Tuesday, 4 August 2009

Net Worth Update: July 2009

My net worth increased 8.65% during July, due mostly to the massive rally in the Australian and global share markets. By 31 July my NW had increased to $702,509 (up $55,938). But that's still about 41% below the peak NW figure I reached in 2007, despite having saved a considerable amount into superannuation in the past two years.

My retirement account (SMSF) gained $18,745 (+6.93%) to $289,256. The gain was mostly due to the stock market rise, with our recent small investment (~$5,000) in 7 ASX200 index CFDs (IQ) contributing around $2,000 of the gain. The overall change in SMSF valuation was also boosted by getting three months backlog of employer contributions deposited into the SMSF bank account in early July, but was held back somewhat by the negative impact of paying out the SMSF tax assessed for FY 2007/8 and also making a provisional tax payment for the 2008/9 FY.

The estimated valuations for my half of our real estate assets (house and investment property) were up $7,662 (+1.00%) to $774,468 in July, and recent sales data indicates a similar rise will be recorded for August. There are some indications that our real estate portfolio valuation may continue to rise during 2009/10, with the gap between new housing construction and the underlying demand for housing supporting house prices in Sydney. However gains will be tempered by the rising unemployment rate. The balance of my half of our real estate mortgages decreased slightly (-$86 or 0.02%) to -$362,944, with all our loans currently "interest-only" and the majority at a fixed rate for the next several years.

My leveraged stock portfolio finally moved back into net positive equity during the month (Woo-hoo!) to have a net value of +$1,729 (a gain of +$29,445 for the month). The gross value of my stock portfolio is around $450,000, so stock market movements have a massive impact on my net worth. The recent rally has been exceptionally steep, reflecting the recent sharp rebound in consumer sentiment and hopes for a rapid recover in the real economy. Although the market may continue to rise (if the economic recovery materialises and unemployment rates max out lower than previously projected), there must be considerable risk that the market will pull back significantly if there is unexpected bad news (or even if the recovery is modest). In the medium term (2-3 years) I think the market might get back to pre-GFC levels if the economy moves back into long-term average growth rates and company profits recover. However, inflationary pressures resulting from the government's deficit-funded stimulus spending could significantly lower the market's p/e requirements in future, limiting growth in stock prices as profits recover. That could lead to another decade of poor stock market performance, similar to the 1970s.

It will be interesting to see how unemployment rate trends as the economic recovery gets underway. It was only a few years ago that economists were predicting labour shortages in the coming decades due to the aging workforce. The current spike in unemployment is likely to lead to a few years of reduced immigration levels, which could exacerbate labour supply issues in the medium term. That could also lead to inflationary wage pressures as the economy recovers and unemployment starts to trend down.

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