My net worth as at 31 December decreased by -$34,230 (-2.92%) during the month to $1,138,196 (AUD), due to quite large decreases in all components of my investment portfolio.
The estimated valuation of my share of our real estate assets fell by -$15,809 (-1.94%). The real estate valuations bounce around from month to month, affected by what mix of houses were sold during the month, so it's only the long-term trend that matters. I already have the raw sales data for the January estimate, and this drop was recovered the following month. The balance of my half of the mortgage increased by -$816 to -$363,969 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).
My leveraged stock portfolios decreased by a net -$12,625 (-3.20%) to $382,028. This isn't as bad as last month, but the combined drop over two months ensured I didn't meet my overall net worth target for the year.
My retirement account also decreased, by -$4,980 (-1.52%) to $322,893. I'm still waiting on an employer contribution of around $4,000 to be processed that has been outstanding since September, which would boost the account balance a bit. There's also the slight miscalculation in the 9% SGL employer contribution for six weeks during Nov/Dec that hasn't been corrected as yet. Hopefully these outstanding contributions will appear in the SMSF bank account during January.
I've been estimating approximate monthly ROI (based on change in net worth minus the $30,000 I'm saving each year) since May 2002, and it's interesting to see how well the distribution of monthly returns matches a normal distribution (with average monthly ROI of 1.08% and a std deviation of 2.28%). Distribution of investment returns tends to have longer 'tails' than a true normal distribution, so it wouldn't be surprising to see a gain or loss greater than 6% of my net worth some month.
The long term change in net worth is still close to the fitted 20.3% pa rate of increase, but this will be harder to maintain in future as the contribution of my annual saving is becoming less and less significant compared to the ROI on my existing investment portfolio. I also doubt that 2008 will see overall investment returns of 14.1% and the cost of borrowed funds is likely to exceed 8% this year. As the interest rate available for prepaying annual interest on my margin loans will probably be quite high when it falls due in June, I may not prepay as much this year and instead sell off some stock holdings in the new financial year to reduce my gearing. Then again, I was thinking of doing that last June but decided against it. Having missed the chance to benefit from market timing last year, I run the risk of selling at a market bottom and reducing gearing when interest rates have peaked. So I'll probably just grit my teeth and stick to my long term asset allocation and gearing plan.
Copyright Enough Wealth 2007