Looking back on 2008, it is difficult to remember that the year actually began rather well with my net worth growing in each of the first five months of the year. It was only during the second half of the year that the declines in equity prices began to outstrip the net rentals on my properties and the savings from my income. The final result for the year was a decrease in net worth of 1.37%. While a decline of 1.37% may not seem that significant, after netting out the effect of net rentals and savings, my assets declined by about 15% during the year.
What went wrong?
The strategy that produced such impressive returns from 2003-2007 effectively went into reverse. With emerging markets being the primary focus of my non-property investments the combined effect of major declines in all of those markets and the rise of the US$ resulted in horrendous losses for some positions (in particular Vietnam). The smaller positions in developed market equities and commodities also suffered from the global bear market.
What went right?
Even though property prices have fallen 20-30% off their peaks, they still continue to generate net cash flow. Given that property is my largest asset class (by a considerable margin), this is reassuring.
I maintained a high savings rate (estimated at about 59% of pre-tax income). In part this was due to cut backs in some luxury expenses and a couple of anticipated expenses not eventuating at all.
I increased my allocation to cash/deposits.
I stopped buying high cost actively managed funds and purchased lower cost ETFs (lower cost being a relative term).
My "no draw down" approach to my retirement income was fully vindicated by the events of 2007. If I had been a retiree relying on withdrawal of capital to fund my living expenses I would be in serious trouble at this stage. Following my plan of only relying on income generated from my assets (rents, dividends) would have seen me end the year with an increase in income and no draw down of capital.
In spite of failing to achieve my target return, I am still on schedule to retire in 2012/2013. Why? Simply put, I am now able to acquire assets at higher yields than I could a year ago. So, yes the losses hurt, but its a good type of hurt.