Monday, 5 November 2007

My Portfolio's Asset Class Returns over Past Three Years

Over the past three years my overall networth has increased by an average of 17.1%pa. However, this is a true "return on investment" figure as it includes annual additions to my savings (via mortgage repayments of principal and additions to my retirement account) of around $30K pa. Allowing for this my overall ROI over the past three years is around 13.7%, which is still very good. My long term target is to achieve a "real" ROI around 5-10% pa.

Comparing my three main investment categories (real estate holdings, stock investments, and retirement account I find that my real estate equity has shown an average rate of increase of only 5.6% pa during this period. Even this figures is inflated as it includes a reduction in my outstanding mortgage of over $15K. I'm not surprised by this result as the Sydney real estate market has been very flat since the last property "bubble" burst in 2002. Fortunately our two properties are in the upper-middle price range, which hasn't fared as badly as the botom end of the market. I expect that the Sydney property market may improve over the next three years as there is considerable pent-up housing demand which is starting to spill over into very low vacancy rates and increasing rents. This improvement may be delayed if there are another couple of interest rate rises over the next 12 months.

My stock portfolio has had a terrific run over the past three years. This is to be expected with the All Ordinaries gaining around 15%-20%pa each of the past three years. Combined with a moderate level of gearing via margin loans my stock portfolio has averaging an increase of 30.7% pa. Stock purchases have probably balanced out with stock sales (takeovers etc) during this period, so this is probably close to the true ROI achieved.

My retirement account has grown by an average of 17.1%pa over the past three years, but this has also been boosted by a relatively high rate of additional savings via employer contributions and salary sacrifice.

For fun I did a calculation of where I'd now be if I hadn't bought the second property and had instead kept the additional funds invested in the stock market. It turns out I'd now have about an extra $200K in net worth and my overall ROI would have been around 17.1% rather than 13.7%. Looking on the bright side at least I didn't liquidate all my stocks back in 2002 and invest in a rental unit, or kept my money in a bank account.

The lesson out of all this is that it generally isn't possible to pick which asset class will do best over the next 3, 5 or whatever period. So it's best to maintain a diversified portfolio spread accross the asset classes, in whatever proportion suits your personal risk tolerance and return expectations. That way you're most likely to achieve the results you want with the least possible volatility in portfolio value.

Copyright Enough Wealth 2007


Colin said...

I think the key is to no doubt, cut through the media hype, and find something that isn't the current bandwagon. A year ago, property was claiming an amateur could still flip properties. No doubt with careful planning, solid research, and some trade skills you could still flip for good (read: not outstanding) money. I worry about all these amateurs who are so far behind the curve they'll probably continue to be in financial purgatory.


Dividends4Life said...

Asset allocation is key in any strategy. Good read!

Best Wishes,