Thursday, 28 May 2015

Me vs. BRW "Rich List" 2015

Years ago I picked the cut-off net worth for getting onto BRW magazine's "Rich-200" list (the wealthiest 200 individuals in Australia) as a suitable "benchmark" for evaluating how well my net worth was tracking. As the cut-off more than 100 times my net worth, I divide the annual report's threshold by 100 and compare it to my current net worth as shown below (the graph is on a log-linear scale, as compounding tends to make wealth grow exponentially).

The chart clearly shows how I have been generally tracking quite well against this benchmark, with the exception of 2008 when the GFC caused me to have to liquidate a large part of my geared share portfolio at the bottom of the market. Over the past four years I have been slowly making up ground against the benchmark, probably due to my portfolio being overweight in Sydney real estate and the stock market, whereas many of those on the "rich-200" list have a large part of their wealth tied up in resource companies.

This benchmark is quite challenging due to a couple of reasons:
1. Being limited to the wealthiest 200 Australians, the population growth means that this is slowly becoming a more exclusive cohort
2. As under-performers get dropped from the list, the cut-off is biased towards those with the best investment performance

On the other hand, starting from a relatively low level of net worth means that initially my income was a large percentage of my net worth, and that savings were making a large contribution to my increasing net worth. This effect is slowly diminishing as my net worth grows to a larger multiple of my salary package (currently around 13.7x) and hence the ROI of my existing investments starts to outweigh the increase due to my savings. Of course, once I retire and start to draw down on my savings, rather than adding to them, it will be almost impossible for my net worth to keep pace with this bench mark...

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My Stock and Fund Investment Portfolio going into FY 2015/16

I am no longer an active investor, as I eventually realized that I don't have any exceptional talent for timing the market, nor for picking individual 'winners' - either stocks or fund managers/funds. Hence, my ongoing regular investment/saving plan is:
1. an automatic contribution into superannuation via the compulsory SGL (superannuation guarantee levy, currently 9.5% of pre-tax salary) and an additional $800 of 'salary sacrifice' from each fortnightly pay. Within the SMSF $5000 is automatically moved from our ANZ V2 High Interest SMSF bank account into our investment in Vanguard LifeStages HighGrowth Index Fund.
2. $100 per month investment into the Colonial First State Geared Share Fund via a direct debit by my StGeorge Margin Lending account (with a matching $100 loan amount being invested)
3. $100 per month invested into the Vanguard LifeStrategy HighGrowth Index Fund held

So, overall I am currently saving around 30% of my total pre-tax salary package, mostly via tax-effective superannuation savings.

I had sold off some of my smaller individual stock holdings and some of my Resource Company Investments (when the 'mining boom' was coming to a close) in recent years, so the remaining investments in my geared portfolio are likely to remain unchanged during financial year 2015/16. I recently took up my entitlement to 88 additional shares in National Australia Bank, and IPE Private Equity is likely to continue to decline in market value as they slowly sell off various private company holdings and pay out the proceeds to the shareholders.

Overall the level of gearing is fairly modest (loan:value ratio around 50%), with the total dividend income distributed last year slightly exceeding the interest on the margin loans (hence the portfolio was slightly 'positively geared'). Some of the dividend income is reinvested, so I actually have a slightly negative cashflow and have to use some of my 'take home' pay to cover any monthly margin loan interest payments that aren't covered by the dividends I receive. The dividend paid out by Woodside Petroleum is also likely to be a lot less than was paid out during the past 12 months.

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Thursday, 7 May 2015

Slow progress with the 'Lake house' renovations and extension

The prefab house on the 25-acre hobby farm at Lake Wallis my parents transferred to me early last year had become very run-down during the ten years one of my sisters was living there (rent free) and supposedly looking after my parent's herd of alpacas... in reality she appears to have spent most of her time collecting and hoarding junk, which my parents are now in the process of slowly clearing out and either taking to the local tip (at a cost of about $85 per trailer load) or packing up to transport to their larger farm at Inverell (where my sister and the alpacas herd had moved to at the start of last year). Once all the junk has finally been cleared out the old carpet will be removed and the house fumigated before being renovated (new lino floors and patched and repainted walls). My plan is to then submit a DA (development application) to the local council to have a two-storey extension added to the rear of the existing house, so that there will be enough room for us to stay at the farm with my parents during school holidays.

My parents plan on eventually buying my sister a small farm for he to live on, using some of the proceeds from selling off their Inverell farm, and to down-size by moving back to the Lake Wallis farm to live. The balance of the proceeds of the sale of their Inverell farm should help self-fund their retirement for the next few years (they get a small UK pension due to the years my father was in the RAF before moving to Australia in the early 60s, and recently also a small amount of Australian aged-pension, having now spent most of the superannuation my father received when he retired as an airline pilot in the early 1990s). In another few more years time the value of the Lake Wallis farm they gifted to me will no longer be counted in the pension 'assets test', so my parents should then be eligible for a slightly larger Australia pension income to live off. As I am now paying the rates, insurance and maintenance costs for the Lake Wallis house their living costs should be fairly modest by then (provided they are no longer paying for any of my sister's living expenses!). I also plan on moving to Lake Wallis myself when I retire in ten or fifteen years time (unless I get retrenched beforehand), but I doubt my parents will still be living there as my father would be pushing 100 by then (although it is possible, as his Aunt will be celebrating her 100th birthday in a few months' time).

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Net Worth: April 2015

Continued weakness in the Australian stock market saw my geared stock portfolio decline in value, and also resulted in the value of my retirement account (SMSF) decreasing despite two months of employer contributions (SGL and salary sacrifice) being deposited into our SMSF bank account during April. On the other hand the continued boom in Sydney real estate pushed up the estimated valuation for our home (which may be overly conservative due to reasons mentioned last month). I also adjusted the valuation for 'other real estate' (the hobby farm at Lake Wallis) upwards by $11,000 to incorporate the cost of having the pastures 'mulched' and trees within 10m of the farmhouse removed to reduce the bushfire hazard (allowed under the current "10/50" state legislation).

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Net Worth: March 2015

Not much change overall, with gains in my retirement account and home valuation mostly offsetting weakness in my stock portfolio during March. The home valuation is more approximate than usual this month as I missed getting some of the online median sales price data. In any case the home valuation may turn out to be highly conservative, as it is based on median sales data for the entire suburb/postcode area, whereas the value of our house may be boosted if there is rezoning (for medium or high density housing) in the near future due to the construction of a new regional hospital in the vicinity.

Some neighbours on the adjacent main road (opposite the hospital construction site) have already been offered an 'option' to sell their property to a developer for around $2.5 million in two years time (they only get a 1% payment up front). While not everyone has accepted the offer (some are holding out for a higher price, while others don't wish to sell their home at all, or wish to sell and move out immediately rather than having to wait for two years before selling their house), construction of the hospital is already underway and redevelopment on the surrounding area will soon follow. While our house is a bit further away from the hospital site, it is still within the surrounding 'zone' earmarked for strategic redevelopment, and a council decision on rezoning is due very soon. It is quite likely that our house with get rezoned from current standard residential (single dwelling, maximum 8m/2 storey) to medium density (eg. townhouses/villas or blocks of 3-storey flats). DW fondly imagines we will eventually be able to sell in a couple of years for $2.5m or more (compared to the current valuation of around $1.15m), but I will wait and see how the zoning goes and what offers from developers actually eventuate. As the 'family home' isn't subject to capital gains tax in Australia, any windfall profit would be tax-free, allowing to replace our house and still have money left over to invest or add to our super.

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Friday, 3 April 2015

Iran deal terminally stupid

After years of sanctions that were obviously starting to bite, Iran finally came to the negotiating table -- and got everything they wanted. The 'deal' will lift the sanctions that were impacting Iran's economy (which some western critics had complained simply punished the innocent population of Iran -- but what better way to incite the population to be disaffected with their leadership and encourage change from within?) and in exchange Iran was not 'agreed' to halt research into developing nuclear weapons, but instead has reached an 'understanding' that includes some limits to the use of its nuclear research facilities and the amount of enriched uranium it can stockpile.

What this means in reality is that instead of the 'worst case' scenario of Iran being theoretically (but never realistically) being able to stockpile enough enriched uranium for a single nuclear weapon 'within months' (but not having the ability to actual build a nuclear weapon for many years to come), we now have a situation where they can continue developing the knowledge and technology required to produce a functional and effective nuclear weapon (which was always going to take several more years or research, and time to steal/buy technology from Russia, North Korea, Pakistan etc.) and can still produce enough enriched uranium for a weapon within a year or so of being ready to make use of it...

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Monday, 16 March 2015

Quick, Sell (Lease) the 'poles and wires' before they're not worth anything!

The latest opinion polls suggest that the NSW election is likely to see the coalition remain in government for another term. Theoretically that should mean that their policy to 'sell' (actually a 99-year lease of 49%) the electricity system 'poles and wires' should go ahead, with most of the proceeds going to build other much-needed public assets (ie. infrastructure). Of course, with the minor parties still having enough senators to block any government legislation that Labor is opposed to, just winning another state election isn't a guarantee that this policy will ever get implemented. But it should - if for no other reason that if they wait too long the 'poles and wires' are likely to be entirely worthless within a few decades.

Just as the sale proceeds from selling the electricity generation assets (coal-fired power stations) were eventually much less when the sale went through a decade or so after it was first proposed (due to the move towards alternative electricity generation sources to address the need to reduce greenhouse gas emissions), the value of the existing 'poles and wires' used for distributing bulk generated electricity is likely to plummet when rooftop solar power generation starts to eliminate the need for many houses to remain connected to 'the grid'. Already a house could be self-sufficient in electricity generation if the entire rooftop was covered with standard PV panels (and expensive storage batteries), but developments in PV technology mean that within a decade or so the required set of 20 or so large panels could be replaced by a single panel around 1 square meter in size, and at much lower cost. It would only need improvements in the cost of batteries (or the development of alternative energy storage systems like hydrogen fuel cells, room temperature superconducting magnets etc.) to make it affordable for most houses to be self-sufficient in terms of energy. How much will the old 'poles and wires' be worth then?

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Monday, 2 March 2015

Net Worth: February 2015

A significant rise in the Australian Stock market over the past month gave a major boost to my net worth via increases in the valuation of my geared stock portfolio (gearing is fun when the market is rising -- not so much during the GFC) and also a rise in my superannuation account balance. Our house price estimate also managed another slight increase. Overall my net worth hit a new high of over A$1.75 million.

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Thursday, 5 February 2015

Net Worth: January 2015

 The three major components of my net worth (my share of our house, my geared stock portfolio, and my retirement savings account) all enjoyed substantial gains during January, pushing my net worth total up by just over 3%. The strength of the Sydney real estate market shows no sign of abating, and with inflation remaining low there is even the prospect of a rates cut by the RBA providing further stimulus to the housing market as a by-product of their attempt to stimulate the economy as the impact of the resources bust continues to drag on economic growth and boost unemployment. In hind-sight it would have been better to postpone selling our investment property for another couple of years, but I'm glad to be free of the hassles of being a land-lord. The Australian stock market is likely to benefit from any economic stimulus provided by a rates cut, as despite recent gains the ASX200 is still well below the pre-GFC levels. While it would be foolish to try and predict how things will develop during 2015, from this point the prospect of achieving a net worth of two million by the end of this year or next seems possible. How likely it is remains anyone's guess. One month (October) of employer superannuation contributions were paid into our SMSF bank account during the month, with the other two monthly contributions for the quarter due any day now (they had to be paid by the end of the month after the end of the Oct-Dec quarter).

As usual I've left unchanged (at $325,000) the initial valuation for the rural property I was given last March as I intend leaving the property to my sons, so any potential capital gains will remain unrealised. I only include it at all as the holding costs (council rates, house insurance etc.) are a drain on my cash flow. While I don't include notional gains in its valuation in my monthly net worth figures (the current monthly valuation estimate is $366,450) I will add any large capital expenditures (such as building an extension to the existing house) to its valuation to 'balance the books'. The monthly valuation estimates for this property are not very reliable in any case, as the source data is movements in the average house sale prices in the nearby township, and not sales data for similar rural 'hobby farm' properties.

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Sunday, 25 January 2015

Back from our holiday cruise

After spending a few days at a seaside motel with the family over the Christmas period, I took a couple of weeks of annual leave and we all went on a 13-day cruise from Sydney to New Zealand on the Sun Princess. The total cost was around $10,000 (or about $2,500 per person), which isn't too bad considering that included the travel (to and from New Zealand and between the stops at Milford Sound, Dunedin, Wellington, Napier, Auckland, the Bay of Islands and a couple of other places), the accommodation, all meals (aside from a few snacks and a couple of lunches while in port), and land excursions to Rotarua and around Bay of Islands.

Aside from possibly going on a skiing weekend this year (or next year), and spending the Christmas holidays with my parents either at the rural property I 'inherited' (that is, if the farm house ever gets renovated into a livable condition again) or at a nearby motel (so I can do some work on the farmhouse and farm during the stay), we probably won't take another major holiday for another three or four years. We had been thinking of taking the boys on a tour of Italy/Greece sometime, but as DS1 is already in year 10 this year and starting one HSC subject as an accelerated student, we will now defer this until after he has finished his year 12 (HSC) exams. Considering the high cost of traveling around Europe by car, train or plane and staying in hotels in the major cities, I am now considering doing a cruise instead when we eventually travel there. A 14-day cruise stopping at Rome, Florence, Venice, Athens, Istanbul and several islands looks quite attractive, but not cheap. Ah well, time to start building up my holiday savings account once more...

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