Wednesday 31 December 2008

That was a year to remember

Well, the Australian stock market has ceased trading for the year (it closed early today so everyone can get a good vantage point for tonight's fireworks and/or partying). The All Ordinaries index had its worst calendar year on record, plummeting 43%, compared to the 32% slump during the oil shock of 1974 and the 34% fall in 1930, during the Great Depression. The drop in 1987 calendar year doesn't even rate a mention.

Hopefully I'll still be around in twenty or thirty years to be telling my grand kids "I remember the Great Stock Market Meltdown of '08"...

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Displaying the All Ordinaries Index on Desktop

At work we're still using Windows 2000, so I have loaded the Sydney Morning Herald's All Ordinaries chart onto my Active Desktop. This also works with XP, but active desktop isn't available in Vista so I use a sidebar gadget at home. Monitoring the market serves no useful purpose (for me anyhow - but if you are day trading using your mobile phone it *might* be helpful), but on volatile days I can glance at it and go "Ooh, Aaah" as the market plummets or takes off. A bit like watching a fireworks display.

At home I now have Vista, so I've loaded the Stocks 3.3 sidebar gadget and set the options to only display the All Ordinaries Index (data from Yahoo!, code ^AORD). If you want to track your portfolio live you can add up to 30 symbols, such as BHP.AX, and you can specify the number bought and (average) cost so it displays current profit/loss. Unfortunately it doesn't seem to allow a portfolio total to be displayed, which would be fun (you could see your net worth going up and down minute by minute).

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Tuesday 30 December 2008

Goals for 2009?

I'm a bit wary of setting goals for 2009, after failing to meet my 2008 goals. Some of the goals (around investment portfolio returns and increased net worth) turned out to be wildly optimistic given my asset allocation, use of gearing, and the GFCs impact on my equity investment returns. It's disconcerting to consider that I could have come close to meeting my goals if simply closed out my stock portfolio a year ago, paid off my margin loans, and put the balance into an online savings account for 2008!

This year I'll not even try to guess where the market might be in 12 months time and set any ROI goals - I'll just aim to meet my home, real estate investment and margin loan interest payments out of current income (salary, dividends and rental income), and to keep socking away 50% of my pre-tax salary into retirement savings via salary sacrifice and SGL contributions into our SMSF. A sub-goal will be to ensure that my employer makes the salary sacrifice contributions at the right times so I avoid any "excess contributions" tax liability.

It would be nice if there are further interest rate cuts by the RBA in 2009, as this would reduce the amount of cash DW and I have to contribute each month towards the interest-only payments on our home loan. Any surplus cash flow could be directed towards paying off some of my margin loan debt (or possibly some of our home loan debt - although the interest rate on the home loan is lower than the margin loans, the home loan interest isn't tax deductible).

I'll have to roll over my 2008 goal of losing weight and going to the gym - I only managed to lose around 7kg this year, and my BMI is still around 30. Given that my diastolic blood pressure is way too high (although my systolic is OK), I need to get down to an ideal BMI of around 22 to see if I can avoid taking blood pressure medicines.

One new goal for 2009 is to keep my current job (although that is somewhat out of my hands given the current economic climate). This time last year my net worth was high enough to toy with the idea of "early semi-retirement" - perhaps taking a pay cut in order to change careers into teaching or financial planning. But the drop in my net worth during 2008 means that I probably need to keep earning at my current income level until 65 in order to afford a "comfortable" retirement. My direct boss "left the company" suddenly a couple of weeks ago (he wasn't inclined, or allowed, to give specifics of his departure, but I'm pretty sure it was a "voluntary redundancy" along the lines of what I got from my previous employer ten years ago). If I'm lucky that cost saving will be the extent of the belt tightening required by our department, but it could just be the start of a round of company-wide "right sizing" if Australia goes into recession during 2009.

My other perennial goal is to start tracking all my income and expenses using Quicken. If I get can get my "new" Dell laptop repaired under warranty (it was doing strange things when I took it on holiday last October, and the DVD drive isn't working) I'll load Quicken 2008 onto it and be able to update my accounts during my lunch break, rather than trying to do so at night when the kids have been put to bed.

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Sunday 28 December 2008

Tax Office website has closed down for the holidays

Although the 2007/8 tax return deadline was officially the 31st October, since I'll be due a small refund I only really need to finish my return by 31 December so I can lodge it electronically using the ATO's free filing software "eTax". So I spent the last couple of days of the holiday break finalising the capital gains calculations for my 2007/8 tax return - trawling though ten years of previous tax files to get my DRP records up to date for the shares that were sold that year. However, while looking up some details online regarding the Mayne Nickless demutualisation and the Alinta "scheme of arrangement", I tried to follow a link to relevant information on the ATO website, only to see the following message:

It seems that the ATO shut down it's website on Christmas Eve, and it won't be available again until 5th January! I'll try using eTax to lodge my (and DW's) tax returns before eTax stops working on 31 December, but I suspect it won't be possible to lodge an eTax return while the ATO website is offline. If it doesn't work I'll call the ATO on the 5th January to enquire about lodging electronically, but I suspect I'll end up having to fill in and lodge the paper "tax pack" forms this year. It's not much of a hassle, but it will mean I won't get my tax refund as soon, and I may not be able to import the 2007/8 data into eTax next year.

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Saturday 27 December 2008

How Efficient is your favourite Charity?

An interesting article that points out the relatively high salaries paid to executives at some not-for-profit charitable organisations, the under-reporting of how much of the money raised by charities is consumed by fund-raising and administration costs, and how some charities have large pools of donated funds sitting in investments (that have done poorly this year). It appears that some charities are mostly concerned with justifying their continued existence, gaining "market share", and "empire building". While investing a small percentage of the funds raised makes sense in order to be able to maintain a consistent level of expenditure when income fluctuates from year to year, accumulating a large investment portfolio should not be the main aim of any charitable organisation.

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Thursday 25 December 2008

Season's Greetings

Merry Christmas to all readers of EnoughWealth!

After a slow start, Christmas trading in Australia appears to have picked up considerably in the last few days - apparently the Government's economic stimulus package is being spent. It will be interesting to see if we avoid a recession in Australia during this global slow-down. The hefty interest rate cuts this year may restrict the drop in Australian residential real estate prices to the 10-15% already experienced (although QLD and WA will probably continue to decline given the effect of the plunge in commodity prices on the mining sector in those states and their relatively high price ratios compared to historic ratios to NSW and VIC). On the other hand, home affordability is still very low at the current prices, and although there is currently undersupply of new housing compared to demand, the increased unemployment rate over the next year may cause the government to reduce immigration levels, which will lessen demand for housing in the medium term. Falling real estate prices have accounted for around $100K of the $500K drop in my net worth this year, so my financial progress in 2009 will be significantly affected by how Sydney real estate performs. My asset allocation is now even more overweight in real estate compared to this time last year, due to the plunge in equity markets.

It is impossible to know where the stock market will end up in twelve month's time - after all, this time last year many "experts" were still expecting the US sub-prime financial crises to not impact the global economy, or even have much impact on the US "real" economy. And I was silly enough to let my Index put options expire without taking the time and effort to replace them. However, with markets down around 45%, it feels close to the bottom (although it seemed similar back in March, when the market plunge paused after a fall of 25-30%, the "normal" bear market decline), and the Australian stock market could stage a rapid recovery (although not to 2006-7 boom levels) if our economy does manage to dodge a recession. After all, GDP is a lot higher than it was 5-6 years ago, so stock prices are relatively cheap if GDP holds up and company profit margins can recover - especially with interest rates continuing to drop to the lowest levels for a long while.

Hoping for a Happy New Year in 2009!

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Monday 22 December 2008

Got our Economic Security Strategy Bonus Payments

Last week we received $2000 in Economic Security Strategy Bonus from the Federal Government. We are eligible for the government hand-out since we get a small Family Tax Benefit Part A payment, and have two children. Although the government would like this money to be spent asap in order to stimulate the local economy and avoid Australia joining the US, UK, Japan and several European countries in recession, we've simply used the money to meet a couple of month's mortgage repayments shortfall.

It will be interesting to see how big an impact this stimulus payment actually has. I suspect that all the bad economic news over the past 6-12 months has tempered Australian consumers love affair with debt-fueled consumption. Perhaps most recipients of this largesse will use it to repay CC debts, or perhaps make an undeducted $1000 contribution into their superannuation fund (and thereby get another $1500 from the government via the co-contribution)?

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Sunday 7 December 2008

Financial Crisis dims Christmas lights

I've been a bit late putting up our Christmas decorations this year. We put up a few inside lights and our artificial tree two weeks ago, but I only got around to unpacking and installing the outside lights today. We went for a walk around our block yesterday for DS1 and DS2 to see the neighbour's Christmas lights and there seemed to be a few less displays than last year. Apparently the financial crisis has caused many people to not "light up" their houses for Christmas this year. I can understand people not buying new lights in the current economic climate, but I can't imagine that people who have been putting up Christmas light displays for years would save a significant amount of money by not turning on the same lights they've used in previous years. It's probably just that people aren't in such a "festive" mood this year, and can't muster the enthusiasm required to set up their lighting displays this year. What do you think?

Anyhow, I've added one LED net light to our collection so far this year (about $20), and I'm thinking of buying one of the larger free-standing garden light displays to "complete" our collection (you have to draw the line somewhere, or it could become an expensive obsession to have the "best" display in your street/suburb/state/the world). There are some nice 3D rope light displays available, but can be quite expensive for something you only use for a couple of weeks each year, and has no resale value. I'll check out what is available in the Christmas Warehouse Sale close to my workplace tomorrow, I'm thinking of something that the kids will enjoy and isn't too "religious". Perhaps something like this one for $100:

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Thursday 4 December 2008

Shifted my son's cash savings into long-term asset allocation

DS1 had $10,000 he'd earned from two years of doing a paper round sitting in a St George online savings account. It was earning a good rate of interest, and was nice and safe (especially since the Australian government guaranteed bank deposits), but cash isn't a sensible asset allocation for an 8-year old with a very long investment time frame. So, with interest rates rapidly dropping as the RBA cut the official rate by 3% in the past 3 months, and the stock markets appearing reasonable value at current prices, I decided to open a Vanguard investment account for DS1 so he could invest his $10,000 in a suitable index fund. The one we (I) decided on is the Life Strategy High Growth fund, which invests in a mix of the other Vanguard Index funds to achieve an asset allocation of:

Asset Sector ..................... Fund ... Target
...................................Actual . Allocation
Growth Assets
Australian Shares ................43.5% ....44.0%
International Shares .............28.9% ....29.0%
Australian Property Securities ... 5.2% .... 5.0%
Int. Property Securities (Hedged). 5.6% .... 5.0%
Int. Small Companies (Hedged) .... 3.8% .... 4.0%
Emerging Markets Shares .......... 2.9% .... 3.0%
Total Growth .....................89.9% ....90.0%

Income Assets
Australian Fixed Interest ........ 4.1% .... 4.0%
Int. Fixed Interest (Hedged) ..... 6.0% .... 6.0%
Australian Cash .................. 0.0% .... 0.0%
Total Income .....................10.1% ....10.0%

The fund has a fairly high fee (0.9%) for an index fund, especially compared to the US Vanguard funds, but there are fee rebates for larger investments, so you pay 0.6% fee on amounts between $50,000 and $100,000, and a reasonable 0.35% for amounts over $100,000. If DS1 continues to use this fund for investing as he gets older it should be a reasonable investment vehicle for his non-retirement savings.

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Monday 1 December 2008

Net Worth Update: November 2008

Another exceptionally poor month. My net worth as at 30 November decreased by another -$92,546 (-12.13%) during the month to $670,548 (AUD), due to the continued losses in my geared equity investments (down by $39,207 (64.88%) to only $21,222. At one point during November my stock portfolio had negative value, with my margin loans and HELOC being greater than the value of combined portfolio. The estimated valuation of my share of our real estate assets also decreased significantly this month, by -$43,523 (-5.31%). The balance of my half of the mortgage decreased by $234 to -$367,554/ The RBA interest rate cuts over the past three months have reduced the monthly interest payments, reducing the amount of monthly "redraw" required to cover the interest payments while DW is working part-time. There is speculation that the RBA will cut rates by another 0.75%-1.25% at their next monthly meeting, with the scope for further interest rate cuts to offset the effects of the global recession increasing as inflation fears rapidly subside.

I had to sell off some of my Australian stock portfolio this month to avoid margin calls, and my margin utilisation is now slightly below 90% on all three margin accounts.

The balance of my retirement account also decreased this month, by -$10,050 (-4.00%) to $241,186, as it's invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equitites. The market declines were largely offset by two month's worth of employer contribution being deposited into our SMSF account this month.

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Tuesday 25 November 2008

A fun weekend away

My company held it's annual staff "conference" last weekend. We were flown from Sydney to northern Queensland, and put up at a five-star hotel for three nights. Aside from attending the official dinner on Saturday night, the rest of the weekend was free time. DW and I arranged for DS1 and DS2 to stay with my parents for the weekend, so we had a chance to relax and take things easy for a couple of days. The stock market went up nearly 6% today, so I'm still in a holiday mood at the moment ;)

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Thursday 20 November 2008

Bailing rapidly, but the boat is still sinking

The Australian market followed the US lead and dropped another 4.5% today. It's now declined by more than 50% in the past year, dropping to levels last seen 4.5 years ago. Although my three margin lending accounts hadn't quite gone into the "buffer" zone (100%-105% margin utilisation), it was time to bite the bullet and start selling some of my stocks. From my Comsec account I sold my ASX shares (around $8K worth). They have dropped by a similar amount to the overall market (around 50%), but I doubt that they will recover as much as other stocks when things start to improve. The current bear market will have scared a lot of "mum and dad" investors and day traders out of the stock market for quite a while, which will impact on ASX trading volumes and profitability for years to come.

Recent Trades:
Sell ASX .20 Nov 2008 ..200 @ $29.734
Buy. IANG 18 Nov 2008 ...90 @ $77.000
Sell LDW .17 Nov 2008 1,350 @ .$2.500
Sell BBW .17 Nov 2008 1,782 @ .$0.820
Sell THG .17 Nov 2008 4,000 @ .$0.580

Out of my Leveraged Equities account I sold off the rather large block of Telstra (TLS) shares I had built up from the T1 float and the T3 float (I fortunately didn't buy into the T2 tranche as it was way overpriced). That will realise around $40K which will improve my overall margin utilisation in that account (since the margin value of the TLS shares was around $32K). I also took the opportunity to sell off $1,000 worth of miscellaneous Babcock and Brown infrastructure trust stocks, which I'd wound up with after a takeover:

Sell BBI ...Babcock & Brown Infr 25/11/2008 ...222 $0.04 .....-$8.21
Sell BBP ...Babcock&Brown Power 25/11/2008 ...197 $0.04 .....-$6.90
Sell BBW ...Babcock & Brown Wind 25/11/2008 .1,241 $0.77 ...-$889.57
Sell BEPPA .Bbi Eps Limited .....25/11/2008 ...472 $0.10 ....-$47.67
Sell TLS ...Telstra Corp .......25/11/2008 10,200 $3.98 -$40,149.44

After the market drop and these stock sales my accounts margin utilisation currently stands as follows:

Comsec Margin Lending
...Loan:................ $107,752.98
...Portfolio Value:..... $197,079.95
...Margin Value:........ $110,578.33
...Margin Utilisation:........ 97.44%

Leveraged Equities
...Loan:................ $170,473.54
...Portfolio Value:..... $178,075.27
...Margin Value:........ $138,921.53
...Pending sale proceeds: $41,101.79
...Margin Utilisation:........ 93.13%

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Tuesday 18 November 2008

Ejecting ballast from my portfolio

My margin loan portfolios continue to sink rapidly in value as the market slide shows no sign of abating. Last weekend's G20 meeting didn't inspire market confidence, with the Australian market trading down another 3% in the morning session. I decided to dump some of my smaller holdings in small cap stocks, as they could be no liquidity available in these stocks if the market has another "black" day, and I get a margin call. I'd have preferred to clear out my block ING Private Equity stock (I still have 90,000 of these - bought for approx. $1.02 via option rights, and last traded around $0.52), but there is no trading volume in these at the moment. The current bid price is around $50c, but only for 1,000 shares. The next offer is at $0.40 for 25,000. There hasn't been 100,000 IPE shares traded in total this month, so putting my 90,000 shares on the market would probably depress prices considerably. Although there is a risk that many of the small, unlisted companies owned by the Private Equity funds that IPE invested in will go out of business in a severe recession, at current prices it is probably not worth trying to liquidate this stock. Although any cash realised from selling off IPE would help reduce the margin utilisation of my Comsec account (as IPE currently has 0% margin value), the 0% margin value also means that any change drop in the price of IPE shares won't trigger a margin call.

In the end I cleared out three of my smaller share holdings (@$19.95 brokerage per trade), realising $7,096.39:

Stock Price Qty Net
Sold LDW $2.500 1,350 $3.355.05
Sold BBW $0.820 1,782 $1,441.29
Sold THG $0.580 4,000 $2,300.05

As LWD and BBW had 0% margin value, and THG only 50%, selling these stocks will have the same impact on my Comsec gearing as injecting $6,000 of cash. It will also reduce the number of individual stocks I own and therefore simplify my annual tax calculations of dividends and trust income.

I also placed an order to BUY 90 IANG shares with the proceeds, but the order hasn't been filled as yet. At around $77 the IANG shares are trading at a substantial discount to the underlying bond portfolio (around $100 per share), and yield a fully franked dividend of around 6%. The next reset date for the shares is 15 March 2010, at which time they may be redeemable for closer to the full $100 than their current market value. I already have 200 of these shares, so I'm just adding to an existing holding rather than adding another new security to my portfolio. The IANG shares have a margin of 80%, so using the sale proceeds to buy this stock will still have the effect of adding another $5,000 cash to the portfolio.

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Saturday 15 November 2008

Just a thought

It was interesting watching the US election from the outside. Obama's win seemed inevitable, given Bush's record breaking unpopularity and that the Democrats came close to winning the last couple of elections. But it was still nice to see Americans finally elect a "minority" candidate - although why someone who is equal parts "white" and "black" is universally labelled as "the first black President" seems a bit odd.

Anyhow, the enthusiasm that accompanied Obama's historic victory wasn't shared by the stock market. I wonder how the current market performance compares to first ten days post-election of previous US presidents? Is there any correlation between market reaction immediately post-election and how it performs over the one or two term period of the presidency?

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Zero Equity in Equities

Although the Australian market recovered weakly on Friday (in response the Wall Streets huge rebound) it was still close to the four-year lows reached on Thursday. That drop had increased the margin utilisation on my three margin loan accounts back over 90%, with only the recent injection of the last of my available cash holdings preventing them moving into the margin "buffer zone" or getting a margin call (when margin utilisation goes over 105%).

My equity in my stock portfolios had increased from around $100,000 four years ago to around $400,000 a year ago. It's now plunged down to roughly $0 - that is, the overall value of my stock portfolio is now roughly equal to the amount I borrowed to invest in the stock market! The reason that my equity has reached zero while the gearing of my margin loan accounts is still less than 70% is that I last year I borrowed around $240,000 to invest in stocks (mostly ING Private Equity) using a HELOC (a property-secured "Portfolio loan" from St George bank). The stocks I bought using the HELOC are part of my margin loan portfolios.

I made some truly stupid investment decisions (or indecision) in the past 12-18 months:
1. Despite realising that the market was getting overpriced after a lengthy bull run, I decided to not sell some of my stock holding to reduce my gearing levels. For tax reasons I decided to maintain my tax-deductible borrowings and avoid realising capital gains. I'd often read that you shouldn't let tax considerations govern your investment decisions, but I'd now go even further and say that you should try to ignore tax when making financial strategic decisions, and then only consider tax effective ways to implement the intended strategy.
2. Instead of selling stocks, I chose to "insure" my portfolio buy purchasing Index Put Options with a 9-month expiry period early in 2007. However, I then didn't ensure that I replaced them with a new set of Options when they expired in December 2007. I did make a token move to buy replacement put options during December, but when I couldn't easily find a suitable listed option (with the desired expiration date and index value) I gave up. Having decided to use options to protect my gains rather than sell some stocks, I should have followed through on this plan - even if it meant taking a day off work to implement the plan.
3. I was tempted to invest all investible funds immediately they were available, rather than wait for a buying opportunity:

When we opened our self-managed superannuation fund in March last year we started "rolling over" our existing retirement account funds into the SMSF bank account. This meant that almost 100% of our retirement savings were in cash last July. Despite feeling that the market was possibly due for a significant correction, or even an overdue 20%-30% bear market decline, I still decided to reinvest our retirement savings into our long-term asset allocation (100% Australian and International Equities) immediately. My token effort at dollar-cost-averaging only meant that we invested 5% each week. Spreading out the DCA period for 1-2 years would have been much better in hindsight.

When we changed our home loan to "interest only" I setup a portfolio loan facility to let me borrow against the "unused" equity we had built up in our property portfolio. Again, I invested the available funds almost immediately, rather than having the patience to wait until there was an obvious buying opportunity.

On days like last Thursday, when the market has dropped more than 6% in a single day, I can't help day-dreaming about how much better off we would be financially if I had replaced my Index Put Options when they expired, and had delayed investing my $240,000 HELOC until now, when the market is 40%+ below it's high point.

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Wednesday 12 November 2008

Back online

Early last week I arranged to have my $30 per month landline disconnected, as I hardly ever use it and it costs more than the mobile phone plan DW and I share. The phone service was supposed to be turned off within a day or so, but it was still working last Thursday when suddenly our cable Internet stopped working. I phoned the Optus help line the next day and after spending nearly half an hour on the mobile phone I managed to book a service technician to visit on Saturday morning (between 7:30 and 12:30). On Saturday the technician didn't turn up before we finally had to go out in the afternoon, and the next day Optus phoned my mobile number to let me know that we weren't at home when the technician visited (at 3pm!). We had to rebook the service call for Wednesday morning (when DW would be at home) and when the technician eventually arrived it didn't take him long to work out that there was actually nothing wrong with our cable modem - it turned out that Optus had disconnected our cable Internet instead of our phone service by mistake! Our Internet service is now back on, and it will be interesting to see whether or not our telephone service stays connected and if we stop being billed for the telephone after this month.

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Tuesday 4 November 2008

Economic cloud has a silver lining

I'm glad to receive any good financial news these days, so the Reserve Bank of Australia's larger-than-expected rate cut (0.75%) today was indeed welcome. The RBA has now made three consecutive rate cuts, of 0.25%, 1.00% and 0.75% - slashing the official interest rate by 28% from 7.25% to 5.25%. Although the tax-deductible mortgage interest for our investment property is at a fixed rate, our home loan is the standard (for Australia) 25-year variable rate loan. With our home loan balance still almost $500,000 the recent rate cuts will reduce the annual interest expense by around $10,000 pa. Since the interest on our home loan isn't tax deductible, this is equivalent to DW and I earning an extra $15,000 pa or thereabouts.

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Monday 3 November 2008

Net Worth Update: October 2008

I thought last month was pretty dismal - this month proved that I didn't really know what a bad month was. There's an old saying that the equity markets go up by the stairs and down via the elevator, but last month it felt as if the elevator cable had broken and I was hurtling to my doom. At the moment the emergency brakes appear to have been applied, but I'm holding my breath waiting to see if the plunge resumes.

My net worth as at 31 October decreased by another -$141,895 (-15.68%) during the month to $763,094 (AUD), due to the huge losses in my geared equity investments (down by $93,422 (60.72%!) to only $60,429 despite a slight rebound in the last few days of the month) and a drop in the valuations of our real estate investments and retirement account. The estimated valuation of my share of our real estate assets decreased by -$12,263 (-1.47%). The balance of my half of the mortgage increased by -$939 to -$367,778 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). The recent large cuts in the official interest rate by the RBA has now flowed on to a reduction in existing variable home loan interest rates, but the monthly repayment amounts won't decrease until December. There is widespread speculation that the RBA may cut rates by another 0.25%-1.00% at their next monthly meeting, but the scope for further interest rate cuts to offset the effects of the global recession are limited by continued inflation concerns. We have around half of our property loans at a fixed rate for the next 3-4 years, so we avoided the full impact of increased home loan rates. But a cut in the interest rate on the variable component of our home loans will make life easier.

I had to sell off most of my US stock portfolio and deposit the cash into my Australian margin lending accounts to avoid margin calls, but my margin utilisation remains over 90%. Continued market declines would force me to sell off some stocks and park the proceeds in a cash management account. The timing of the sale of my US stocks could not have been worse - I managed to sell "at market" on the morning of "Black Friday" which cost me around $15,000 compared to selling a day earlier or later. Such is life.

The balance of my retirement account also decreased substantially this month, by -$35,271 (-12.31%) to $251,236, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equitites. There was no employer contribution into our SMSF account this month, although two month's worth of contributions were processed on 3 November, which will boost next month's balance. Hopefully by the time I retire the "blip" in stock market in 2008 will look similar to the "blip" that occurred in 1987, and not the one that happened in 1929...

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Wednesday 29 October 2008

Added some cash to my son's retirement account

DS2 has a "child superannuation account" I opened for him when he was two year old. It was initially invested 100% in the geared share option (which did very well for the first four years), but I switched it into 60% ungeared shares, 20% real estate and 20% bonds at the start of 2007 (I wish I'd done the same asset reallocation for MY investment portfolio!). So although the account has lost a bit of value in the past 12 months, it's performance over five years is still pretty good. I think it's too early to switch this account back into 100% geared stock investments (although I think that's probably a reasonable asset allocation for an 8 year old that can't withdraw the funds until retirement age in 50 years or so), but I decided to make a $1,000 contribution into his account yesterday while the stock market is "on sale".

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Tuesday 28 October 2008

Interesting Times

The past month on the global stock markets has been interesting, to say the least. I'm expect I'll be telling my grand-kids about the global financial meltdown of '08. Just how amazingly bad the past four weeks have been is well illustrated in the chart below (snapshots taken from here), with markets around the world down 20%-60% in just FOUR WEEKS!

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Monday 27 October 2008

A graph I wish I'd plotted a year ago

I've been trying to find some empirical evidence to support my hope that the current bear market is already "overdone" and we must surely be close to the mythical "bottom". I was thinking that now the market is back down to where it was four years ago it must be getting below "fair value" - after all, it wasn't considered to be too excessively priced in 2004, having just started to recover after the bust of the dot-con bubble. And since then the Australian economy has experienced continuous economic expansion. With the current view that Australia is liable to suffer an economic soft landing rather than a recession, that would mean that the listed companies (which are, after all, a large chunk of the economy) must be worth a bit more than they were four years ago.

Unfortunately (for my current peace of mind) I then looked up the stats on Australia's GDP (gross domestic product) and the ASX200 Index since the 1970's. As you can see from the graph below, all it shows is that the stock prices did get vastly inflated compared to the value of the underlying economy during the past decade, and the recent 45% decline has only now brought it back in line with it's "normal" ratio to the value of the Australian economy (GDP). I had a feeling during 2007 that the bull market had gone on for a bit too long, and considered either taking some profits or "insuring" my portfolio via Index Put Options. In the end I bought some put options that expired in Dec '07 but then didn't replace them with new ones! If I'd had this chart to hand last December I would have made sure I kept my portfolio insurance in place for another year. It's nice to say "live and learn", but I suspect that this is one lesson I've learned a little bit too late to be of any use.

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Sunday 26 October 2008

A taxing weekend

The Oct 31 deadline for Australian tax returns is fast approaching, so I took a day off work on Friday and spent this weekend working on our tax returns. I'm still struggling through my stock capital gains calculations (I hate it when a stock gets taken over, as it means dredging through the past 15 years of paper records to work out the cost basis), but at least I got around to lodging tax returns for DS1 and DS2 using eTax. DS1 did busking to earn some income, so he might be entitled to a government co-contribution based on the money he put into his superannuation account last year. In previous years only PAYG employees were entitled to the co-contribution, but I think that this year self-employed people are also eligible. There wasn't really much point lodging a tax return for DS2, but he did have a couple of dollars of franking credits due on his stock dividends so I decided to go ahead and spend ten minutes lodging a return for him.

Hopefully I'll finish sorting out my capital gains figures today and be able to lodge tax returns for DW and myself today - we should each be due for a refund as our rental property was negatively geared last year (due to having to cut the rent while the property was being repaired after a tree fell on the roof!) and my stock portfolios are negatively geared using margin loans.

I'm thinking of selling off most of my individual stock holdings this financial year and reinvesting the proceeds in Commonwealth Diversified Share Fund (CDF) shares. At current market prices my capital gains tax liability should be negligible, and after calculating all the capital gains figures for next year's tax return future returns will be a lot simpler with only a couple of dividends from CDF each year and no capital gains events due to individual stocks being taken over. A couple of decades of investing in individual stocks has proven that I don't have any great talent for picking outperforming stocks (to be honest I only spend a trivial amount of time researching stocks before I decide to buy or sell them), so I may as well just invest in a diversified portfolio of stocks via index funds (in my superannuation account) or CDF shares in my stock portfolio.

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Friday 24 October 2008

My margin loan accounts are both in "the buffer"

The Australian stock market fell another 107 points (-2.7%) today - it was the third consecutive day of losses and helped push the market down 2.5% for the week. It is also the lowest close since November 23, 2004. My two biggest margin loan accounts, with Commsec and Leveraged Equities, both got flagged as being in the "buffer" today. This means that my loan balances are above 100% of the margin value (around 70% of the market value) of my stock portfolio. If the margin utilisation gets above 105% I'll get a margin call, which would mean doing something to bring the loan balance back down to less than 100% of the margin valuation of my portfolio. I transferred $10,000 cash from my savings account into each of the margin loan accounts today, which should prevent me getting a margin call on Monday. I'm still hopeful that we're close to finding the "bottom" of this current bear market - it's already much more severe than most bear markets, and Australian p/e ratios are getting absurdly low. Also profits will undoubtedly drop significantly this financial year due to a global recession, the Australian economy is still expect to achieve positive growth. On that basis the market would appear to be in a panic and oversold, simply echoing the plunging stock markets in the US and Europe, where the economies are likely to plunge into a severe recession this year.

If the Australian market continues to drop next week I'll have to start selling off my stock portfolios to meet margin calls - I'm rapidly running out of cash to inject into these accounts!

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Comsec Margin Lending Customer Service dives along with the market

Big Banks are often accused of treating their customers with contempt when chasing profits. Comsec Margin Lending just provided a fresh example of this. When I logged in to my margin loan account this morning to check how close I am to getting a margin call, I noticed this new notice appearing on the "welcome" page:

"Loan Summary:

If you trigger a margin call that is below $5,000, please expect an SMS text message as notification of that margin call. Failure to act on this SMS notice will result in a sell down of a portion of your portfolio to cover the appropriate margin call obligation.

It is your responsibility to provide us with your latest contact details. Failure to do so may result in you not receiving notification of a margin call. To update your contact details, simply click on ‘Profile’ under the ‘Quick Links’ section on the top left of the website."

In other words, since they don't have my mobile phone number on record (and it's often turned off anyhow), I may not get contacted before they start liquidating my investments to meet a margin call!

In contrast, I have a very small CFD trading account with CityIndex that I opened with just $100 (and got another $500 added to the account by CityIndex for opening an account after attending their seminar). I had created a portfolio of ten Australian stock CFDs in that account, and the market crash of the past two weeks saw it get a couple of margin calls, then get liquidated (I owe them just over $100 now to settle the account). However. even though the account was for a Small amount, and the margin call was only $100 or so, I received several liquidation warnings from CityIndex via email AND I received a phone call from a real human being to warn me that I had a margin call to meet to avoid my positions being liquidated.

Compared to that, the customer service at Comsec is really poor.

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Saturday 18 October 2008

When the going gets tough, the tough get saving

So far this month my net worth is down by another $100,000 or so, dropping below $800,000. Considering my net worth has now dropped by around 1/3 from it's peak at just under $1.2 million during 2007, any thoughts of early retirement have disappeared. I can't see my net worth regaining 50% to it's previous peak for many, many years. And rather than being well ahead of target with my retirement savings, I now expect I'll have to keep pouring 50% of my gross salary into my retirement account (via salary sacrifice) until I'm 65 if I'm to be reasonably sure of a comfortable retirement funded purely from my retirement account.

I can't do much about my investment performance, so for the moment I'll just focus on trimming any unnecessary expenses from our budget. Hopefully if interest rates continue to be slashed by the RBA the interest-only payments on our property loans will eventually be reduced enough for us to start making repayments of principal, rather than using the redraw facility while DW is working part-time.

If the market drops much further I'll have to seriously consider selling off my share portfolio and using the proceeds to clear my margin loan debts and establish some cash reserves. With the economy expected to contract, I don't want to be in the position of having large debts to service at a time when my employment could be downsized. For the moment I'm just hanging in there and hoping this is just another blip in the long-term performance of Australia equities...

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Monday 13 October 2008

The market went up 5% - is it time to be fearful, greedy or complacent?

The Australian market was up 5% today, recovering a large part of last week's "Black Friday" plunge. That means the market is down "only" 40% from it's high last year, rather than 45%! Now, is it time to be fearful that this is just a temporary bounce and seize the opportunity to off-load some stocks and reduce my gearing? Or is it time to be greedy and assume we've seen the bottom of this particular bear market? As I'm fully invested in the stock market and already geared to the hilt, for me the "greedy" option is to be somewhat complacent and just maintain my current level of investment in stocks.

Today I'm inclined to be "greedy" (optimistic?) and stay invested in the market for the long haul (another 20+ years), however I may take this opportunity to sell off some of my individual stock holdings and reinvest the proceeds in an ETF such as Commonwealth Diversified Share Fund (CDF). Over the past 20 years I've decided my stock-picking ability is mediocre, so I may as well just invest in an Index Fund. Current prices provide an opportunity to sell out of individual stocks that I've owned for many years and offset the resulting capital gains with some losses realised by selling out of stocks I purchased more recently. This offers me the chance to simplify my stock portfolio without significant tax costs. A streamlined portfolio invested mostly in Index funds and ETFs will greatly simplify my annual tax returns in future years. I suppose every cloud has a silver lining.

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Sunday 12 October 2008

Annual Self-Managed Super Fund Paperwork lodged

I finally got around to scanning all the paperwork from ANZ bank and Vanguard regarding our SMSF investments during 2007-8 and emailing a zip file (2MB) containing the 52 files to our SMSF administrator. does all the annual compliance, tax return and audit paperwork for a flat $699 annual fee, and they have electronic read-only access to most of our SMSF accounts. However, the Trustees (DW and myself) are supposed to lodge a "checklist" by 30 September to help in the preparation of the SMSF's tax return (due by 31 October). Because I'd been overseas on holiday during August and September, I only just got around to completing the "checklist". The only information that eSuperfund probably needs to complete the tax return was the spreadsheet detailing what each contribution into the SMSF bank account was for. Because DW and I work for the same employer and are both making "salary sacrifice" contributions into our SMSF, the monthly employer contributions for both DW and myself were deposited into the SMSF bank account in a single transaction each time. Hopefully I'll get a copy of the SMSF tax return to check before it is lodged with the ATO at the end of this month.

It will be interesting to see if the annual member statements provide any "annual return" calculations, or just opening and closing balances and total contributions and earnings for 2007-8 (negative of course!). It's been a pretty bad year for our retirement savings. We "rolled over" about $380,000 (combined) into our SMSF last year, but the current value is just over $300,000 despite 9% of our salary going into the fund via the Superannuation Guarantee Levy, plus additional contributions via "salary sacrifice". Ah well, I've still got another 20 years or so to rebuild our retirement nest egg. Hopefully the "High Growth" fund will perform well over the longer term, and we don't get laid off in the coming recession...

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Saturday 11 October 2008

Sailing very close to the wind

Despite pouring $10,000 cash into my margin lending account with Leveraged Equities over the past two days, the market plunge this week saw my margin utilisation hit an all-time high of over 97% as at close of business on Friday. There is an extra 5% "buffer" allowed after hitting 100% margin utilisation before a margin call will be issued, but another substantial decline in the Australian market early next week would force me to start selling off some of my Australian stocks. The "at market" sale of Berkshire Hathaway "B" shares from my US portfolio went through on Friday at $3,000 per share. That was a pretty tragic result, as the stock was massively down at the open, but recovered to close at $3,780! With 20:20 hindsight I should have placed the order with a fixed price rather than "at market". As usual greed and fear brought me unstuck. I sold the stock because I wanted to free up some extra cash to avoid selling Australian stocks due to a margin call, and yet I was too greedy to place a limit order at a reasonable discount to Thursday's closing price. Trying to get a slightly better price by going "at market" ended up costing my about US$10,000! At the moment it seems that everything that could go wrong, is going wrong.

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Friday 10 October 2008

Life on the Margins

The market crash of the past week erased most of the wriggle room I had left in my margin loan accounts. My most leveraged account (with Leveraged Equities coincidentally) needed a cash injection of $5,000 to keep it out of the 5% "buffer". As of last night my three margin loan accounts were all getting close to 100% margin utilisation:

St George Margin Loan ..................84.27%
Commonwealth Securities Margin Loan ....88.75%
Leveraged Equities Margin Loan .........92.86% (even after the cash injection!)

With the Aussie stock market down another 7% or so today, I transferred another $5,000 cash from my Credit Union savings account to the Leveraged Equities Loan account. That's just about tapped out my at call cash reserves, so I'll need some additional cash if the market continues to fall. I transferred the balance from my ING online savings account (around $500) to my credit union account, and I also placed an order with Comsec-Pershing to sell my 10 "B" shares of Berkshire Hathaway. Although BRK.B has dropped along with the rest of the US market, the plunge in the AUD vs USD exchange rate means I'll still get as much in AUD from selling today as I would have realised a couple of weeks ago. The trade won't settle for three business days, so I have to keep my fingers crossed that I don't get a margin call before the funds clear into my Australian bank account.

I had a look at selling off one of the less desirable stocks in my LE margin loan account (that has 0% margin value), however the stock had an offer price but no bid price! If I'm forced to liquidate some of my Australian portfolio to meet margin calls I'm likely to end up having to sell off the 'blue chip' companies as they have the best liquidity.

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Net Worth Update: Sep 2008

What can I say? Arghhhh! or perhaps, D'Oh! (wish I managed to roll over my index put options last December!)

My net worth as at 30 September decreased by another -$55,428 (-5.77%) during the month to $904,990 (AUD), due to the large losses in my geared equity investments (especially the 5% drop on the last day of the month!) and a drop in the valuations of our real estate investments and retirement account. The estimated valuation of my share of our real estate assets decreased by -$17,359 (-2.05%). The balance of my half of the mortgage increased by -$1,455 to -$366,839 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). The recent cut in official interest rate by the RBA hasn't flowed on to a reduction in existing variable home loan interest rates. There is widespread speculation that the RBA may cut rates by another 0.5% at their next monthly meeting [since I wrote this post on 1 Oct the RBA has cut rates by 1%], but this probably won't be passed on in full by the banks due to the spike in overnight interbank cash rates due to the ongoing "credit crunch". Fortunately we have around half of our property loans at a fixed rate for the next 3-4 years, so we've avoided the full impact of increased home loan rates. But a cut in the interest rate on the variable component of our home loans would make life easier.

I've avoided any margin calls on my leveraged stock accounts so far during this bear market, but my margin utilisation is now over 90%. Continued market declines would force me to sell off some stocks and park the proceeds in a cash management account. Although I have a small amount of cash available at call, I can't reduce my margin loan balances at this time as I have fixed and prepaid the interest for this financial year.

The balance of my retirement account also decreased substantially this month, by -$8,293 (-2.81%) to $286,507, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equities. I've now finished re contributing (via salary sacrifice) the $34,000 of undeducted, non-preserved contributions that I had withdrawn last year, so my ongoing salary sacrifice will start to boost my retirement account balance from now on.

The employer contributions of my salary sacrifice amounts for Feb, May and June were only processed in the last week of June, and therefore didn't appear as a deposit in our SMSF bank account until the start of the new financial year (July). I finally managed to get advice on this timing issue from the tax office (they had mislaid the private ruling application I had lodged on 30 June), and the news wasn't good. The delay in the processing of my employer's (tax-deducted) contributions means that my total "concessional" contribution for the 2007-8 financial year was well below the $50,000 cap, and the remainder will be counted this financial year (based on the date the deposits appeared in our SMSF bank account). As I've already made arrangements for close to the maximum $50K in concessional contributions to be made this financial year (SGL and salary sacrifice), I could easily exceed the "cap" if my employer processed all the contributions in a timely manner this year - resulting in an extra tax liability of 30% on the "excess" contributions! As I'm only saving around 15% in marginal tax rate via salary sacrifice this is very bad - not only am I tying up the sacrificed salary in my superannuation account for 15 years (until retirement), I could end up paying MORE tax! The possible "solutions" to this timing issue are all rather unpleasant:
1. Hope for the best, and if my employer contributions are processed on time this financial year I could end up owing a 30% tax penalty on around $8,000 of "excess" contributions = potential cost of $2,400.
2. Reduce my salary sacrifice for the remainder of 2008-9 so that the total "concessional" contributions can't exceed the $50,000 cap. This would increase my taxable income by around $8,000 and also impact family tax benefit calculations = potential cost of approx. $1,200+
3. Ask the payroll department to make sure the last 3 months worth of salary sacrifice aren't processed until the last week of June 2009, so they don't hit our SMSF bank account until next financial year. This will avoid any tax penalties, but will only defer the problem for another 12 months. I would have to continue finessing the timing of employer contributions indefinitely (until the concessional contribution cap is increased, or I decide to reduce my salary sacrifice in future). There is also the risk that despite making arrangements regarding the timing of employer contributions, they might be deposited before the end of the financial year.

At the moment I'm going with option #3, and will probably then reduce my salary sacrifice arrangements for the following financial year - changes to the way family tax benefit treats sacrificed salary (ie. will include it in "assessable" income calculations, even though it isn't part of "taxable" income) will lessen the cost of doing so in 2009-10. (Assuming the tax rules don't change before then!).

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Tuesday 7 October 2008

Cut! Cut! Cut!

I think everybody (except those on the board of the Reserve Bank) were surprised when the RBA announced a massive 1.0% cut in the official interest rate. Nearly everyone in the media had been predicting that the RBA would follow up last month's 0.25% cut with another cut, but they were expecting the RBA would perhaps double their usual adjustment by making a 0.5% cut. The decision to cut by a massive 1.0% suggests a couple of things:
1. That the RBA, having only stopped INCREASING rates with last month's cut, was scrambling to "get ahead of the curve" now that the world economy looked like going pear-shaped in a hurry
2. That with the recent plunge in oil and commodity prices they are no longer worried about the inflation rate staying above the target 2%-3% band for long. There had always been a few that the RBA shouldn't have been too concerned about the part of the inflation surge that was purely extrinsic (caused by commodity and oil price spikes) as it was a one-off (like the introduction of the GST). Now it looks as if at least part of that inflation component will be unwound as commodity prices drop back to sustainable levels.
3. That they have started to worry about just how robust the Australian economy can be when the EU and USA are falling into recession. The view that the Australian economy would continue to grow due to the expansion of the Chinese economy assumes that the Chinese economy will continue to grow strongly even if the EU and USA are in a prolonged recession, due to domestic demand. However, domestic Chinese demand will surely slow as exports drop off and inventory starts to accumulate.

The big banks appear to be passing on around 0.75% of the interest cut, which will benefit our cash flow. We have around half of our property loans at a fixed rate for a few more years, but the half that is at variable rate will benefit from the rate cut. 0.75% interest rate cut will trim our interest payments by around $230 each month.

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Monday 6 October 2008

Online businesses need more time than money

My annual domain name registration for a couple of my online business ideas fell due yesterday - and

I think both of them are worth keeping, so I stumped up the $13 or so renewal fee for each (Dotster is not the cheapest registration option around, but I can't be bothered trying to transfer them to another service). I've been getting a few hits on even though there is no content there as yet, so I think it has potential for generating some AdSense revenue if I load up the site with useful content. But the fact that I still haven't got around to doing anything with the site twelve months after I first registered the domain shows that it won't be easy to convert a good idea into a money spinner. At least I did take a lot of great digital photos of heraldy in various churches and castles while I was on holiday, so I now have some original content to upload! Now I just need to find the time to work on articles and artwork for the site...

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Dive! Dive! Dive!

It's a public holiday here in NSW, so I'm sitting at home getting my SMSF tax documentation organised and trying to ignore the jungle that replaced our garden while we were on holiday overseas. It's not a national holiday, so the stock market was still trading today, managing to post the lowest close for almost three years. The Aussie dollar has also plunged to a two year low (against the greenback!), and most commentators expect the Reserve Bank to cut the official interest rate tomorrow - possibly by 0.5% rather than the normal 0.25% move. With inflation still running well above the RBA's target of 2%-3% "on average", the RBA normally wouldn't be looking at cutting rates yet, but, despite the latest figures showing the economy is still growing and unemployment remains close to 20-year lows, the global financial situation gives the impression of Wiley Coyote running off a cliff. His legs are still running and his eyes are on the Road Runner, but the ground has dropped out from beneath his feet. The Aussie dollar had been strong on the back of the commodity boom, but commodity prices have started to come off the boil in the past couple of months. The Australian economy would be relatively unscathed by a recession in the US and the Eurozone, but, it would suffer from a slow-down in the Chinese economy. And since a US and Euro recession would impact the Chinese economy, the Australian economy will be affected by recent events in the US and Europe - it's just a question of lag.

Overall, the global financial crisis feels a bit like one of those submarine movies where something has gone disastrously wrong and the sub is plunging rapidly towards the abyss. All the ballast has been blown, and yet the submarine is still going down, maybe just a little bit slower. We're all sitting on the edge of our seats, wondering if things will level out before the financial system implodes.

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Tuesday 23 September 2008

Back from my holidays

Arrived back Sunday night after five weeks driving a campervan around Germany, Switzerland, Austria, England, Scotland, Ireland and Wales. Some glitches with my new laptop meant that I couldn't log into WiFi available at some camp sites, so I didn't access the 'net during our trip.

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Thursday 14 August 2008

Busy preparing for our European holiday

I've been busy the past week trying to get everything ready for our trip to Europe. We will be hiring camper vans in Germany and then in the UK, and I'm planning to make this trip as leisurely as possible, rather than trying to cram in as many "sights" as possible. Travelling with my parents (who are in their 70s) and two young boys (8 and almost 2) for five weeks may be a lot of fun, or it could get quite stressful if we try to rush our journey. I'm taking my digital camera, digital compact video camera and my older miniDV video camera on the trip. If I manage to access WiFi hotspots with my new laptop during the trip I may post some photos over the next five weeks. I doubt I'll be posting much about personal finance during our vacation...

** Warning: rambling techno-babble follows **

Most of my trip preparation time so far have been used trying to get my electronic gadgets to behave. It took several attempts to get a set of digital photos formatted and loaded onto a digital photo frame we are taking as a gift for my 93 year old great-Aunt. I picked 60 photos to load onto the internal memory of the photo frame, and initially tried to reduce and crop photos to fit exactly the resolution and 16:9 aspect ratio of the photo frame. However, it was taking so long that I decided not to bother with cropping each photo, but simply reduce all 60 photos so that the entire set should fit into the internal memory. The photo frame documentation didn't mention the amount of free memory available, so I phoned the customer service number to find out. As it turned out the figure I was quoted (32MB) was incorrect - I could only load about 3MB of data before the memory was full. For the moment I'm leaving the photo frame with just 15 images loaded. I can either re size the images (again) on my laptop while we are travelling, and load all 60 images at lower resolution (they'll appear the same at full size, but won't look very good if the zoom function is used), or I can leave the 15 photos loaded into internal memory and buy a cheap USB memory stick to store the remaining 45 photos. An added benefit of using additional USB memory is that I could store additional photos that we take during our stay in Germany and London, before we visit my Great-Aunt.

Aside from the photo frame, I've also spent many hours attempting to get my new Dell Laptop setup for the trip. The initial configuration of the system when it was first powered up went without a hitch, and the Vista home premium OS looked very sexy with the enhanced graphics display I'd opted for. However, once I'd loaded in some freeware encryption software (Truecrypt) in order to create an encrypted volume (to store my financial website passwords to use during our trip), and some image editing software (Mindworks Alchemy) to be able to convert my Pentax RAW photos to jpeg format during our travels, things started to go haywire.

I connected the laptop to the Internet through my home network, but the system crashed due to low memory while autoloading some software updates. Apparently the 1GB RAM I'd hoped to scrape by with wasn't sufficient for Vista once some other apps had been installed.

I then decided that I'd better install some network security software before accessing the Internet too much, but I didn't want to register the 1-month free version of McAfee viruscan that came with the Dell laptop. Instead I bought a 3-PC licence of McAfee Security suite so I could replace the expired version on my desktop PC as well as install it on my two laptop PCs. Once I made the purchase I tried to update my existing McAfee Security Suite on my desktop, that had expired last week. Unfortunately it refused to update properly, still reporting that the installation needed to be "fixed" after the download finished. The expiry date displayed by McAfee also hadn't changed, even after I rebooted the system.

Since updating an existing installation hadn't worked, I decided to uninstall the 1-month trial version of McAfee from the new laptop before downloading the newly purchased version. Of course, when I then tried to login to 'My Account' with the laptop I couldn't get it to work (nothing happened when I pressed the "login" button, even though I used the same details that work OK on my desktop!). I though that the applications I already loaded may be causing the problems, so I used the Visa "restore" function to reset the system to the state prior to my starting to install any applications. Unfortunately "restore" only resets the OS system software, so the deleted McAfee 1-month trial application was still deleted. Trying again to login to my McAfee account still didn't work after the reset, so I'm currently stuck with a laptop that only has the firewall and anti-virus security that comes as part of the Vista OS - not the ideal setup for accessing the internet for financial transactions while travelling the globe!

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Saturday 9 August 2008

Most expensive addresses in the world

The latest listing of the 10 most expensive streets in the world (published by The Wall Street Journal's Wealth Bulletin) includes Wolseley Road, Point Piper in Sydney coming in 9th place, at $29,000 a square metre - based on the recent sale of the non-waterfront, hillside property Craig-y-mor for $32.4 million. The most expensive address on the list is Avenue Princess Grace in Monaco where apartment sales of more than $US40 million translate to an incredible $190,000 a square metre. If we sold our home we could just about afford to buy a walk-in wardrobe in one of those apartments! On the other hand, the are untold millions of people in the world living on the streets or in slum conditions, so our housing cost would be much closer to the "top 10" than the world average.

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Monday 4 August 2008

Net Worth Update: July 2008

I'll keep it short and sour - another depressing month, due to the stock market's continued slide affecting my share portfolio and also my retirement savings. The value of my geared stock portfolios was further reduced by some of the prepayments of annual loan interest made by 30 June appearing in the account balances in early July. And the retirement account balance dropped during July despite being boosted by three months of salary sacrifice contributions arriving in our SMSF bank account. The only bright spot was an increase in the estimated valuations of our home and investment property - but the latest sales figures show that the real estate valuations will drop considerably for August.

Property valuations +$12,516 (+1.47%) to +$866,346
Mortgage loans..... -$....91 (-0.02%) to -$365,488
Retirement accounts -$.1,910 (-0.67%) to +$284,075
Stocks & other..... -$36,579(-17.28%) to +$175,115
TOTAL NW........... -$25,882 (-2.63%) to +$960,048

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Sunday 3 August 2008

A look at our household electricity costs

While I was filing away our utility bills I decided to tabulate the last five years worth of electricity bills to see how things had changed. As expected, the cost of electricity has been increasing each year, and has gone up by around 25% over the past four years. I expect future increases to be even more substantial, given the rising cost of fossil fuels (most of NSW electricity generation is coal-fired power stations).

What was unexpected was the massive increase in our daily energy use in the past two years. It probably shouldn't have come as a shock, as we would have started using a lot more electricity running the clothes dryer and hot water system after DS2 was born two years ago. Hopefully we can reduce our electricity use a bit over the coming year!

Financial | Total | Annual | Daily | Cost
Year ____ | MWhr_ | Cost__ | kWhr_ | c/kWhr
2003-2004 | 12.33 | $1,134 | 34.25 | _9.20
2004-2005 | 10.62 | $__997 | 29.50 | _9.40
2005-2006 | 10.44 | $1,072 | 29.00 | 10.30
2006-2007 | 12.24 | $1,286 | 34.00 | 10.50
2007-2008 | 14.85 | $1,713 | 41.25 | 11.54

On the other hand, our electricity is costing less than $5 per day to run computers, electric piano, TV, CD player, hot water system, electric lights, reverse cycle air-conditioner/heater, cooking equipment etc. for a family of four, so it's pretty good value for money.

I wonder if it would be worthwhile hedging the cost our energy use (petrol and electricity) for the next 10-20 years by buying some oil CFDs?

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Thursday 31 July 2008

Alternative Investment Performance Update: Macquarie Equinox

A couple of years ago I borrowed $50,000 to invest in an "alternative" investment - ie. not the usual cash, stocks, bonds or real estate. I invested in the Macquarie Equinox Select Opportunities Trust, a portfolio of absolute return managers (hedge funds) initially the following proportions:

Component Fund .................................. Initial Weight .... Fund Inception Date .. Compound Annual Return
------------------------------------------------- ------------------- ---------------------- ----------------------
Convivo Absolute Sovereign High Yield Fund ...... 10% ............... Jul 1999 ............. 18.08%p.a. (USD)
Ashmore Asian Recovery Fund ..................... 10% ............... Jun 1998 ............. 16.34%p.a. (USD)
Japan Macro Fund ................................ 10% ............... Mar 2000 ............. 19.62%p.a. (Yen)
SPARX Korea Long-Short Fund Limited ............. 10% ............... Dec 2003 ............. 32.25%p.a. (USD)
Campbell & Company - FME Large Program .......... 10% ............... Apr 1983 ............. 14.72%P.a. (USD)
Denali Offshore Parners - Global Macro Traing ... 10% ............... Jun 2000 ............. 26.43%p.a. (USD)
Aspect Diversified Programme .................... 10% ............... Dec 1998 ............. 11.46%p.a. (USD)
Irongate Global Strategy Fund ................... 30% ............... Jul 2004 ............. 15.24%p.a. (USD)

Weighted average "expected" return ......................................................... 18.46%p.a. (USD)
Actual Annual return to date ............................................................... 10.03%p.a. (AUD)

The usual provisos applied regarding "historic returns are not an indication of future performance", so when I decided to invest in this product I ignored the splendorous compound annual return figures and instead assumed that returns on this investment had a reasonable chance of achieving around 10%p.a. over the 7-year investment period - so far, despite the turmoil in the global stock markets the fund has yielded 10.03%p.a. I expect that the returns so far have also been negatively affected by the appreciation in the AUD over this period, so there is some prospect for a boost in returns in coming years if the Australian dollar has peaked against the USD and starts to drop back to it's long term average exchange rate (around 75c-80c).

I borrowing the entire amount from Macquarie Financing at a fixed rate of 7.75%pa until the maturity date (30 May 2014), at which time the loan can either be repaid with the proceeds of liquidating the investment, or paid out and the investment retained. Borrowing to invest in an income-producing asset such as this is quite tax effective. The annual interest payments are 100% tax deductible, so I get a tax refund of, say, 40% of the interest cost each year. When the investment is eventually sold, any capital gains will benefit from the long-term CGT concession, and so will be taxed at around 20%. The effect of this tax benefit can be seen in the "Loan" and "Net Tax Loan" lines:

The unrealised Net Profit from this investment (Investment Valuation - Total (after tax) cost of Loan) is currently around 9c per $1 invested - or a total of approximately $4,500.

This plot also shows how the Macquarie Equinox returns have low correlation with the Australian Stock market returns. It can also be seen that the Trust has had lower volatility than the stock market over this period. The Trust underperformed an investment in the stock market for the first year, but in the second year has continued to produce positive returns will the market has suffered considerably. I'm not betting on the Trust producing superior returns to the stock market or real estate over the long term, but by including it in my overall portfolio of investments it should help reduce risk (volatility) without adversely impacting on overall performance.

When the investment is due to mature in 2014 I'll need to investigate possible refinancing of the investment loan, as it may be tax-efficient to retain the investment until I am retired and (hopefully) living off my tax-exempt SMSF pension income. If the Seniors Tax Offset is still available by the time I reach 65, it may be possible to realise up to $50,000 of capital gains each year during retirement will a lower effective capital gains tax rate.

So far this investment strategy is working out quite nicely (better than my CFD Forex trading!), although there is always the risk that one (or more) of the component funds might implode (think Long Term Capital Management), which could easily wipe out the returns on this investment, and leave me out of pocket for the interest on the investment loan. In a worst case scenario, the Macquarie Equinox Trust itself could become worthless, leaving me with a $50,000 debt. While it is alluring to make a profit from "other people's money", it's never a free ride. It reminds me of the Lloyds Insurance "Names" who for many years received income without having to tie up any of their investible net worth. However, when things went pear-shaped they had massive personal liabilities, which drove many of them bankrupt.

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Monday 28 July 2008


More of an implosion, actually. After slowly trading my CFD account back up to $3,300 during this year (with some hope of recovering my initial $5,000 stake by year's end), I had a big loss a week ago when the Aussie suddenly dipped against the greenback. I managed to pick the wrong directional moves several times in a row, ending up with less than $2,000 in my account by the start of last week. Foolishly I then increased my contract size from $25K to $150K in an attempt to recover my losses if the Aussie resumed it's trend towards parity with the USD. For a while this high risk approach appeared to have paid off, with the AUD reaching close to 98c just prior to the release of the latest inflation numbers last week. My account balance had recovered to just under $3,000 and I started thinking about reducing my position from $150K to my usual position size of $25K or $50K. Unfortunately I decided to "hang in there" for just a little bit longer...

Of course the Aussie dollar then plummeted overnight, and continued dropping even when the inflation numbers came out slightly higher than expected (which theoretically should have increased the chance on another interest rate rise by the RBA, and hence boosted the AUD vs USD). Having rapidly lost $1,000 I decided to keep the position open in the hope that there would be a rapid rebound. But eventually I gave up and closed out the position when my account balance was down to only $700. I then bought the AUD again when it had dropped another half a cent and seemed to have bottomed out. This turned out to be a false bottom and the Aussie broke through the bottom of the long term up trend and my position got closed out with a residual $190 in the account, which I'll have to cash out. It's nice to imagine that if I just added a little bit more to my account and resumed trading I could eventually recoup my losses - but that's the siren song that lures gambling addicts to their doom. I'd rather just cut my losses and run.

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Monday 21 July 2008

Salary review time

Last week the annual salary reviews were distributed at my workplace - since I'm already at the top of the salary range for my position I just received the standard across-the-board "inflation" adjustment, which was 4% this year. The chart below shows how well the "inflation" rises have tracked the headline CPI rate over the past few years - the figures for 99/00, 01/02 and 03/4 can be ignored as I changed roles and received pay increments in those years. Overall, it appears that my company has been pretty good at increasing salary in line with inflation. Of course, the AWE (average weekly earnings) rate tends to increase by more than inflation, so the company policy of making the basic pay rise track the inflation rate isn't particularly generous. However, although I want my salary to keep pace with our living expenses and provide enough income to fund my savings plan, the annual "pay rise" is rather insignificant compared to other influences on our wealth and standard of living. Compared to the effect of RBA rate rises on the monthly payments for our home loan and margin loans, and the impact of real estate and stock market valuations on my net worth, it matters very little whether my pay rise is 2%, 4% or even 10%!

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Saturday 19 July 2008

Makes you wonder about all the mistakes they don't fix up

DS2 has a retirement (superannuation) account with ING that I opened on his behalf in November 2006. There haven't been any transactions on the account since the initial $1,200 deposit, and the value of the account had only increased slightly to $1,289.48 by 30 June 2008. It was therefore a bit of a surprise to get a letter from ING yesterday stating that a recent "review [of] our processes, controls and systems" had "identified an additional value" of $26.80 that will now be credited to the account as an adjustment. While I'm glad that they've apparently found a mistake and are rectifying it, it's a bit of a shock that the required "adjustment" is over 2% of the account balance! It makes you wonder how many mistakes by professional investment managers go undetected.

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CityIndex CFD Portfolio

I decided to create a portfolio of CFDs for the ASX20 stocks (top 20 Australian listed companies by market capitalisation), exlcuding the financials. This provided a list of ten stocks and I bought enough units of each stock CFD to give them equal weight in this portfolio. Overall the contracts have a value of approx. $3,000 worth of shares, and the required margin is around 10%. This used up approximately $300 out of the $400 account balance I had before making these trades. Combined with the $100 'credit' allowed on this account it means that these stocks could drop by around 8% before my account would be liquidated (and I'd end up owing CityIndex $100). On the upside, if the market recovers from here, a 10% gain would boost the value of these stocks by around $300, giving me a ROI of around 100%. It illustrates the extremely geared nature of using CFDs for "investing" - hence the reason they are mostly used for speculative day trading.

It will be interesting to see how the interest charges work out in practice. In theory interest is charged on the entire value of the CFD contract (not just the margin value), and the rate is a few percentage points above the RBA overnight cash rate. However, in practice interest charges are debited daily, and on the small amounts due each day on $3,000 worth of CFD contracts rounding to the nearest whole cent could have a significant effect. After one month I'll add up all the interest amounts and work out the effective interest rate being charged. I'm hoping to just hold on to these positions for a long period (rather than actively trading), so the interest charge will be important.

After the latest trades my CityIndex CFD portfolio is as follows:

Currency AUD
Cash Balance 411.56
Open Equity -14.72
Net Equity 396.84
Credit Allocation 100.00
Margin Requirement 286.89
Trading Resources 209.95
Account Summary
AUD 484.49
USD -85.05

CFD Trades
17 Jul 2008 BHP Billiton (AUD) CFD___ Buy Market _8 @ $38.03 $304.24
17 Jul 2008 Brambles Industries CFD__ Buy Market 44 @ _$7.90 $347.60
17 Jul 2008 CSL CFD__________________ Buy Market 10 @ $34.94 $349.40
17 Jul 2008 Foster's Group CFD_______ Buy Market 75 @ _$4.61 $345.75
17 Jul 2008 Rio Tinto (AUD) CFD______ Buy Market _3 @$117.16 $351.48
17 Jul 2008 Telstra Corp CFD_________ Buy Market 80 @ _$4.30 $344.00
17 Jul 2008 Woodside Petroleum CFD___ Buy Market _5 @ $59.24 $296.20
17 Jul 2008 Woolworths (AUD) CFD_____ Buy Market 14 @ $25.50 $357.00
17 Jul 2008 Wesfarmers CFD___________ Buy Market 10 @ $32.53 $325.30

Although the US and UK markets were up on Thursday night, the Australian market dropped on Friday - mainly due to the resource stocks which are a significant part of this portfolio. Therefore the portfolio had lost $14.72 the first day. If the Australia market doesn't bottom out soon this could be a very short-lived experiment.

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Thursday 17 July 2008

Playing with my CityIndex CFD account

It's gotten a bit boring watching the value of my geared stock accounts drop further and further each day. And in the past couple of days my Forex trading with CMC Markets has also given back the gains I'd made so far in July, and the latest monthly valuation figures for my real estate show an overall decrease.

So with all the doom and gloom around I decided to take my mind off the woeful state of my investments by dabbling a bit more with my CityIndex CFD account. I didn't like my earlier trades of commodities (gold and oil) on this account, as the minimum contract size was too large compared to the modest value of this account ($250 I initially deposited plus another $250 "bonus" money credited by CityIndex for opening the account). Today I thought I'd use the account to buy into the Australian stock market at it's current level, so I hunted around for a proxy for the overall market. The actual ASX200 futures contracts might suit, but I thought I'd start out by simply buying the minimum 1 unit of Australian Foundation Investments Co (AFI) CFD. AFI and ARG (Argo Investments) are listed investment companies that act a bit like a managed fund and perform very similar to the overall market (see the charts below), but with much lower fees than managed funds. The CityIndex stock list included AFI but didn't show ARG, so I decided to buy the minimum quantity if AFI. The stock was trading at $4.64 and the CFD for this stock has a margin requirement of 15%, so buying 1 unit cost $0.69 of my available funds (approx. $411 at the moment). Having confirmed the low amount of money required to buy a unit of this stock, I was intending to top up my holding to 100 or 200 units of AFI if it dropped a few more cents. However, the stocks CFD listing suddenly disappeared off CityIndex screen, and can now only traded by phone! Although CityIndex touts it's web-based trading platform as being much more dynamic that the java app provided by other CFD providers (such as CMC Markets), I'm finding the ability for stocks to be added (and removed) at will by CityIndex to be more of a nuisance than a benefit.

Anyhow, I then bought one unit of Westfarmers just before the market closed for the day. I'm not sure whether I'll buy a few units of various Australian stock CFDs and create a virtual diversified 'portfolio' in my CityIndex account, or if I'll have a go at trading the ASX200 futures CFD. Anyhow, this account only involves a few hundred dollars of 'play' money, and will give me something to fiddle with while ignoring the large changes in the value of my long-term stock and real estate investments.

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Thursday 10 July 2008

Sold some IPE and bought some IANG instead

I have a large block (for me) of the listed ING Private Equity company IPE, which I obtained last year when the $1.00 options were exercised. Since then the general market slump has seen them marked down severely, to around $0.70 at present. Although the book value of the IPE shares would still be much higher than this, they could continue trading at a discount to book value for a long time, so I decided to off load some of my holding - selling 22,000 of them at $0.70, realising $15,370.05 after Comsec brokerage fee of $29.95. That still leaves me holding 90,000 IPE shares, which I'll keep for the longer term.

I bought 200 IANG shares (IAG (NZ) Reset Exchangeable Securities) for $80.20 each - costing $16,269.95 incl. brokerage.

Overall, these trades will have increased my margin loan debt by $900, but will actually reduce the chance of getting a margin call. The IPE shares only have a margin value of 5%, whereas the IANG shares have a margin value of 80%, so the margin valuation of my portfolio will have increased by roughly $12,000 by making these trades. The IANG shares should also be a somewhat less risky investment than the IPE shares they're replacing - being an investment in a portfolio of high quality, short dated, fixed interest securities (Portfolio) managed by IAG Asset Management Limited (IAGAM). This Portfolio has an Australian Bond Fund Rating of ‘AAAf’ from S&P. It pays a fully franked dividend of 1.2% above the 90 day Bank Bill Rate, which should provide income roughly equivalent to the current margin loan interest cost (tax-deductible) of 10.50%. The IANG shares used to trade around the issue price ($100) plus accumulated dividend, as shown below. However, over the past year they have been deeply discounted by the market to currently trade around 20% below "face value". Since the IANG shares first "reset date" is in a couple of years time (15 March 2010), and the portfolio of bonds currently still has a valuation of $100.70 per share, this discount seems likely to be a temporary "panic" reaction and the shares should recover to around $100 by the reset date (barring any significant defaults in the bonds held within the portfolio). Combined with the fully franked dividend rate IANG seems a safer bet than holding on to the IPE shares they replace.

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Monday 7 July 2008

Why homeowners don't mind inflation, except when the central bank tries to fight it.

Around 35% of Australian "homeowners" actually own their homes outright, the rest have a mortgage to pay off. For those with a mortgage, such as myself, inflation has a positive impact in that house prices tend to be underpinned by the cost of new houses in the same area - which are in turn linked to inflation. On the other hand, the mortgage principal isn't affected by inflation. Whether you may be paying off the principal over 15, 20 or 25 years, or have an "interest only" loan, inflation won't change the amount of principal owed.

This means that if the value of your home just keeps up with inflation (no real increase in value), over ten or twenty years inflation will have reduced how much you owe the bank (in real terms). For example, our house is valued at around $840,000 and we have a mortgage balance of $490,000 which will remain constant (if we continue to use an interest only loan). If inflation kept running at the current 4% pa or so, our house price would increase to approx. $1.7 million by the time I'm due to retire eighteen years from now, but the amount owed would only be "worth" $242,000 in today's dollars by then. Therefore our equity would have increase from $350,000 to the equivalent of almost $600,000 simply due to inflation.

Unfortunately, higher inflation levels are generally bad for the economy, so the central bank attempts to control it using the fairly blunt instrument of official interest rates, which in turn pushes up the interest charged on variable rate home loans. Although we fixed the interest rate on our investment property, our home loan is at the standard variable rate, so our repayments have almost doubled with the rise of inflation from 2% to 4%. For that reason a temporary spike in inflation would be better for us than a permanent shift to higher inflation rates. If inflation drops back into the RBA's target range of 2%-3%, repayments on our mortgage will trend back down towards the previous rates (although probably not quite as low as before, given the effects of the global credit squeeze), while the real value of our mortgage debt would have taken a permanent hit. Also, our salaries tend to keep pace with inflation, so a temporary spike in inflation would end up making the interest-only repayments a smaller proportion of our pay packet (although it's a bit of a struggle in the interim).

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Saturday 5 July 2008

Rents to rise 10%?

While browsing through an investment magazine at the local library I came across an interesting chart of seasonally adjusted vacancy rates vs. the real (above CPI) rent change. As one would expect, rents tend to rise most when vacancy rates are low, but the relationship was quite precise. As shown in the table below, real rents increase by an additional 2%pa for every 1% drop in rental property vacancy rates:

Real Rent Change......Vacancy Rate

Rents tend to just keep pace with inflation if there is an adequate supply of available rental properties (3% vacancy rate), and rents outpace inflation if there is a shortage of properties to rent.

With inflation in Australia currently running above 4% pa and the vacancy rate for rental properties in Sydney dropping below 1% this year, rents should (according to this relationship) rise by around 8% pa.

At some point housing affordability will limit the growth in house prices in Australia - some estimates suggest that Australian houses are currently 30%-50% overpriced. But, with new dwelling construction rates currently well below the rate of increased demand caused by immigration, and the potential for rapid rises in rental yields over the next couple of years, there could be at least one more 'boom' left in the Sydney property market before I retire. When the fixed rate mortgage on our rental property is due for renegotiation in about three years time we may think about selling it and investing the proceeds in our SMSF.

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