beginners focus on investing in the stock/commodity market for a shorter period, even though the long term investment performance is pretty consistent.

Because the longer you hold, for example, stocks, the more consistent your future returns will be. In fact, for the 1-year and 5-year holding periods, the range of possible returns is entirely predictable.

Let’s compare the 1-year and 5-year growth of the S&P 500 index:

Due to the market crash in March 2020, the S&P 500 index fell, but according to the chart above, the index grew to its past performance and continued its growth.

If you are a well-paid developer, chances are you looking for an investment with a long-term focus. You know that it will tend to have steady and consistent returns and big profits over time.

Compared to hyper-focused investors in the short term, you will not struggle to perform well daily or even hourly, because you earn well and don’t need to chase big profits immediately.

Just keep your focus on the long run, and you will be generously rewarded in the future.

📚 Lacking the understanding of financial language

Indeed, this is a big one!

No doubts that most developers are usually well-educated and professional people. Still, not many are convenient with understanding financial definitions or expressions when it comes to financial literacy.

If you are serious about your investment, it is a prerequisite to become financially literate and take advantage of all the options. Even if you are not confident, googling things that you don’t understand and asking a lot of questions helps — a great deal!

“We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate."—Robert Kiyosaki

Be sure you are conscious of all the financial terminology you are facing during your investment research. Try to find the explanation to any unknown word on your own first, if you are still unsure or have questions, don’t hesitate to get a consultation with an expert you trust.

💬 Conclusion

Be flexible and humble, and learn from mistakes. Before you start investing, you should be able to explain why you’re buying.

Have a long-term view and ignore the short-term volatility, because low-risk investment with a long-term horizon may later yield high dividends.

LearnLifeWealthTravel | Dream Big, Think Growth !!

@anybodycanfly

Common Investment / Trading mistakes

~ No goals, no objective, no plan
~ Over-activity, too much & too often
~ Not enough diversification, no meaningful Concentration
~ Extra belief in paid advisors
~ Chasing momentum
~ Mixing short & long term
~ Ignoring taxes
~ No self review

05:30 AM - 29 Jul 2020

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Investing your money is quite a challenging thing to do in the beginning! And still, it is vital to learn and apply it as just savings alone cannot help you achieve all your financial goals.

How Developers Can Supercharge Their Savings

Ilona Codes — Thu, 30 Jul 2020 06:49:39 +0000

Any type of financial investment should earn you compound interest. Over time, this will build the value of your investment passively.

If you start investing, you should learn how to develop an understanding of the passage of time that affects the value of a dollar that you have invested.

It means that the time value of money refers to the concept that invested money can earn interest and be worth more in the future than it is today.

“Someone's sitting in the shade today because someone planted a tree a long time ago."—Warren Buffet

Assuming that the annual market rate of interest is 10%, the $100 deposit will earn 10% or $10 by the end of the year: $100 in 2020 is $110 in 2021.

As a developer-investor, you should always make decisions regarding cash flows and prepare a cash flow analysis that takes future cash flows into account before investing in any asset.

❗️ Compute your investment’s present and future values before investing, because the present value is always less than the future value.

This is true because money can earn simple and compound interest:

Simple Interest is earned on the principal amount (the original amount of investment) only according to the above-listed example: $100 in 2020; $110 in 2021; $120 in 2022 => each year, the $100 investment will earn $10.
Compound Interest is earned on the principal + interest earned in prior periods: $100 in 2020; $100 * 1.10 = $110 in 2021; $110 * 1.10 = $121 => the original $100 investment would increase more than $10 per year due to the compounding of interest.

What’s the difference in the investment balance that would be at the end of 10 years using both simple and compound interest?

🧮 Use my compound interest calculator here!

Here is the main implementation algorithm of a simple compound interest calculator with JavaScript to easily compute the compound interest and total deposit future value of the investment in years, based on an initial principal:

// this function will return a table with data for all next years
const calculate = ({ principal, years, interest }) => {
  const rate = interest / 100;
  // the first entry is year 0—makes the logic simpler below
  const table = [[0, principal, principal, 0]];

  for (let i = 1; i <= years; i++) {
    table.push([
      i,  // year number
      table[i - 1][1] + principal * rate,  // with simple interest
      table[i - 1][2] * (1 + rate),  // with compounding interest
      table[i - 1][2] * rate  // compounding dividends this year
    ]);
  }

  // remove convenience entry for year 0
  return table.slice(1);
};

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it."―Albert Einstein

Importance of the compound interest for investors

If you want to learn how to put your money to work for you without much effort, learn first how compound interest works! It can help you exponentially grow your wealth because you are not only getting interest on your initial investment (principal), but you are getting interest on top of interest!

Let me illustrate how your money can make more money for you with examples:

🎓 Saving money for the college tuition for your child

Goal: Start saving at birth for 18 years.

Question: How much do you have to save today for the investment to grow to $50000 at the end of 18 years with the 10% average interest rate?

Formula: pv = fv / (1 + i) ^ n

Explanation:

You want to have a $50000 at the end of 18 years, so the fv (future value) is 50000
The number of periods is 18 years, n = 18
The interest rate is 10%, i = 0.1
You don’t know pv (present value), so it is unknown in our equation

Solution: pv = $50000 / (1 + 0.1) ^ 18 = $8992.94

👉 You need to invest $8992.94 today that pays 10% per year to have $50000 in 18 years.

If you wanted to invest on a monthly basis instead of a one-time lump sum, how much would you need monthly?

🚘 Buy a car in X years

Goal: To save enough money to buy a $50000 car in 5 years.

Question: How much do you have to invest each month to save $50000 in 5 years, with the current market interest rate of 7%?

Formula: PMT = (FV * i) / (n x ((1 + i/n) ^ n x (t - 1))) (capital letters to indicate that is an annuity problem)

Explanation:

You want to save on an annual basis in order to have $50000 in 5 years. You have to calculate an FV (future value of an annuity)
The time is t = 5 years, and the number of times interest is compounded is monthly n = 12
The interest rate is 7%, i = 0.07
You don’t know PMT (the monthly payment you must pay to reach your goal in 5 years), so it is unknown in our equation.

Solution: PMT = (50000 * 0.07) / (12 x ((1 + 0.07/12) ^ 12 x 5 - 1)) = $698.30

👉 You need to pay $698,30 into your savings each month with the 7% of interest rate to buy a car for $50000 in 5 years.

🏦 Investing in bonds

Goal: investing in bonds long-term (more than a year).

Let’s assume you are considering an investment in bonds. Your broker suggests buying 200, 3-year, 6% XYZ Corporation bonds, which pay interest semi-annually.

You ask the broker for more clarification, which they gladly provide:

these bonds have a face value of $50 and mature at the end of 3 years from the issuance date
6% is the contractual rate of interest, which you will receive
these bonds pay interest semi-annually, so you will receive 3% interest every 6 months

What you know:

Bond investment = 200 bonds x $50 = $10000
Semi-annual interest payments = $10000 x 3% = $300 (you will get twice per year)
Contract rate of interest = 6% per year
Inflation rate = 2%
Maturity date = 3 years or 6 time periods

Question: What is your investment’s present value, and how much money will you return in 3 years?

To answer your question, you have to analyze the bond — make a bond valuation:

Step 1: Calculate the pv (present value of a lump sum) of the bond face

Formula: pv = fv / (1 + ir) ^ n — the equation present value equals future value times the factor, where “ir” is an inflation rate.

pv = $10000 / (1 + 0.02) ^ 3 = $9423.22 — the present value of the face of the bonds in 3 years.

Step 2: Calculate the PV (Present Value of an annuity) of the periodic bond interest payments

First, we need to calculate a semi-annual interest payments = $10000 x 3% = $300 (you will get twice per year)

PVIFA = (1 - (1 + i) ^ -n) / i => (1 - (1 + 0.03) ^ -6) / 0.03 = 5.42

This means that every $1 you receive is worth $5.42 in present value. Now you can work out the present value based on the payment amount that you are receiving semi-annually: PV = $300 * 5.42 = $1626

Step 3: Add the results of Step 1 + Step 2 to calculate the bonds' value for 3 years:

The present value of your money in 2022 is $9.423,22 + $1.626 = $11.049,22 influenced by the 2% of inflation rate along 3 years.

💬 Conclusion

One of the main tasks of financial managers is to use compounding interests to estimate the risk and return on investments and compare investment risks and return to analyze financial challenges and opportunities.

To select which financial products are apt to invest for the long term, there are some metrics that you, as an investor, need to understand. The power of compounding interests is one of them.

It is easier than it sounds, and you do not need to be a financial manager to do it. Just remember that small changes in annual returns can affect the future value of our investment. Thus, if your goal is to maximize future wealth, anything that decreases the annual returns should be avoided, and every opportunity that increases the annual returns should be undertaken.

📌 Sources

What Is the Time Value of Money and Why Does It Matter?

PVIFA (Present Value Interest Factor of Annuity)

The rule of 72 for compound interest (Video)

Top 5 Best Ways to Start Investing For Developers

Ilona Codes — Sun, 26 Jul 2020 06:32:29 +0000

Having money in the bank that is just giving you zero profit and killing your capital instead of making more money is not going to help you achieve your financial goals.

Saving is not investing.

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Many economies nowadays suffer from inflation and currency devaluation (especially for developing countries). To beat those, you need to create additional value on your money through investment.

If you don’t have time to read multiple books, articles, and other boring docs nor the capacity to make sense of those, let me simplify things for you.

Here are some simple suggestions on how you can start investing efficiently and step by step to become better at that:

🧓 Invest in an individual retirement account

You won’t be getting a paycheck from your employer in retirement. No income. None. That’s obvious. You are going to have to rely on other income sources at that time.

“The question isn’t at what age I want to retire, it’s at what income."—George Foreman

Traditionally, an individual retirement account is a long-term passive investment, usually for 15-40 years, with post-tax paid earnings—you will pay taxes only when you decide to stop contributing and cash out your money.

Depending on the country, there are different types, rules, and names for the “individual retirement account” program. To get more information about such an investment opportunity, you should contact the bank or financial consultant in the country you are a tax resident of.

The definition and investment model of an individual retirement account in the USA, you can read here.

📊 Invest in low-cost index funds

No matter what kind of investor you are, you should always think like an investor about the diversification of your assets in your investment portfolio.

For an investor-beginner, I recommend you to start thinking about long-term investment initially because long-term capital gains tax rates are significantly lower than short-term capital gains tax rates (depending on the country). In this case, you get to keep way more money in your securities.

Low-cost index funds and ETFs are the best options to go into that for at least the first 5–10k before venturing to other funds or individual stock picking.

An ETF is a basket of securities — stocks, bonds, commodities, or some combination of those that you can buy and sell through a broker. They combine the diversification benefits and are available at various risk levels. Moreover, your investment capital shouldn’t be a large one at the beginning. You can start at $25 per month.

Index funds are common among ETFs too. It’s a passive investment fund designed to track indexes like S&P 500, NYSE, NASDAQ, etc. and automatically investing in stocks on the index they are tracking.

To start investing in low index funds/ETFs, you have to open a brokerage account. My favorites are:

Fidelity
E*Trade
Robinhood (100% free to join, plus offers extended market trading hours)
Interactive Brokers
Trade Republic (available only for German and Austrian tax residents).

A few example options, I have already invested in: US S&P 500 Index Fund consists of an index of 500 of the largest U.S. companies, NASDAQ 100, based on market capitalization; Vanguard ETFs, MSCI World, and more.

Admin fees for index funds shouldn’t be more than 0.05% to 0.3%. Because the fewer admin fees, the less they will eat your return from index funds investment.

Another nice thing about investing in index funds is that you can automatically set up your monthly/bimonthly/quarterly investments. It removes the pressure to decide when to make each investment and free you from the order fees for each investment contribution.

Most brokers offer this functionality. It consists of automatic investments to make it easier to stick to your investment plan.

🏦 Invest in fixed deposit and bonds

A fixed deposit is one of the most common ways to invest money with low-risk. Every bank offers a variety of services in fixed deposits that will lead to lucrative returns because they come with a fixed maturity period.

The maturity period can range from 15 days to five years. It can be considered for both short-term and long-term investments. So, if you want a safe investment, then fixed deposits are one of the best ways to invest money.

When you buy a bond, you are loaning a specific amount of money to its issuer for a determined time. In exchange, the issuer promises to make regular interest payments at an agreed rate until the bond comes due and then repay your initial investment - the principal:

For example, you buy a 5-year, $8000 bond paying 4% interest rate. The issuer, in exchange, will promise to pay the interest rate on that $8000 quarterly, and then return your $8000 after 5 years.

The advantage of putting bonds in your portfolio is that they are a relatively safe investment. Bond values don’t tend to fluctuate as much as stock prices, so they are less likely to keep you worried consistently.

💎 Invest in commodities and metals

The argument for investing in physical assets (like gold, oil, steel, etc.) is that resources are tangible and hold value.

During the recession in a bear (falling) stock market, the price of precious metals is usually growing. Gold often holds value when stocks fall:

“Gold remains an invaluable long-run inflation hedge that provides a strong foundation for any risk-intolerant portfolio. Allocating 5% to 15% of your portfolio to precious metals — with the majority in gold — could be one of the best defenses against an economic downturn and an uncertain geopolitical arena in 2020."—Young Entrepreneur Council (YEC)

When you invest in commodities like natural gas, corn, soy, and coffee beans, you are counting on supply and demand, which, in turn, drives the commodity price higher than what you paid for it.

Basically, you invest in futures. If the market price would be higher than your future contract, you will make money.

The most common way to invest in commodities for individual investors is around just $1,000, for example, via ETFs.

Here is the list of ETFs you can invest in precious metals and commodities.

🎓 Invest in yourself

Money doesn’t change people. It just gives them the freedom to become more of a person they already are.

At the beginning of your investment journey, the key is to focus on building assets and cash to invest in more assets.

The first step is to educate yourself about finances and find ways to free more money for investments.

If you want to learn how to free extra monthly cash from your dev-salary for investment, you can get my 15 tips on how to free extra cash for investment.

The second step is to use it to make yourself better:

Invest time to research what you feel passionate about
Invest money in courses to learn new skills
Invest in reading books
Invest in experience
Invest money into automation to spend your time on more important things

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Conclusion

Investing may seem scary, but it doesn’t have to be. The best way to begin investing is to start!

In theory, there is no difference between theory and practice. In practice there is.–Yogi Berra

Every investment option has its pros and cons. Some vehicles come with low risks, while others have a high level of risks. So, before investing in any financial product, understand it well in terms of risks and returns. Along with that, determine your risk tolerance, too. However, having a diversified portfolio of assets reduces the risks.

Do it as carefully and as thoughtfully as you can, decide on the investment type you want to invest in, consider starting with a small initial investment in a passively managed fund. Especially if you’re working toward a long-term goal like retirement, it’s important to stay confident, even during unprofitable years in the public market.

Why Developing Your Personal Investment Strategy is a Must?

Ilona Codes — Wed, 22 Jul 2020 07:08:10 +0000

If you learned how to save money successfully, sooner or later, many of us will be faced the question: “How can we invest our hard-earned money profitably — assets like shares, stocks, bonds, funds, certificates or gold?”

Obviously, you don’t want to make bad decisions that can lead you to money loss, and not the capital win.

To profit and grow your capital, you have to find the right investment strategy for you by dealing with your personal risk profile. Your risk profile will show which investments you correspond to and influences your investment strategy.

📊 Investment risk profiles

Four main factors have an impact on your risk profile:

🔹 Risk tolerance (how well you as an investor can cope emotionally with losses on your investments)

How much money are you emotionally ready to lose in the worse case?

The higher the personal risk tolerance, the higher the proportion of high-risk investments and asset diversification.

🔹 Risk capacity (the risk you can take according to your financial situation)

Do you have a regular and secure income?

The higher your regular income, the higher the risk you can take.

🔹 Knowledge of finance (Level of financial knowledge and experience with securities)

How well do you understand financial products?

The more you deal with investments, the better you can assess the risks.

🔹 Investment goal (It influences the money return from your investment that you want to achieve)

What do you want to achieve with your investment?

The higher the money return, the higher the risk you must take.

Have you given enough thought to your risk profile? Then you are ready actively to manage the risk of your investments – asset class risk* for your investment portfolio.

Asset classes* include stocks, fixed income, cash, foreign currencies, real estate, commodities, etc.

Assets you can invest in, depending on your risk-taking capability – your asset allocation strategy.

According to the book “Souverän investieren mit Indexfonds und ETFs” by Gerd Kommer (unfortunately, I could find only in the German language), we can divide asset risk into four categories we would end up as follows:

The conservative investor is very risk-averse and saves for emergencies. They seek stable returns and are less concerned about growth; they often lack time to actively monitor investments.
The balanced investor tolerates a little more risk that the conservative investor. They are long-term investors who don’t need returns immediately and want to achieve some growth potential for their investments. They might entail some fluctuations in value, but with low volatility than the overall investment market.
The growth investor is a risk-seeking investor whose investments are more risky assets like stocks and ETFs. They want good growth potential and don’t need current returns. They face a fair amount of volatility, but not as much as a portfolio invested in equities exclusively. Such investors might be unemotional about the process while being active in portfolio management.
The aggressive growth investor is an investor of a very high-risk tolerance. The risk-proneness of this risky portfolio is at least 70%. They may be active day traders at online brokerages, actively follow the stock markets (even if they don’t execute dozens of trades each month).

That motivated me to implement a small quiz, that will help you define which type of an investor you are, and which asset risk you are capable of taking, and in which proportion.

🚀 Quiz implementation

First, we'll make sure that the answer options are assigned a specific weight: negative value for this being a more risk-averse option, and positive value for this being a more risk-seeking option.
Then we'll sum up all the weighted values for each question.
Finally, we'll determine ranges at which “conservative” investor becomes balanced, and at which balanced becomes growth, and at which growth becomes aggressive-growth.
The result is in which range the riskiness score lies—that’s the investor profile.

Here’s a straightforward way of implementing that:

// ©2020 Ilona Codes. All rights reserved.
// Playing with weight values changes results

const weights = {
    'A': -2,
    'B': -1,
    'C': 1,
    'D': 2,
};

const determineInvestorType = questions => {
    // we initialize answer option counts
    const counts = {
        'A': 0,
        'B': 0,
        'C': 0,
        'D': 0,
    };

    // we count how many answers are of each option
    questions.forEach(question => {
        counts[question.chosen]++;
    });

    // we calculate the weighted score
    let score = 0;
    Object.keys(counts).forEach(letter => {
        score += weights[letter] * counts[letter];
    });

    // we determine in which range does the score lie
    let investorType;
    if (score < -5) {
        investorType = 'conservative';
    } else if (score < 5) {
        investorType = 'balanced';
    } else if (score < 10) {
        investorType = 'growth';
    } else {
        investorType = 'aggressive_growth';
    }

    return {
        investorType: investorType,
    };
};

Of course, the sophistication of this algorithm can be increased at will!

Your investing strategy should reflect your personal investor profile. Knowing which one you are could help you put your investments to work in a way that fits your personality, preferences, and goals. To help you figure out it quickly and easily, you can take this quiz: “What’s Your Developer-Investor Personality?”

Disclaimer: No rush, no push! Only you are responsible for setting up your investment portfolio in the way you feel comfortable with. The test presents exemplary types of investment structures with deviations, and cannot be construed as investment advice.

💬 Conclusion

All returns are derived from an assumption of risk. Each investor has their own risk tolerance, and different investment objectives require taking on different levels of risk.

“Over 90% of investment returns are determined by how investors allocate their assets vs. security selection, market timing, and other factors.”—Brinson, Singer, and Beebower, ‘Determinants of Portfolio Performance II: An Update,’ Financial Analysts Journal

Within your asset allocation, you will want to diversify among industries, sectors, and other risk factors to mitigate downside volatility, alongside some bonds to provide an equity hedge.

That’s why you need to determine your portfolio allocation based on your propensity for risk, knowledge of finance, and investment goals.