An updated snapshot of my specific stock and mutual fund investments is shown below. The current situation is far from ideal - with an extremely high loan:value ratio (LVR) of almost 100% (pre-GFC I had been maintaining the overall LVR around 65% by buying additional investments as the value of my portfolio increased. That strategy was based on expected long-term ROI of 10%+ and occasional bear market dips of 10%-25%). Unfortunately I had to sell off some of the more liquid stocks to avoid margin calls in early 2009, and so the portfolio hasn't gained as much during the stock market rebound as it lost on the way down.
Also, the portfolio now includes a large amount of illiquid holdings such as ING Private Equity, the Ord Minnett Hedge Funds (now mostly invested in bonds and fixed interest), and the Macquarie 'Select Opportunities' Fund (also now mostly invested in cash, with current NAV about 15% below the capital protected amount that should be paid out in 2014). Altogether around $162,000 of the $500,000 invested has limited upside potential, while I'm stuck paying about 8%+ interest on the investment loan balance! As these investments reach the maturity dates I'll cash them out and be able to reinvest the funds (or, more likely, reduce the outstanding loan balances).
The portfolio no longer includes my 'investments' in managed agribusiness funds (Timbercorp Pine Forest, Rewards Teak and Rewards Sandlewood projects) which all went out of business.
Overall, my worst investments have been in 'managed' funds, with 'tax effective' agribusiness schemes performing the worst (~100% loss), ING private equity losing around 50% of it's value since launch/rights issue (although it may recover a bit), Macquarie equinox down about 15% (but should pay out the capital protected amount on the 30 May 2014), and the Ord Minnett 'Hedge' Funds currently frozen until maturity (OMIP 220 matures 30 Jun 2015, OMIP 320 matures 30 Dec 2016, and OMIP SL matures 30 Jun 2017) - but at least they locked in some profit via the 'rising guarantee' mechanism prior to the GFC.
Lessons learned?
1. Gearing (or investing using 'other peoples money') is great when things work out as expected, but the downside risk can be extremely painful. Unfortunately, with margin loans you can be forced to liquidate investments at the worst possibly time - IE. selling out at the bottom, rather than being able to invest when the market is down. In hindsight, I should have avoided borrowing more against the rising value of my portfolio as the bull market matured, and should have taken profits and paid off loans when the market had done well and upside potential was less obvious (eg. in 2007)
2. So-called 'expert' managers are better at protecting their fees than they are at managing portfolio risk. If you can't pick the best stock investments yourself, what makes you think you're an expert at picking the best managers? Most under perform the market, after taking fees into account. And some are real shonks (but can write a great looking prospectus).
3. The 'fine print' is often so voluminous and incomprehensible that you don't really understand the risks involved. For example, I had expected hedge funds would have returns uncorrelated with the stock market, and would be able to make profits during a severe bear market by shorting stocks and indexes. In reality, hedge funds tracked the market down, and ended up being frozen due to the capital guarantee requirements. I had also expected the risks in agribusiness investments were mainly crop yields and lower than expected prices when the timber matured (and the exorbitant up-front management fees and investment advisor commissions). In reality, it turned out that when the management company went broke, the investors ended up 'owning' trees on land that had the leases terminated - so immature trees had to be sold off at fire-sale prices by the management company liquidator, rather than being able to be retained by the investors until maturity.
4. Be very wary of tax considerations affecting your decision making. I decided not to sell off some of my portfolio in 2007 due to potential capital gains tax liability (and the potential impact of the extra 'income' on family tax benefits). Instead I tried to be 'smart' and protect my portfolio from a possible bear market by buying Index put options in March 2007. Eventually those options expired (Dec 2007) just before the market crashed, and my lack of experience trading options meant I didn't have put options in place during 2008.
5. In theory, investing in a dozen high-risk, high-return investments should work out OK, as sufficient diversification will reduce the overall risk. In reality, the risk-premium was insufficient and the diversification proved to be illusory (the investments negative returns turned out to be highly correlated during a global recession).
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The ups and downs of trying to accumulate a seven-figure net worth on a five-figure salary, loose weight, get fit, do a post-grad course and launch a financial planning business - while working full-time.
Tuesday 14 September 2010
Sunday 12 September 2010
Free international phone calls
When I was a lad, international phone calls cost a small fortune and the line was often so bad you could hardly understand what the person on the other end was saying. Over the years the cost of international telephone calls slowly dropepd and quality improved, and for the past few years DW has been able to call her overseas relatives using a pre-paid 'calling card' which only cost a few cents per minute for calls from Australia to the US and Malaysia.
Now calls to the US (landline numbers) can be made at practically no cost, with the advent of free internet calls to US numbers via GMail for Australian users (if they have their GMail account setup to use US English). DW has made a couple of half-hour VOIP calls to her sister in the US using GMail, and was delighted with the quality (and no cost). Apparently the service is free until the end of 2010, so I'm not sure if there will be charges for using it in future (for example, calls to mobile phones cost a few cents). Any charge would have to be negligible or else DW will go back to using her 'calling card', especially since she can't use the GMail VOIP to make free calls to Malaysia.
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Now calls to the US (landline numbers) can be made at practically no cost, with the advent of free internet calls to US numbers via GMail for Australian users (if they have their GMail account setup to use US English). DW has made a couple of half-hour VOIP calls to her sister in the US using GMail, and was delighted with the quality (and no cost). Apparently the service is free until the end of 2010, so I'm not sure if there will be charges for using it in future (for example, calls to mobile phones cost a few cents). Any charge would have to be negligible or else DW will go back to using her 'calling card', especially since she can't use the GMail VOIP to make free calls to Malaysia.
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Friday 3 September 2010
Going Green(ish)
Yesterday I signed a contract for NuEnergy to install a 1.5kW photovoltaic power system on our roof. The installation won't happen for 10-12 weeks (as all the application paperwork for the Federal government rebate has to be approved before installation can commence). So, hopefully, the system will be installed before Christmas.
I decided to sign-up immediately because the state government feed-in tariff of 66c per kWhr power generated by small PV systems is due to be reconsidered now that the review threshold of 50MW PV capacity has been reached. The review is due to be completed by the end of September, and soon afterwards new legislation will be passed by state parliament for a new (probably lower) Gross feed-in tariff, or possibly removing the option of Gross feed-in for new agreements. So, time was of the essence in getting signed up for the existing Gross feed-in tariff with Energy Australia.
The PV system should cost around $3,000 installed (due to the Federal governments rebate worth about $6,000!), and at a Gross feed-in tariff of 66 per kWhr the system should generate about $1,400 income per year until the end of the current tariff in 6.5 years time. So the PV system should pay itself off in the first two years, and earn us a net profit of around $5,000 by 2017. After that it should continue to provide about 15% of our energy needs at zero cost, saving around $500 off our annual electricity bill. Since the cost of electricity is rapidly rising the annual saving from 2017 is likely to be much greater, but we will still have a much bigger electricity bill than today. By 2017 there may be more efficient PV cells available, so it might be worth augmenting the capacity of our system at that time.
Once the system is installed and I have actual energy production data available from the 'smart' meter, I may experiment with boosting output by positioning some mirrors around the PV panels. As second-hand mirrors are available for minimal cost, it may be possible to reflect additional sunlight onto the panels relatively simply. A carefully positioned fixed mirror would direct additional sunlight onto the panels in the middle of the day, and only cast a shadow onto the PV array when the sun is at low altitude. The net effect should be a gain in total daily output from the PV system.
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I decided to sign-up immediately because the state government feed-in tariff of 66c per kWhr power generated by small PV systems is due to be reconsidered now that the review threshold of 50MW PV capacity has been reached. The review is due to be completed by the end of September, and soon afterwards new legislation will be passed by state parliament for a new (probably lower) Gross feed-in tariff, or possibly removing the option of Gross feed-in for new agreements. So, time was of the essence in getting signed up for the existing Gross feed-in tariff with Energy Australia.
The PV system should cost around $3,000 installed (due to the Federal governments rebate worth about $6,000!), and at a Gross feed-in tariff of 66 per kWhr the system should generate about $1,400 income per year until the end of the current tariff in 6.5 years time. So the PV system should pay itself off in the first two years, and earn us a net profit of around $5,000 by 2017. After that it should continue to provide about 15% of our energy needs at zero cost, saving around $500 off our annual electricity bill. Since the cost of electricity is rapidly rising the annual saving from 2017 is likely to be much greater, but we will still have a much bigger electricity bill than today. By 2017 there may be more efficient PV cells available, so it might be worth augmenting the capacity of our system at that time.
Once the system is installed and I have actual energy production data available from the 'smart' meter, I may experiment with boosting output by positioning some mirrors around the PV panels. As second-hand mirrors are available for minimal cost, it may be possible to reflect additional sunlight onto the panels relatively simply. A carefully positioned fixed mirror would direct additional sunlight onto the panels in the middle of the day, and only cast a shadow onto the PV array when the sun is at low altitude. The net effect should be a gain in total daily output from the PV system.
Subscribe to Enough Wealth. Copyright 2006-2010
Net Worth of My Children
No, this isn't a soppy "my kids are priceless" post, just an occasional updates on their financial net worth. As of 30 August, DS1 (10 yo) had a net worth of $55,504.50 spread between his retirement savings account (superannuation), share portfolio and Vanguard Index fund investment. DS2 (4 yo) had a net worth of $7,091.64 - with relatively more invested in bank accounts, a small retirement savings account, and a small stock portfolio.
The chart below shows the progress of their net worths over the past few years. I had hoped that the stock investments and superannuation account deposit I had made for DS2 would have grown enough by now to match the value DS1 had when he was four. Unfortunately the GFC has meant not much growth in the investments of DS1 and DS2 over the past three years, so DS1 is falling behind. The small overall growth in DS1's NW over the past three years has been almost entirely due to the money he has earned busking, at the government superannuation co-contribution matching amounts he has received into his retirement savings account when he has deposited some of his earned income into super each year. He was also helped by my switching his super out of the geared share fund at the start of the GFC, and moving back into shares close to the bottom in 2009.
The chart also shows that from age 4-7 DS1 saw a substantial rise in his NW. This was due to a combination of his stock portfolio doing very well in that period, but also because he (with a lot of help from me) had a paper round earning almost $100 a week for those years. As I don't feel like getting up before dawn anymore to "help" with a paper round, DS2 will have to find some other source of revenue. If he manages to learn a bit of recorder music I think I'll let him join DS1 when he goes busking from an hour on the weekend - they can split the earnings which should help DS2's age-equivalent NW catch up over time. Although DS2's presence may help DS1 collect a bit more when busking, sharing it will reduce DS1's busking income - his first experience of 'taxation' and 'redistribution of wealth' ;)
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The chart below shows the progress of their net worths over the past few years. I had hoped that the stock investments and superannuation account deposit I had made for DS2 would have grown enough by now to match the value DS1 had when he was four. Unfortunately the GFC has meant not much growth in the investments of DS1 and DS2 over the past three years, so DS1 is falling behind. The small overall growth in DS1's NW over the past three years has been almost entirely due to the money he has earned busking, at the government superannuation co-contribution matching amounts he has received into his retirement savings account when he has deposited some of his earned income into super each year. He was also helped by my switching his super out of the geared share fund at the start of the GFC, and moving back into shares close to the bottom in 2009.
The chart also shows that from age 4-7 DS1 saw a substantial rise in his NW. This was due to a combination of his stock portfolio doing very well in that period, but also because he (with a lot of help from me) had a paper round earning almost $100 a week for those years. As I don't feel like getting up before dawn anymore to "help" with a paper round, DS2 will have to find some other source of revenue. If he manages to learn a bit of recorder music I think I'll let him join DS1 when he goes busking from an hour on the weekend - they can split the earnings which should help DS2's age-equivalent NW catch up over time. Although DS2's presence may help DS1 collect a bit more when busking, sharing it will reduce DS1's busking income - his first experience of 'taxation' and 'redistribution of wealth' ;)
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Wednesday 1 September 2010
Net Worth Update: August 2010
The stock market weakened considerably during August, resulting in lower valuations for my geared stock portfolio and our Self-Managed Superannuation Fund. Property valuations also declined slightly, and the latest average sales figures show an even greater decline will impact next month's NW figures. However, with the latest Australian economic growth figures showing robust growth (around 3.3% pa) I expect 2010 overall to show modest or no growth in house prices, rather than the US-style crash in property prices some pundits have been predicting for the past couple of years.
While it is interesting to plot the daily gyrations of the stock market and monthly ups and downs of the real estate market, it is probably more useful to concentrate on sticking to my budget, looking for additional areas to reduce expenses, and leave my retirement and investment savings plans running on autopilot. Better to focus on the small effects I have control over, than worry about the big effects on my NW that are outside my control (since I don't intend to change my asset allocation on the basis of recent performance diverging from historic averages).
* the Stocks figure is portfolio value - margin loans. As my portfolio value (and margin loan debt) is around $500,000 relatively small movements in the stock market produce huge percentage swings in the net value of my stock portfolio each month.
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While it is interesting to plot the daily gyrations of the stock market and monthly ups and downs of the real estate market, it is probably more useful to concentrate on sticking to my budget, looking for additional areas to reduce expenses, and leave my retirement and investment savings plans running on autopilot. Better to focus on the small effects I have control over, than worry about the big effects on my NW that are outside my control (since I don't intend to change my asset allocation on the basis of recent performance diverging from historic averages).
Assets___________$ Amount______$ Diff_____% Diff Stocks_*___________$8,330_____-$3,531___-29.77 % Retirement_______$330,494_____-$4,054____-1.21 % Properties_______$919,801_____-$2,824____-0.31 % Debts____________$ Amount_____$ Diff_____% Diff Home Mortgage(s)_$364,018________-$54____-0.01 % Net Worth________$894,607____-$10,355____-1.14 %
* the Stocks figure is portfolio value - margin loans. As my portfolio value (and margin loan debt) is around $500,000 relatively small movements in the stock market produce huge percentage swings in the net value of my stock portfolio each month.
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