Friday, 1 February 2008

Net Worth Update January 2008

Net Worth Update January 2008

My net worth as at 31 January decreased by -$72,120 (-6.34%) during the month to $1,066,077 (AUD), due to the large losses in my geared equity investments, which was only parially offset by a strong month for our property valuations. Last month's comment that "it wouldn't be surprising to see a gain or loss greater than 6% of my net worth some month" proven uncomfortably prescient. (I'm still waiting for a month where my net worth increases by 6%!) Over the past two months my net worth has decreased by a substantial -9.26%

The estimated valuation of my share of our real estate assets increased by $25,384 (3.18%). The balance of my half of the mortgage increased by -$835 to -$364,804 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). Interest rates are still being increased in Australia, as inflation has broken through the top end of the official 2%-3% "target" band. The RBA is expected to raise rates another 0.25% at next week's monthly meeting, which will flow on to variable home loan interest rates. Fortunately we have around half of our property loans at a fixed rate for the next 3-4 years, so we won't feel the full impact. One positive of higher inflation might be that house prices increase in line with rises in the cost of new home construction, while our home loan debt will remain constant. My parents' generation benefitted from this effect in the 70s and 80s when inflation took off into double digits after the first global "oil shock", causing a boom in house prices at a time when nearly all home loans were for 30-years at a fixed rate around 5%-6%.

My leveraged stock portfolios decreased by a net -$70,106 (-18.35%) this month to $311,922. I think this is the worst monthly result I've recorded. Another 10-15% decline in the stock market would force me to sell off some of my equity investments to avoid getting a margin call, and a further decline of 40% would wipe out the value of my geared stock portfolio entirely, wiping around 30% off my net worth. It's interesting that my hedge fund investments haven't been performing particularly well during this period, despite their alleged ability to profit from short selling during bear markets.

The balance of my retirement account also decreased substantially this month, by -$4,980 (-1.52%) to $322,893, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equitites. 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. Yesterday the payroll manager informed me that the missing transactions have been located and the funds should appear in the SMSF bank account next week.

The timing of our move from a retail superannuation fund into our own Self-Managed superannuation fund last year turned out to be less than ideal, with our withdrawal from the retail fund being executed during the mid-year stock market correction, and then reinvested into the Vanguard fund over several months during late 2007 when the markets were hitting new highs. My current retirement account balance is now below what it was at the start of 2007, despite having contributed around $35,000 to my retirement savings during the year. This year I'll be contributing another $50,000 to my retirement fund via a combination of salary sacrifice and the 9% SGL, so if the market takes a while to recover or drops further I'll at least be "averaging down" the entry price.

One good thing is that I still have twenty years to go before reaching "normal" retirement age, so hopefully the current drop in my net worth chart will appear as an insignificant "blip" by that time - similar to the market crash of '87.

Although we're only 1/12th through the year, it appears highly unlikely that I'll achieve my goal of increasing my net worth by $150,000 (13%) in 2008. From the current situation I'd have to gain $222,000 over the next 11 months, or around 20.8% in 11 months!

Copyright Enough Wealth 2007

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