Friday, 13 February 2009

Asset Allocation and Gearing Review

I updated my asset allocation spreadsheet today, and it confirmed how the stock market crash has distorted my asset allocation and blown out my gearing levels. I'd be pretty close to my ideal LVR and gearing ratios if stocks were still at their Jan 2007 prices:



My asset allocation in 2007 was overweight residential property compared to my target allocation, and I wanted to increase my gearing (debt) levels slightly from 40% LVR (65% debt:equity) to 50% LVR (100% debt:equity). Since it wasn't feasible to sell off part of our home or investment rental property, I decided to borrow against our real estate equity and invest the funds in Australian stocks. If share prices had stayed at their Jan 2007 levels my current situation would by something like "The Plan" - with debt:equity still under 100%. As it turned out, I borrowed and invested the extra funds in the stock market just before the GFC took hold, and the drop in share market valuations has meant my debt:equity has blown out to 170% and my net worth has nearly halved.

At the same time my asset allocation has shifted from around 40% real estate to almost 50% real estate, and my allocation to stocks has dropped from around 50% to only 35%. NOT what I had expected!

My debt:equity should drop back to around 150% this July (if the stock markets remain flat until then) as the fixed rate term on my margin loans expires, and I can use some of the cash sitting in these accounts (from selling off some stocks in the past year) to repay some of the margin loan debt.

I'm currently adding about $50,000 per annum to my retirement savings (which is being invested roughly 44% in Au shares, 36% in International shares, 10% in property and 10% in fixed interest). This should bring my gearing back down to 100% within five years, all else being equal. Any improvement in the stock market would of course help immensely!

If the market gains 50% over the next 5 years (fairly optimistic in the current situation, but still 20% below it's previous peak) I would be roughly in the same position as I was in Jan 2007 - pretty depressing as it will mean that saving about half my salary for 7 years had not improved my net worth over that period. In hindsight it would have been much better to sell off my stock holdings in 2007 and stick the money in the bank.

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1 comment:

lowincomelady said...

Hindsight is a sobering thing...