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Friday, 6 May 2011

Net Worth Update: April 2011

Hardly any change in my net worth over the past month, with the small (-0.27%) decline in the estimated price of our real estate this month being offset by a slight rise in the stock market that boosted my geared stock market investments by a similar amount. But things aren't looking too rosy for the rest of 2011 - Australian property prices are slowly declining across the board, interest rates aren't dropping (and may rise if inflation takes off), and the economy is growing at below trend rates. So I can't see our property portfolio rising above the current valuation during the next financial year, and a 5%-10% drop is quite possible (hopefully not the larger drop some people have been expecting since the GFC). The Australian stock market also doesn't look very positive at the moment, so my share investments and superannuation account aren't likely to contribute much to my net worth in the short term.

As some of my 'capital guaranteed' hedge fund investments mature over the coming years I'll use the proceeds to reduce my margin and investment loans - it makes no sense to borrow to invest when interest rates are close to 10% pa and total investment returns are much less than this. Meanwhile I'll continue to save $25K pa via salary sacrifice and SGL contributions into superannuation, and any spare cashflow will be used to pay off some of our non-deductible home loan.

Assets___________$ Amount______$ Diff_____% Diff
Stocks_*__________$16,665______$2,775______n/a %
Retirement_______$375,280________$621_____0.17 %
Properties_______$970,496_____-$2,667____-0.27 %

Debts____________$ Amount_____$ Diff_____% Diff
Home Mortgage(s)_$360,399______-$503_____-0.14 %

Net Worth______$1,002,042______$1,232_____0.12 %
* the Stocks figure is portfolio value - margin loans. As my portfolio value (and margin loan debt) is around $500,000 relatively small movements in the stock market produce huge percentage swings in the net value of my stock portfolio each month.

My version of net worth calculation only includes major assets (including my home equity) and debts. Cars, boats etc. and household goods are not included. Monthly credit card balances are also not included as I pay my credit cards off in full each month. I also pay the uni HECS fees for my Master of Astronomy course as I go, so I don't have any outstanding uni HECS debt. I haven't allowed for any capital gains tax liability that would be incurred if I sold off our investment property, shares etc.

Note: some readers have asked why I include our home as part of our property portfolio, and therefore include it as part of our net worth. The simple answer is that technically "net worth" should include all assets - all debts, so leaving out the value of our home (and the outstanding mortgage balance) would be misleading. A slightly more complicated answer is that excluding the value of our house (because we have to live somewhere, so its not really a saleable asset) would make it hard to compare "home owner" net worth with all those people who are renters. If you excluded the home value, but still included the outstanding mortgage amount as debt it would be even more misleading. Finally, in my own case I'm supposedly going to inherit a house and farm in the country from my parents, so when I retire I probably could sell off the family home and not have to use the net proceeds to buy another property... If you want to exclude any equity in the family home from your calculations you are no longer calculating "net worth" but another commonly quoted figure sometimes called "net investible assets". Another complication is that in some countries (like Australia) most people have a "superannuation account" with a known current value which, but some people have a "defined benefit" account which will have a particular value once retirement age is reached, but might currently have a much lower "vested" value (for example, if they change employers before reaching retirement age). In other countries (eg. USA) the present value of social security seems to be a bit of a moveable feast, as it will be received as a pension rather than a lump sum, and the amount received may be affected by other factors (eg. wealth and other income when retired?).

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