Wednesday 15 August 2007

Every Cloud has a Silver Lining

The Australian Stock Market dropped another 3% or so today. Since I'm a long-term, high-risk-tolerance investor (supposedly) I should be sitting fully-invested (mostly in stocks) and having to grit my teeth and bear it as the market drops, taking my net worth down with it. But by happy coincidence I'm not as fully invested in the stock market right now as I should be.

A large chunk of my net worth is tied up in two properties (our house and one rental property). Although this has been a drag on my overall investment portfolio performance since the Sydney property market peaked in 2003, this year the property market has started to pick up a bit. The latest monthly sales price data came out today, and the estimated valuations of our two properties have jumped $25,964 and $10,364 respectively.

My margin loan accounts are still fully invested in stocks, but I'd been allowing my gearing level drop from around 70% debt:equity a couple of years ago to recently dip below 50% as the bull market had progressed. This has reduced somewhat the geared effect of the market drop on my stock portfolio equity. At the same time I've had some Index Put Options in place since the start of the year, and the increased value of these as the market drops offsets around 1/3 to 1/2 of the losses on my stock portfolio.

And, most fortuitously, we're in the middle of shifting our retirement accounts from a retail Superannuation fund into our own SMSF. This has meant that our retirement funds are currently either in transit between accounts ("the cheques in the mail") or is sitting in the SMSF bank account awaiting investment. So, if the market keeps dropping before we reinvest in our preferred high-growth asset allocation we could end up getting some benefit from the current market shake-out.

If the market drops another 5% or so in the next week we would end up reinvesting at a discount of around 10% compared to the prices at which we cashed up last week. Of course the market could just as easily bounce back before our funds transfers are completed and we re-invest. But at least at this stage we're in a better position that if the market had been in a strong rally while we were sitting on cash.

Copyright Enough Wealth 2007

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