Friday, April 30, 2010

Monthly Review - April 2010

April was another positive month for financial progress with small gains on my investments and positive cash flow on my properties combining with favourable exchange rate movements produced another a solid gain in net worth. Savings were low.

Here are the details:

1. my Hong Kong equity portfolio declined marginally. There were no trades this month

2. my ETFs appreciated slightly with a small loss on Hong Kong being more than offset by gains on Russia, Taiwan and India)

3. my commodities appreciated slightly (ETF, silver, HOGS, NICK)

4. all of my properties are let producing a positive cash flow and contributing to the gain in net worth. The tenant who was in default has paid off the arrears

5. currency movements produced a gain as the USD depreciated

6. I did two ELDs over China Construction Bank and Sinopec

7. savings were positive but limited due to a combination of income at the low end of expectations and expenses being high.

My cash position is currently low due to last month's completion of the latest property purchase (a JV with mrs traineeinvestor) and most of my cash is now tied up in ELDs.

I have started making an accrual for redecorating our apartment next year.

For the month, net worth increased by 2.0%. The year to date increase is 9.1%. A good start to the year.

Monday, April 26, 2010

Life insurance policy replaced

I have (finally) completed the task of replacing my term life policy. The old policy was issued out of the US through an employer sponsored scheme.

There were four problems with the old policy (i) it wasn't for enough money (ii) the annual premium was not fixed (iii) there was no guarantee of future coverage and (iv) there was a risk that 30% of the proceeds would be lost to US withholding taxes.

With the new policy, I have a fixed premium for 10 years with the option of continuing for a further 10 years at a higher annual premium (which has been fixed now), my future coverage is guaranteed for at least 20 years (I can quit the policy at any time) and there is no issue of US withholding tax. The cost per dollar of coverage is about the same. I have increased the size of the policy to reflect the increased mortgage on our home taken out last year to fund investments.

I can now tick off one more item on the road to retirement.

Equity put option written #2

This morning I wrote a second equity put option.

Details are as follows:

Underlying: China Construction Bank (939)
Strike price: $6.37
Market price: $6.42
Annualised premium: 19.95%
Term: 1 month
Effective purchase price if hit: $6.27

CCB is a company that I would be happy to buy for the long term and have come close to buying several times already - and would have done well had I done so.

Equity put option written

This morning I wrote an equity put option.

Details are as follows:

Underlying: Sinopec (386)
Strike price: $6.23
Market price: $6.48
Annualised premium: 10.11%
Term: 1 month
Effective purchase price if hit: $6.18

Sinopec is a company that I would be happy to buy for the long term. In fact, I came close to simply buying the shares directly.

Tuesday, April 20, 2010

Hong Kong Homes Least Affordable?

A recent survey has claimed that Hong Kong homes are the least affordable in the world - with the average flat costing 10.4 years of household income. This compares to 9.3 times for Vancouver and 9.1 times for Sydney which came in second and third on the survey. The survey uses median property values and median gross income levels to calculate affordability. In the case of Hong Kong, the medium house price was HK$2.18 million (US$280,000) and the medium household income was HK$210,000 (US$26,900).

Hong Kong fares better in terms of affordability with between 44% and 34% of household income being spent on mortgage payments (depending on which calculation you wish to use).

The survey makes the point (as have a lot of people, including myself), that the affordability ratio is based on the current very low interest rates (0.8-2.1% pa in the survey - which is actually higher than I am paying on most of my mortgages). Because those interest rates are floating, it means that any increase in interest rates will have an immediate and substantial effect on affordability.

I agree with both the fact that housing is very expensive in Hong Kong and that affordability (and, by implication, property prices) are vulnerable to a rise in interest rates.

What I don't agree with are the validity of comparisons between markets. In particular, basing the expensiveness and affordability calculations using gross income ignores two important facts about Hong Kong - a person on the median income in Hong Kong will pay zero income tax. This is not true for many of the other markets surveyed. In addition, only a small minority of people in Hong Kong own cars - that is significant expenditure which a lesser percentage of Hong Kong residents incur than would be the case in a lot of other markets.

There is, of course, another basis for differentiating the Hong Kong market from other markets - the extent of taxpayer subsidised home ownership programmes in Hong Kong goes far beyond first home buyer credits and rental subsidies in other markets.

So, yes Hong Kong real estate is very expensive. Yes, it is probably over priced. Given the flaws in the survey methodology, I do not know how overpriced it is and how it really compares to other markets.

Friday, April 16, 2010

Moving closer to retirement - non-financial preparation

Ensuring that I have sufficient financial resources to fund my retirement is important - I have no wish to be compelled to return to the workforce after I quit.

The non-financial aspects of retirement are also important. Sitting in front of the TV or computer all day is a good way to achieve terminal boredom, mental atrophy and physical degeneration. While I am confident that Mrs Traineeinvestor would have no difficulty coming up with a list (a long list) of things for me to do, I suspect I will be much happier working off my own list.

Accordingly, having a list of things to do prepared before I retire is important and I have been working on it for some time. The list currently includes:

1. places to visit: high on the list is a drive through the South Island of New Zealand. Syria and other parts of the Middle East also feature, although I am hoping to do some of them next year as part of my annual leave;

2. fitness: I "run" a very slow marathon (4.5 hours). Working hours limit the time available for training. I would like do some overseas marathons. Sydney in particular;

3. hobbies: I have a number of interests which I really do not have time to do much with: photography and wine being two examples. I can see myself doing some courses on both. I would like to take up sailing again;

4. investments: I will continue to manage my investments. This is something which has to be done - fortunately I find it interesting;

5. other activities: like many I have always wanted to write a book. I have done the plot outline and some of the contents. Finishing this project would be great (regardless of whether or not it ever gets published). There are some charities and running clubs which I would like to volunteer my time to. Lastly, some further study would enjoyable.

There are quite a few other things on the list as well, but the above will be enough for the first year or so.

Wednesday, April 14, 2010

Moving closer to retirement - positioning the portfolio

As mentioned in a number of previous posts, I hope to retire by the end of 2012 or 2013 when I will be 46 or 47. In spite of the financial crisis we remain on track to achieve this - in part this is due to the luck of living in a place which was relatively unaffected by the crisis and in part due to a career change providing me with a lump sum of cash when the markets were depressed and making a decision to fully invest that cash as soon as I could.

I need to think about how to position the portfolio for when I stop working. The original draft of the retirement plan prepared in 2005 called for about half of our income needs to be met from rental receipts and half from dividends on shares. Since then we have acquired more properties than we initially expected with the result that the net rental income from the properties would just about meet all of our budgeted retirement expenses. Of course, there are the not-so-small matters of (i) paying off the mortgages on the investment properties before the rental income becomes available for living expenses and (ii) paying off the mortgage on our home. In addition, I would need additional assets to cover emergencies, expected one off events and periods of vacancy on the properties.

Running the numbers suggests that I could clear the mortgages and leave myself with a portfolio of equities (and a few bonds) sufficient to retire on with an acceptable margin of safety by the end of 2013 (possibly 2012) if I wished. There are (as expected) some important caveats:

1. the Hong Kong property market remains sound. I don't need it to keep going up. I don't even mind a minor pull back in values. A fall in rental levels is another matter altogether. This is the major risk to the retirement plan

2. I go off contract at the end of 2011. I'm assuming that I will continue to be employed for the last two years and that my income will be similar to my current contract

3. I have been pursuing a strategy of investing in equities rather than paying off mortgages. With floating interest rates at less than 1% this has been an excellent strategy recently. I do not mind carrying some mortgage debt in retirement but I have to accept that doing so carries risks - in particular the potential to be hit by rising interest rates and falling equity prices at the same time.

Current thinking is to continue buying equities and not pay off the mortgages on the investment properties as long as interest rates remain low, switch to paying off debt once interest rates rise above a given level (2.5%?) and to pay off the mortgage on our home in full before retiring.

I will then meet our retirement expenses from a combination of surplus cash flow on the properties, dividends and interest receipts. As the remaining mortgages are amortised (they are all P+I), the cash flow from the properties will increase - providing a measure of protection against inflation.

This is clearly a riskier strategy than simply paying off the mortgages, but it has the potential to result in a more secure early retirement. Given that I could continue working if needed, the downside is merely deferral of retirement rather than a reduction in our standard of living.

Tuesday, April 13, 2010

Taking my eye off the ball

It has been a long time since I have had a tenant fail to pay the rent on time - years in fact. Unfortunately, I got a bit complacent and didn't scrutinise the the monthly bank statements carefully enough - I just looked at the balance of the account that the rent is paid in to and noted that it was increasing a bit each month.

Bad call. One tenant missed his payments in both February and March before I noticed. To a certain extent, I only had myself to blame for not keeping a closer watch on the payments. Given that the standard deposit in Hong Kong is only two month's rent, any further default would effectively leave me an unsecured creditor. In any event, a couple of calls from the agent produced a promise to pay the arrears immediately. He was also a few days late with the April payment, but has now caught up.

I have asked him to use auto-pay which significantly reduces late payments and defaults but he has declined. Last time a tenant defaulted, I decided I should make auto-pay a term of each new lease - unfortunately I did not follow through with that.