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Tuesday, 1 September 2009

Net Worth Update: August 2009

My net worth increased 7.21% during August, due mostly to the continued rally in the Australian and global share markets. By 31 August my net worth had increased to $753,137 (up $50,628). At the start of 2009 I had hoped for the economy to stabilise and show signs of recovery by the end of the year, and would have been happy for no further decrease in my net worth over 2009. Things were looking pretty dire by the end of February, having lost another $70K or so of net worth. At the bottom of the stock market slump in early March, my net worth had dropped to only $554,783 - the lowest since August 2003! And unfortunately the prospect of margin calls on my geared stock portfolio forced me to liquidate around half of my remaining portfolio. By mid-year the stock market recovery was well underway, and I had thought I my net worth could realistically recovery to $750K by year's end. That level has already been surpassed, and it looks as if the market has already priced in an economic recovery by the end of 2010. Any significant bad news (eg. China growth stalling) would probably see the market drop steeply again. In the medium term (2-5 years) the economy and company profitability may completely recover from the GFC, but I don't expect the market to reach the previous peak - investor confidence will probably be more subdued than in 2007, and inflationary impacts flowing from government stimulus spending around the globe will see official interest rates at higher levels, which will reduce p/e ratios.

My retirement account (SMSF) gained $18,375 (+6.70%) to $308,631. The gain was entirely due to the stock market rise, with our small geared stock investment (7 ASX200 index CFDs, code: IQ) boosting the gain. The were no employer superannuation contributions banked during August. We have around $8,000 cash sitting in the SMSF bank account, but I'm hesitant to add to either our Vanguard HighGrowth index fund investment or IQ CFD holding when the market has had such a steep rise for the past two months. I'll invest the cash if there is a substantial correction (10%+), or start to dollar cost average by investing our monthly contribution amounts if the market stabilises around the current level.

The estimated valuations for my half of our real estate assets (house and investment property) were up $6,921 (+0.89%) to $781,389 in August, but recent sales data indicates a smaller rise (around $4,000) will be recorded for September. Also, September will see our total mortgage debt increase by about $2,000 due to having to redraw this amount to meet our loan interest payments while the rental property was vacant during August. New housing starts remain below the level of increased demand (there was record high net migration to Australia in 2008/9, surpassing the previous high set in 2007/8), so there is likely to be another "property boom" in Sydney once the economy has started growing enough to stabilise unemployment rates (late 2010?). Higher inflation would also see construction costs for new housing rise, which usually boosts prices of existing stock, while the real value of our mortgage would drop. A decade of higher-than-average inflation would probably see the value of our real estate portfolio rise slightly in real terms, while our mortgage debt would be slashed in real terms (even with our mortgages currently being "interest only").

My stock portfolio showed the benefits of leverage when the market is rising rapidly, but my overweight (13% of total portfolio value) investment in IPE (ING Private Equity fund) shares is having a negative impact on my portfolio performance as the market start recovers. Being a 'fund of funds' that are invested in unlisted private equity, I expect the economic recovery will have to be well underway before IPE trades closer to NAV (currently NAV is quoted as around $0.47 per share, but the shares are trading around $0.21 following a 1:1 rights issue at $0.17 a share in June). Before the GFC IPE shares were trading around 85% of NAV, so I expect IPE will outperform the market in the medium term if the real economy recovers and the prospects for small, unlisted companies brightens substantially. My $51,240 invested in IPE (244,000 shares) is high risk, but theoretically could have great upside potential. For example, if the ASX200 reached 6,000 when the economy has recovered (another 33% rise from current levels, but still around 12% below the 2007 peak), the NAV of IPE should rise to around $0.63 per share. If p:NAV recovered to pre-crisis levels of 85%, this would result in a share price of about $0.53. It's probably an overly optimistic projection, but if it eventuated I would recoup all the loss that resulted from investing $100,000 in IPE just prior to the start of the GFC. (On the downside, IPE could end up worthless if the underlying private equity funds collapse). Converting my "trading" position in IPE options into a large stock holding back in 2007 using HELOC funding was one of my all-time bad investment decisions (the others were: not letting my stock portfolio gearing levels naturally decline during the bull market of 2006-7, not rolling over my index put-options when they expired in December 2007, not taking the opportunity to correct this mistake by investing in new index put-options during the brief bear market rally of March 2008, deciding Microsoft was too expensive to invest in during the early 80s, selling out of my position in Felix resources when the stock had risen from $1 to $2 a share (currently trading around $17!), holding on to my "investment" in Holyman ferries when they'd dropped 50% (they went out of business soon after)... Actually, the list goes on and on). Overall I tend to make the typical amateur stock investor's mistake of holding on to my losers (letting "paper" losses affect my decision making) and selling my winners too soon. That's the main reason our retirement savings are invested in index funds rather than trying to "pick" individual stocks ;)

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3 comments:

David@DINKS Finance said...

Love looking at how currencies impact wealth. It's a field I might possibly go into, and as far as I know the Australian dollar versus the American dollar is a big one with the Aus$ making big gains (I think it will continue to for years to come).

enoughwealth@yahoo.com said...

Of course the first question is what currency is 'best' for tracking your net worth. I use A$ as I live here, have most of my investments in Australia, and plan on retiring here. Whereas Moomim tracks his NW in USD because he resided there for several years and still has a large asset allocation to US equities. But since he's now moved back to Australia it may not make sense to continue to track his NW in USD terms if he doesn't ever move back to the US to live. It would seem best to track NW in the currency you plan on eventually consuming your wealth in. On the other hand, converting NW to USD makes it easier to compare with others (eg. on networthiq.com). But if I converted my data to USD the chart would look quite different, given the movement of AUD/USD from 0.5 to 0.93 few years ago, then back down to 0.75 before now recovering to around 0.84...

enoughwealth@yahoo.com said...

Another consideration is the use of parity purchase pricing. eg. someone with a wealth of 500,000 zlotls may seem relatively poor if that converts to only $50,000 USD. But if the cost of housing and food is much lower in Zlotland their living stadard may be similar to a US resident with a wealth of US$800,000

Most literature I've seen regarding parity purchasing power considers the costs of 'typical' housing and food. But although a one room hut may be 'typical' housing in Zlotland, I don't think it's really equivalent to a 'typical' house in the US. So a Zlotlander with enough wealth to purchase two typical houses in Zlotland isn't really as wealthy as a US resident who has enough wealth to purchase two typical houses in the USA. But in subjective terms they may be equally wealthy, especially since ones feeling of 'wealthiness' is apparently based more on comparison to the peer group rather than any objective measure.