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Friday, 4 November 2011

Wealth - compare global, act personal

The Credit Suisse Research Institute brought out their second annual 'Global Wealth Report' last month (link to free pdf here). It makes interesting reading, although its a bit depressing as it shows that my personal wealth accumulation has been badly underperforming both global and Australian benchmarks since the GFC. That can probably be accounted for by comparing my distribution of financial and real assets and debt load compared with the national average, as shown below:

This shows that although my financial:real asset ratio is similar to the national average for Australian adults (I hold about 4x the average amount of financial assets and 3x the average amount of real assets ie. property), I have much higher debt levels - 8x the national average (via property mortgages and using leverage for my financial asset investments). Overall, my net worth is 2.3x the average for Australian adults, but that is rather disappointing given my age, qualifications, and even my salary. With such high levels of gearing, my wealth accumulation strategy relies on a return to long-term trend rates of asset appreciation sooner rather than later. Otherwise, the servicing costs on carrying a large amount of debt at a time when asset prices remain flat will mean my wealth continues to stagnate until I'm eventually forced to reduce my gearing levels as I approach retirement.

ps. I haven't updated my net worth figures for the past two months - partly because I was busy doing our tax returns and a back-log of uni assignments, but also because falling Sydney property prices and a declining stock market meant that the results were bound to be disappointing. I'll probably get the figures up to date next week, once my uni exam is out of the way.

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Financial Independence said...

In the current climate there is no incentive to save the money. I recently did some calculations and the results are very much frustrating, to be brutally honest. Have a look yourself - they are all published.

If you invest $ 40, 000 a year over 35 years, at modest inflation rate of 2% and administration fee of 1-2% you need stock market to perform at 4% just to preserve value of your money and higher to gain anything.

This means that you are only preserving money you are investing at a very high risk. So it is just plain wisdom - is there a point to be frugal and try to save, if you ended up loosing money?

Feeding financial industry or living your life in full now? said...

In the current climate its difficult to see where you can invest and be confident that you would get a positive real return after tax. But, a savings plan is generally long term, with the amount saved each month expected to build up over many years, and the investment returns averaged over many years, if not decades.

The question then becomes, will share market investment return to the long term (last 100+ years) average, or remain stagnant for a lengthy period?

I'm sticking to my original plan of being invested mostly in stocks (via Index funds), and sticking with it for the long term, ignoring short term peaks and troughs. But its quite possible that the GFC was a paradigm shift, and it would be better to reformulate my investment strategy to account for much lower expected returns for the stock market in coming decades.

agriculture investments said...

Pimco talks about the "New Normal", so I's have to agree with the tenor of what Financial Independence is saying. One will be lucky to earn 2-3% per annum over inflation over the next 10-20 years or so. The unwinding of a giant credit bubble definitely has the affects of limiting the upside in asset appreciation for a forseeable time afterwards.