Wednesday 26 May 2010

Me versus the "rich list"

The annual Business Review Weekly's "rich list" came out today, with the estimated net worth required to make it onto the list of the richest 200 Australians rising to A$185 million (up 23% from A$150 million last year). The chart below shows how my net worth has been tracking compared to 1% of the BRW cut-off for the past few years. Pre-GFC my ultimate goal was to slowly increase my net worth in real terms until I caught up with 1% of the BRW rich list cut-off figure. The theory being that the richest 200 Australians should know a thing or two about investing their wealth, so it made a challenging but achievable benchmark.

The latest results show I've slipped back relative to this benchmark since 2007, which is rather disappointing, but probably unavoidable as my investment strategy involves geared investments in stocks and Sydney property - not the best choice in recent times!
I'm at a bit of a disadvantage when competing against the rich list cut-off, as the list is biased towards those who have done well (ie. those who under perform are automatically culled from the list of 200 and replaced by those who have done well). It would be more relevant to compare my progress to the total wealth of a fixed cohort - for example those 200 people that were on the list in, say, 2000. But unfortunately BRW readers probably aren't interested in the fate of those who have dropped off the "rich list" each year.

On the other hand, my annual salary income is probably a larger fraction of my net worth than most people on the BRW rich list, so in theory I should be able to boost my performance relative to the "rich list" by saving like mad. So far it hasn't worked out that way, with my savings having little impact compared to the diabolical performance of my investment portfolio.

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Sunday 23 May 2010

Time for a household budget review

My employer reviews salaries across the board every year in June, just prior to the start of the new financial year on 1 July. Due to the GFC salaries were frozen last year, and there had been a minimal 2% "cost of living" rise the year before. So I'm hoping that since the Australian economy is now doing quite well (around 3%+ GDP growth) we should see a rise of 4% or more this year. As soon as the salary decision is known I can start updating our budget worksheet for the next twelve months. Some expenses (such as electricity) are increasing much faster than the CPI, so even a reasonably generous pay rise won't result in any surplus to invest or spend.

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Friday 21 May 2010

Master of Astronomy update

My first semester enrolled (part-time and via distance education) in the Master of Astronomy course at James Cook University (JCU) is drawing to a close - the final tutorials and prac assignments for 'Modern Astrophysics' have been submitted and the final exam is only two weeks away. I'm currently in that transient period where I can still fantasize about acing the course - so far I have averaged around 90% on the tutorials and prac assignments, and there seems to be a good prospect of getting a High Distinction for this first course and a 'perfect' GPA of 7.0 (the final exam is 'open book' - every ones favourite!) - at least until next term.

This is definitely a severe case of counting my chickens before they've hatched - I haven't even sat the final exam yet (which is worth 40% of the course assessment), and I have NO idea how well the other 18 students enrolled in this course are doing. As the final mark will be scaled, my final grade depends somewhat on the standard of the other student's work and how 'the curve' ends up. It's possible that all the other student's have been getting high marks and we're all having pipe dreams of getting an HD for this subject!

Anyhow, for the moment I think I can reasonably (?) anticipate getting a HD or D this semester, and I think I can also do well in next semester's course (Astronomy Instrumentation) as I have considerable background in instrumentation from my previous post-grad chemical engineering and applied chemistry studies. If I manage to get a GPA of 6.0 or above for the whole of 2010 I may even get a 'Letter of Commendation' from the Faculty Pro-Vice Chancellor, which would be a first for me. In my previous studies I've tended to alternate between D/HD or P/CR results (and the occasional F) depending on how interesting I found a particular course*. Paradoxically, doing a course of no practical use (so the results really don't 'matter') but for which I have great interest, I'm finding it much easier to remain continuously motivated and producing consistently high quality work. Since there are only 6 subjects in total (done over three years part-time) for the MAstron degree, at this early stage I can even day-dream about doing well in ALL the subjects and possibly being eligible for a university medal (it requires a GPA of 6.5 or above - basically nothing but HD or D grades). After finishing the MAstron degree I'd like to be able to progress on to the Doctor of Astronomy (via coursework & research) or preferably PhD (original research) candidature, and a university medal would certainly increase my chances of being accepted into the PhD program (a lot will depend on the quality of my work in final two MAstron subjects - 'Literature Review' and 'Pilot Research Project').

As I said, this is just the pleasant 'day dreaming' stage that often comes at the start of a new university enrollment - so far, so good, with nothing but blue sky ahead. I'll enjoy the sensation while it lasts.

* I can strongly recommend you don't ever enrol in Partial Differential Equations or Mechanics or Solids unless you really like the topic! Attempting a compulsory course that is both difficult and boring is a recipe for disaster.

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Tuesday 4 May 2010

Net Worth Update: April 2010

Stock portfolio value decreased significantly during late April thanks to the EU soverign debt crisis, which meant our SMSF account also dropped despite the addition of some employer contributions during the month (our superannuation is largely invested in the stock market via the Vanguard High Growth Index Fund). Our real estate investments saw only a slight rise in valuations compared to the previous month's data, as I moved from using monthly 6mo average sales data to monthly 12 mo average sales data due to changes in the data provided via the website. Recent ABS figures indicate that Sydney property prices rose approximately 20% during the past 12 months, whereas my Sydney property portfolio valuation estimates rose by less than 15%. The difference is probably due to a combination of local price performance (ie. Lower North Shore property prices rising less than the Sydney average) and the changes made to how I calculate estimated valuations for our two properties.

Our mortgage balance continued to decrease very slowly, as 2/3 of our mortgage is currently on a fixed-rate, interest only contract (another 2-4 years before resetting to standard variable rate, interest only). The balance of my stock portfolio margin loans remained constant as I am paying interest only on these balances. As interest rates are continuing to rise, I took the opportunity to fix the interest rate (@8.15%) on the balance of my St George Bank Margin Loan for next financial year, although it is doubtful whether my stock portfolio will appreciate by more than 8.15% during that time. Due to the margin loan interest being deductible against my PAYG income (at a marginal tax rate of 30% or 38% depending on my other taxable income/deductible expenses) while any capital gains (held >12 months) are taxed at half my marginal tax rate, my leveraged stock portfolio only has to achieve a total return (capital gains + dividends) of around 7% for me to "break even". In theory, investing in a diversified stock portfolio should yield an average total return of 10% or more over the long term, so gearing should be a good long-term wealth building strategy. But the overall performance this century has been rather "disappointing". Having been forced to sell off some of my stock portfolio to avoid margin calls just as the GFC peaked early last year, my stock portfolio has been lagging the rebound in the overall stock market. The stock sales also left me with a mix of stocks and that I wouldn't choose if I was buying them today - overweight in banks(ANZ, NAB, WBC) and insurers (QBE), private equity (IPE), resource companies (BHP, RIO), and illiquid hedge funds (McQ Equinox, OMIP-220, OMIP-320, OMIP-SL). If there wasn't so much legislative risk associated with superannuation, negative gearing and capital gains I'd probably look at reorganising my investment strategy. But given the current degree of uncertainty about future changes, it's probably best to remain diversified between superannuation and geared real estate and stock investments.

Assets___________$ Amount______$ Diff_____% Diff
Stocks____________$51,850_____-$8,797___-14.51 %
Retirement_______$341,746_______-$695____-0.20 %
Properties_______$866,160______$1,529_____0.18 %

Debts____________$ Amount_____$ Diff_____% Diff
Home Mortgage(s)_$364,152_______-$403____-0.11 %
Net Worth________$895,604_____-$7,560____-0.84 %

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Sunday 2 May 2010

Australian Tax Reform more of a Whimper than a Bang

On the good side, it appears that a lot of the major tax changes that would detrimental to my situation (and should be attractive to a socialist government) ended up not happening (yet - there's always the budget after the next election). Apparently no changes to how capital gains are taxed, negative gearing remains unchanged, and a tax cut for superannuation contributions by low-income workers rather than a flat "concession" for superannuation contributions.

On the bad side, it appears that this "tax reform" isn't as major/significant/revolutionary as Mr Rudd had been intimating for the past couple of years -- there seems to be a definite gap between what Labor promises and what it actually delivers. And from the brief highlights I've read about so far it appears that many of the changes are being "phased in" over such a long time scale that the effects will be minimal for many workers. An example is the headline grabbing "boost" to superannuation SGL rate from 9% of salary to 12% of salary. Even though older workers (who started work well before universal superannuation was implemented) would benefit the most from this change, by not introducing it until 2019 many of these workers will have retired before it comes into effect. Then again, raising the SGL age limit to 75 fits a vision where workers are expected to work well beyond 65 if they are fit and healthy and don't have enough super saved up to retire at 65.

On the plus side, the increase in the contribution cap to $50,000pa for workers aged over 50 with less than $500,000 in super means I will be able to salary sacrifice more into super (though not quite as much as before the last round of superannuation changes were introduced by Labor). The $500 government superannuation contribution for low-income workers (up to $37,000 income apparently) may also be of benefit to DW (working part-time) and DS1 (who earns a few thousand each year from busking and makes superannuation contributions). I won't know for sure until the May budget comes out a week from Tuesday and I can read the fine print.

Probably the worst aspect of this "tax reform" program is that the changes will be introduced over the next decade, and due to political reality (several election campaigns, shifts in the balance of power, and possibly a couple of changes of government) nothing that is currently "planned" will necessarily become reality. In terms of being able to make long term financial plans that are "tax effective", the devil you know is infinitely preferable to the devil you don't know.

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