Tuesday, January 01, 2008

Financial Review 2007

2007 was a fantastic year for my finances with my net worth increasing by 35.4% (not including changes in property valuations). Almost everything I did in 2007 added to my net worth. It monetary terms it was the fourth good year in a row.

The major consequence of the financial achievements of the last four years is that my anticipated retirement age has been brought froward to 47 (from 50) and the required annual rate of return on my investments to achieve this objective is a relatively modest 6.7%. Five years to go.

The highlights:

1. Real Estate: I added to the portfolio and benefited from increases in property values and, to a much lesser extent, rental increases. At the same time the interest rates I am paying on my mortgages declined;

2. Job related income, expenses and savings: my employment continued to generate excellent, if uneven, levels of remuneration. Although my expenses keep rising, the level of savings (around 57% of pre-tax income) was still good. There is room for improvement, but it is hard to be too critical at this level;

3. Equities: although I failed to achieve greater diversification or balance (see below) and my equity investments could have done a lot better if I had made different choices, at year end this part of my portfolio still made money;

4. Commodities: my small investment in silver showed modest appreciation (and considerable volatility) during 2007;

5. Cash management: the amount of idle cash left sitting in low or no interest accounts was considerably reduced in 2007. Putting all but on one of my tenants on autopay helped reduce the float needed to ensure that mortgage payments etc do not bounce.

The low points:

1. Vietnam: I allocated money to a Vietnam fund in January 2007. If I realised the investment now I would be down 8.7% on my original investment. This is the only investment I made in 2007 that actually lost money;

2. Low cost funds: I failed to spend enough time seeking out and investing in passive index tracking funds instead of high cost actively managed funds. While this is not easy in Hong Kong (there are few low cost funds available to Hong Kong residents and many of the overseas ones have tax consequences which make them less attractive than high cost funds), I should have put more effort into the search. This is costing me money;

3. Diversification: I set an objective of achieving greater diversification or a better balance between real estate and other asset classes (primarily equities). I not only failed to increase the allocation to non-real estate assets, the allocation to Hong Kong real estate actually increased. Given that the real estate investments did very well for us this year, I do not feel bad about this "failure" at all.

It's been a great year. As much as I know that good time do not go on for ever, I remain optimistic about my ability to achieve my retirement goals over the next five years.

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