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 domain.com 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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