Friday 21 January 2022

Equities markets off to a shaky start in 2022

Looks like I *might* have made the correct decision to sell off my margin loan portfolio last week - the share markets are looking decidedly shaky at the start of 2022. The prospect of rising interest rates to combat/avoid inflation also makes longer term bonds a bad investment, and Australian real estate looks likely to weaken during 2022/23. Overall it might be a good time to just accumulate cash for a while.

We will remain in our long term asset allocation within our SMSF, and I have quite a lot of my NW tied up in real estate via our home, the lake house I *inherited* from my parents, and also the investment apartment I bought off-the-plan a couple of years ago that will be completed early next year. So my overall asset allocation remains 'high growth' despite the prospects of a couple of bad years coming up.

I won't be surprised if my NW is lower at the end of 2023 than it is at the moment. But at least I won't have to worry about getting a margin call if the stock market tanks.


I got an email notification that my CityIndex CFD trading account had dropped below 100% position coverage. I wouldn't have to put in more cash or close out a position unless the cover dropped below 50%, but it prompted me to review the positions (SPDR S&P ASX200 CFD and iShares MSCI Australia Index Fund that is denominated in USD) - they were both considerably down, due to a relatively high level of gearing inherent in CFDs.  At yesterday's close my overall A$1,306.48 initial investment was down by -A$298.07 (or 22.8%). I had initially opened these positions as long term 'ride the index' geared plays, but I decided I might as well go more 'risk off' and close out these positions. I sold out of the SPDR S&P ASX200 this morning (the Australian market was down about -0.7% after initially dropping 1%) and I will close out the iShares CFD position once US trading opens tonight. I might just xfer the cash out of this CFD trading account as the amount of money involved is relatively trivial and just creates more work at tax time for essentially no material benefit. If I start working on a PhD this year part-time I will have plenty of other things to keep me occupied!


I also got an email regarding the 12% solution portfolio. It states that although the strategy is based on only doing an end-of-month switch (if required), David Alan Carter does track the various indicators throughout the month and decided to alert subscribers of what he calls a "provisional pick" because the indicators had now started to indicate as shift of asset class (from QQQ to SHY (short term bonds)) rather than just a switch between funds within the same asset class. He notes that this could change by the normal end-of-month decision point if equities markets recover, but thought he'd let subscribers know.

He wrote "Obviously, this is a judgement call. And because every investor is in a different life situation and has a different tolerance for risk, I can't offer a specific recommendation."

Seems like a bit of pro-active "don't blame me if you lose a lot of money, I don't give recommendations, just information" PR to me.

Anyhow, I'm glad I decided to close out my 12% solution experimental portfolio last month, so I ended up with a small profit.

It also highlights that while it would be more cost effective to track this strategy with a larger position that I used for my experiment (which would reduce the relatively high trading costs), you would have to be comfortable with the higher volatility (risk) that generally accompanies higher potential/expected returns.

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Friday 14 January 2022

Reduced my Geared direct share investments

While I normally don't try to "time the market", I occasionally succumb to temptation when it seems there is lots of downside risk and little upside potential. I did that with our SMSF investment in Feb 2020 (when we switched from Vanguard 'high growth' to a 50:50 mix of 'conservative' and 'bond' funds just before the developing global pandemic started to impact share markets around the world) and then again later in 2020 (when we slowly moved back into our long term 'high growth' fund allocation when markets had settled down and started to recover).

I've been watching the markets (at least the Australian stock market) trend fairly flat for the past 6 months, with occasional dips and rises as day-to-day news impacted sentiment, but over that time we've slowly moved from the prospect of interest rate rises to combat the possibility of rising inflation, to a more certain hike in interest rates around the world as inflation appears to have increased on a more persistent basis than the temporary 'spike' that was initially expected to die down.

We also have various potential negative events sitting in the wings - the Russia-Ukraine-NATO/US tension, the China-Taiwan- everybody tension, the Turkey-economic reality tension, any of which (or none) could 'blow up' unexpectedly and trigger a substantial market decline.

Overall, there seems more downside risk than upside potential for the next year or two, so I decided to close out my direct share investments on my Commsec margin loan account. The value today was about $6,000 (around -3.0%) less than it was worth at the end December, but I decided to sell out so I can pay off the $32K margin loan and use the remaining cash to pay off a chunk of my portfolio (home equity) loan.

I retained my investment in the Colonial FirstState Geared Global Share Fund, and we are still fully invested in our SMSF, so it is only a slight overall reduction in market exposure to eliminate the modest amount of gearing I currently had.

I'll have to pay a chunk of capital gains tax on the realized gains, but after suffering a serious hit to my net worth via my geared share investments back in 2007/8 I've decided to trust my 'gut' a bit more and take action when it seems there is considerable downside risk and little upside potential after a period of strong market gains. It is contrary to my 'buy and hold' strategy as a 'long term' investor, but as it is limited to only eliminating the use of gearing I feel it is only prudent.

We'll see how things turn out during the remainder of 2022 and during 2023... I'll either be glad I reduced my level of gearing, or regret 'bailing out'.

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Friday 7 January 2022

Opened a new trading account with Superhero

Despite an intention to simplify my finances, I was interested in investing in some of the US defence industry stocks, such as LMT (Lockheed Martin), Ratheon (RTX) etc. There is an iShares Aerospace and defence ETF ITA.US that includes these (and other) defence/aerospace stocks, so I was looking to invest using my trading account, but I couldn't find it in there trading list. I was also a bit put off by their $50 per quarter admin fee, so I had recently transferred all the cash out of that account, so I decided to look into one of the newer trading platforms that offers 'no fee' trading in US stocks. 

I decided to open an account with I has no brokerage fee for trading US stocks, and simply charges a FX fee to convert the initial AUD funds added to the account to USD (for trading US shares and ETFs). It look just a few minutes to setup a new account, and I only had to answer a few questions about citizenship and tax residency (and provide my TFN) to get the account fully setup and funded with an initial A$475.00

I then converted that into my USD 'wallet' which used an exchange rate of 0.71448 USD/AUD which seems reasonable as Yahoo finance is quoting the current AUD/USD exchange rate as 0.7157

There was also a $3.32 FX fee charged, so I ended up with USD$337.01 available to trade. I also ended up with 67 Qantas Frequent Flyer points for the FX (as I provided my QFF # when I signed up), which will offset part of the FX fee I suppose.

I placed an order to buy USD$337.01 of ITA shares 'at market' which I assume will be filled when trading on the US market commences tonight (Sydney time). We'll see how many shares I end up with. Once nice feature is that fractional share trading is available, so I invest the full amount I had transferred into the account and don't end up with a 'cash balance' sitting idle in the account.

I might make some additional transfers into the account and add to the holding over time, but at this stage I am just testing out how the platform works. At the end of the financial year I'll see how the tax reporting also functions.


My order was processed overnight - bought 3.17305 iShares US Aerospace & Defense ETF shares for USD$337.01

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Tuesday 4 January 2022

Net Worth: DEC 2021

My monthly NW estimate has been updated in NetWorthShare for the end of December. Chart is in the side-bar.

Stocks and managed fund investments increased during this past month, up $9,454 (3.07%) to have $317,878 net equity in my geared share portfolios.

Our estimated house price for November (my half) was unchanged at $1,116,769 - it appears that the websource ( where I get the monthly average sales price data our suburb each month has not been updated (despite a footnote stating that the figures were last updated on 6 Dec). So our house price estimate might be slightly understated (although the real estate 'boom' does appear to be rapidly slowing in Sydney).

The value of my retirement savings increased during December to $1,544,793 (up $31,298 or 2.07%).

Overall, my estimated NW increased to $3,313,383 by the end of December - up by $41,312 (1.26%).

2021 closed with a healthy overall increase in my NW of $585,257 (+21.4%) due to the booming stock and real estate markets. As a long term, high risk tolerance investor I will stick to our long term asset allocations, although I suspect that the real estate market could end 2022 at or below current levels, and the stock market could very possibly see a moderate to severe 'correction' during 2022 (there seem to be a growing list of potential negatives - rising inflation, China economic slowdown and property bubble likely to burst, Europe/Russia tensions over Ukraine, US/China tensions over trade, Taiwan  and militarization of South China Sea and rapid growth of Chinese ICBM, aircraft carrier and sub numbers, etc.). The only thing supporting the stock market valuations appears to be the low interest rate environment, so any rise in interest rates to fight inflation could see a dip in the markets. We'll see how 2022 unfolds.

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End of DEC 2021 "12% solution" portfolio changes - terminated the experiment.

For the end of December the emailed trading signal is to invest 60% in QQQ and 40% in TLT. As this is the same allocation as last month, I don't need to do any trades this month. However as I had no trades during the quarter I would have been charged a $50 fee, so I decided to close out my positions and transfer the cash balance out of my IG trading account. I will use the proceeds to reduce the balance of my home equity ('portfolio') loan. Given the slowing Chinese economy, increasing inflation/interest rates, and concerns over the Turkish economy, tensions between Russia and Europe regarding Ukraine, I thought taking a bit of money 'off the table' might be prudent (especially when it is borrowed money!).

My closing IG trading account balance was A$15,133.93.According to the monthly "12% solution"  newsletter, the 2020 performance for this model was +40.6% and for 2021 YTD performance was +21.9% (in USD terms). My YTD performance ended at +37.35% (in AUD terms). The outperformance is mostly due to favourable exchange rate movement (the investment is in USD so the drop in AUD vs the USD has boosted the value of my portfolio in AUD terms). There will be some tax due on the realized capital gains when I do my FY2022 tax return.

The "12% solution" seemed to work out quite well in practice (although historic performance is not a reliable indication of future performance, yada yada), but it wasn't really worth the hassle given the relatively high trading/admin costs. There is probably a cheaper way of executing this model - possible via one of those 'no fee' trading platforms.

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