Thursday, June 29, 2006

What's next?

What should I invest in next?

I have just completed the purchase of a residential investment property. I have a modest amount of cash left over and will be back on the savings path again at the end of the month when I get paid on Friday. So I have cash on hand and more cash will become available for investment each month (excepting November and December when I need to put money aside for taxes and our Christmas holiday).

The question is what should I be doing with the money?

The longer term plan is to allocate about half my assets to real estate and half to equities. If it ends up being an unequal split that is not a problem. At present I am over weight real estate and underweight equities.

Preliminary thinking throws up the following choices: for the deposit on another property. I will need two more small residential properties to achieve the desired real estate component from my retirement portfolio (paying off the mortgages is another matter);

2.increase payments into equity funds. The recent pull back in a number of markets has made these more attractive than they were a few months ago; for an alternative investments. There are a few options available for retail investors like myself - a limited number of hedge funds, bullion - any others?

4. reduce debt. While the gearing in the real estate portfolio is relatively modest, paying off one of the mortgages with the resulting improvement in cash flow is always tempting;

5. build up some cash. I am not a fan of holding cash for the longer term because of the corrosive effect of inflation but it is a useful parking place for money pending identification of a more constructive use.

No decision as yet. In the short term option 5 (cash build up) is the default option. Beyond the short term this is not a sound choice. I'm starting to feel indecisive which is, itself, not a good sign.

Book review - The Undercover Economist

I found The Undercover Economist by Tim Harford to be useful, interesting and, unusually for a book on the "dismal science", entertaining. It gave very clear and straightforward explanations on a range of economic subjects including scarcity and its effect on prices, externalities and how to regulate them, international trade and the impact of trade barriers and an explanation of why some countries have grown richer while others remain poor (or get poorer). What gives this book an edge is that the economic explanations are linked to practical everyday issues relevant to most of us as workers, consumers and investors.

While the issues discussed were generally familiar to me, the explanations were helpful in clarifying my thinking on several issues (especially the sections on how to deal with externalities). Many of these are issues of which investors should have at least a basic understanding. For example, property investors should read the chapter on scarcity. One subject that I would like to read more about is game theory - something about which I know very little.

I had one minor gripe - I found the incorrect use of grammar mildly irritating. I must be getting overly pedantic in my old age.

I preferred The Undercover Economist to Freakonomics. While Freakonomics was also an enjoyable and very interesting read, The Undercover Economist was of greater relevance to me as an investor and a consumer.

Sunday, June 25, 2006

World Wealth Report - some comments

The weekend rolled around and I finally had a chance to finish reading the Capgemini Merrill lynch World Wealth Report. The report provides some insight into how the world's wealthy manage their money and, possibly, some tips for the rest of us.

1.HNWIs are responsive to current and impending economic conditions. This is no surprise as most people respond to what they are experiencing and what they anticipate will happen in the future. One interesting observation was that HNWIs are anticipated to reduce their real estate allocations in the face of rising interest rates.

2. HNWIs increased their exposure to private equity funds at the expense of investing in hedge funds. In part this shift in allocations was driven by the superior returns of private equity funds and in part by hedge funds increasing their fees.

3.Ultra HNWIs often made investing decisions ahead of market trends. As a group, ultra HNWIs were more diversified, more sophisticated and more aggressive with their investments than the HNWI group as a whole. In particular, ultra HNWIs had a much greater exposre to alternative asset classes. Tax efficiency was a notable feature of the typical ultra HNWI's approach to investing.

4.HNWIs continued to diversify their holdings internationally and reduced their exposure to North America. The report suggests that the trend of reallocation of investments away from North America and Western Europe to Asia Pacific and emerging markets will continue.

5.61% of HNWIs are aged 56 or over. This compares with 15% of the world's population as a whole. This indicates that time is one of the key factors in achieving financial wealth is time.

I draw three conclusions from my review of the report:

(i) Getting to HNWI status takes time. (This is not a surprise.)
(ii) Alternative asset classes deserve more consideration.
(iii) Investments need to be constantly reviewed and reallocated in response to anticiapted future conditions - a higher degree of risk has to be assumed.

Interest rates and inflation

The Federal Reserve (and other central banks) has raised interest rates in response to concerns over inflation. The question is whether raising interest rates should slow inflation? I have considerable reservations with the suggestion that raising interest rates alone will stop inflation.

If the inflation was caused by rampant consumer demand and capital investment, raising interest rates could be expected to slow demand because consumers and investors alike have to pay more to service their debts and the additional money spent on servicing debt is not available for other uses. However, rising demand only represents part of the inflation story.

Only part of the current bout of inflation is due to rising global demand for commodities which has driven up the prices of things like industrial metals and energy products. However, there is evidence to suggest that, so far, demand has been relatively inelastic. For example, Alan Greenspan recently commented that there was no evidence to suggest that rising petrol prices had affected consumer demand for petrol.

The the other part of the story behind the inflation numbers is liquidity and the money supply. Central banks around the world have been inceasing the money supply at a rate that has fueled inflation. If the Federal Reserve and other central banks are serious about taming inflation, they will slow the growth in the money supply and tighten liquidity. Of course, tightening liquidity will have other conseqences so they will need to strike a balance between bringing inflation under control and avoiding a recession (or, at least, acheiving a soft landing).

Saturday, June 24, 2006

All men have vices

As I told Mrs Traineeinvestor before we got married, all men have vices. The question is not whether a man has vices, but which vices he has. In my case, it's a reasonably long list with being a little bit too fond of good wine close to the top. This week my passion for wine wrecked havoc with my simplistic (and rather pathetic) approach to budgeting.

About five years ago, I decided that the easiest approach to budgeting for "completely unnecessary luxuries" was to allow myself a vice budget of a fixed amount each year - and no more. For the last four years I have been sufficiently disciplined to spend less than the budgeted amount. This year I let things get out of control. With the 2005 en primeur season now underway, I purchased a couple of cases of ridiculously over priced claret. This is consistent with my practice for the last few years. So far so good. I then noticed that the prices of the 2004 wines were starting to edge up, but that not all merchants had increased their prices. So, you guessed it, I went and ordered a couple of cases of 2004 which broke this year's budget. Add in the art purchased on our holiday last month and I have spent about twice the allocated vice budget for 2006 already.

I could claim that the wine is an investment (it does have some prospects of appreciating in value) but this is a bit hard to reconcile with the intention of drinking at least some of it when it matures.

Back to budgeting school and an austerity regime for me.

Friday, June 23, 2006

Property purchase - completed

The purchase of my latest property was completed on schedule today. There were no last minute problems (which has not always been my experience). So I am now officially even further in debt on a property which is currently producing no income.

The contractor will get back to me on Monday with his quote and I have instructed the agent to look for a tenant on an "as is" basis while I am still deciding whether to renovate or not.

As a footnote, I should have geared higher on this property and used the extra cash to make a partial repayment on one of my other mortgages. The interest rate on the new mortgage is 0.1% less than an older mortgage from the same bank. The difference is not enough to justify the costs of refinancing but with no penalty for early repayment, I could have reduced my financing costs by about HK$4,000 a year.

Getting to Ultra HNWI status

OK, so I am in fantasy land here but after reading the Gapgemini Merrill Lynch World Wealth Report, I started wondering just what it would like to join the 85,400 world wide members of the Ultra HNWI club. The price of admission is financial assets of at least US$30 million. I am probably not alone in thinking that this is a staggering sum of money for the average person to aspire to, but 0.0000128% of the world's population got there. How?

There is a degree of speculation to this, but my expectation is that most of the Ultra HNWIs made their money in one of five ways:

1. Inheritance: unfortunately, I chose the wrong parents for this purpose (for other purposes I made a pretty good selection);
2. Employment: most of the people in this category will be corporate ceos, investment bankers and fund managers (any others?). Only a tiny portion of the workforce will earn enough. Unfortunately, a quick look at my current pay and future prospects suggests that this is not likely to get me there prior to my intended retirement date (or at any other time);
3. Entertainment: TV, movies, music, sports and a few other activities. People falling into this category generally possess exceptional talent or some other rare attribute that I am sadly lacking;
4. Business: people who own their own business. Not sure what to say about this one other than that I don't see myself owning my own business;
5. Investment: its possible but instinctively I assumed that the returns on investment would have to be materially above the long run market average.

I ran two scenarios to see how hard it would be to achieve Ultra HNWI status in real terms under 2 (Employment) and 5 (Investment). Both assume inflation at 3%.

Scenario #1 - the diligent saver

A person enters the work force at age 20, saves $5,000 pa increasing at a nominal rate of 5% and earns 11% on her investments (roughly the long run return on stocks). How many years will it take before she becomes an Ultra HNWI? Answer: in nominal terms, it would take 57 years (worth about $5.7 million after adjusting for inflation). In real terms it would take 79 years.

Conclusion: most of us will run out of time before we get there by saving and investing.

Scenario #2 - starting rich

A person starts out as an entry level member of the HNWI club with assets of $1 million. If we assume that he earns 11% on his investments and ignore savings, how long will it take to achieve Ultra HNWI status? Answer: in nominal terms, it would take 33 years (worth about $11.8 million after adjusting for inflation). In real terms it would take 46 years.

Conclusion: even for the already rich, promotion to the Ultra HNWI division takes a long long time.

Now back to reality.

Wednesday, June 21, 2006

World Wealth Report - a summary

The Merrill Lynch - Capgemini World Wealth Report was released this week. The report provides a snapshot of global personal financial wealth during 2005. As usual it made interesting reading.

The number of High Net Worth Individuals (HNWIs) globally increased by 6.5% to 8.7 million. The aggregate wealth of those HNWIs increased by 8.5% to US$33.3 trillion. These figures show that within the ranks of the world's wealthy, the really rich got richer at a faster rate than the more modestly wealthy. The number of Ultra-HNWIs increased by 10.2% to 85,400 which just shows how few truly wealthy individuals there are.

The definitions? HNWIs are defined as persons with "net financial assets" of at least US$1 million - excluding their primary residence and consumables. The exclusion of the family home means that there will be millionaires who fall outside the HNWI definition. How many? I have no idea but looking at housing prices in developed markets around the world (and some emerging markets) I would expect the number to be large.

Ultra-HNWIs are those with financial assets exceeding US$30 million.

Given the performance of equities and real estate in emerging markets in 2005, it is not surprising that it was in emerging markets such as South Korea (21%), India (19%), Russia (17%) and South Africa (15%) that the ranks of HNWIs grew the quickest in percentage terms. In contrast, the more developed markets in North America (6.9%), Europe (4.5%) and Asia-Pacific (7.3%) experienced much slower rates of growth in HNWI numbers.

In terms of absolute numbers, North America (2.9 million), Europe (2.8 million) and Asia-Pacific (2.4 million) make up the vast majority if the worlds HNWI population.

The report also contains some interesting information about how the wealthy invest their money and the challenges they face in preserving and growing their wealth. I will comment on these issues once I have finished reading the report.

Saturday, June 17, 2006

Property purchase update #5

I finally managed to get hold of the vendor of the new property and arranged an inspection this afternoon with the contractor and the leasing agent.

My original plan had been to get two quotes:

1.a minimalistic repaint and tidy up;
2.a complete refurbishment.

The condition is actually slightly better than I recalled from previous visits. The whole flat looks a little bit tired (scuff marks on the walls, a couple of cracked wall times in the bathroom etc) but there is nothing inherently wrong with anything. The agent has advised that it could be rented out "as is" without any difficulty. After discussing with the agent, I have concluded that there is no need to get a quote for the minimalist repaint and tidy up.

The complete refurbishment effectively involves gutting the flat. All the existing built in furniture would be removed, the false ceiling would go and the kitchen and bathroom would be completely redone. I decided that there was no point in just doing bits of the flat - it won't help to get the rent up if bits of the flat look "new" while other bits look "old".

I'll make a decision between the "rent as is" and "complete refurbishment" choices once I have the numbers to work with.

Effort, risk and return

I was trawling through the most recent entries on pfblogs when I came across this post by Makingourway asking whether putting US$80,000 into 200 small loans through Prosper was worth the time and the risk involved. I have submitted a comment but after thinking about it some more, I felt that it was an interesting question and wanted to explore the questions raised in more detail.

The first question is effectively whether earning an additional return on investment is worth the time spent. This is probably the easier question to answer although different people may well come up with different answers. A person with a demanding job, children and a range of other interests, some of which could suffer as a result of the time spent managing the loan portfolio, may conclude that the additional return did not justify the time spent. In contrast a person who is not in full time employment and has enough spare time may reach the opposite conclusion - that they have plenty of time to spare and that administering a loan portfolio is a good use of some of their time. Personal financial circumstances may also affect the decision as well - a person who is struggling to put aside enough for retirement may reach a different conclusion than a person who is less worried about retirement. Put differently, what is the value of your time and the opportunity cost?

The second question is a much harder one: does the additional expected return justify the additional risk that is being assumed. With 200 Prosper loans outstanding, the probability of one or more defaults occuring in a given year has to be quite high (how high?) even if borrowers with better credit ratings are targetted. The question reminded me very much of the academic studies on junk bonds that were done in the 1980s. If I recall correctly, at least some of the studies concluded that a well diversified portfolio of junk bonds could be expected to provide a risk adjusted return that was higher than the risk free rate of return (usually using Treasury securities as a proxy for the risk free rate of return). If you are borrowing to invest in the loan portfolio the number crunching would be different than if you are investing money that would otherwise be put on deposit.

Assuming my memory is correct, does the analogy hold good for a portfolio of loans made through Prosper?

Friday, June 16, 2006

Property purchase update #4

I signed the facilty agreement with DBS today. The only minor point outstanding with the bank is that fire insurance is not included in the body corporate so I need to arrange that before completion. The solicitors will prepare the mortgage document for me to sign before drawdown next Friday.

The only minor irriation is with the vendor. Under the sale and purchase agreement I have two rights to inspect the property before completion. Unfortunately the vendor has managed to make himself uncontactable so the inspection cannot take place. I was planning on using one of the inspections to show the property to the contractor so that I can agree plans and a quote before completion and he can start work immediately after completion. Based on previous experience, I will lose about a week if I have to wait until completion before showing the contractor the property.

When the contractor does get to see the property, I intend to ask him for two quotes:

1. a minimalist redecoration: basically repainting, fixing minor problems etc
2.a full renovation: new flooring, new light fittings, new kitchen, new bathroom etc

I will then run some numbers and see whether the extra rental from option 2 justifies the additional cost.

Thursday, June 15, 2006

Rent increase less than expected

The lease on one of my properties expires at the end of June.

The tenant has reliably paid the rent on time every time and, apart from replacing one of the airconditioning units shortly after the lease commenced, has not troubled me with any maintenance - zero. The tenant likes the property. His wife likes the property. So I want him to stay and he wants to stay. The sticking point has been agreeing the new rent.

The previous rent was set two years ago at the commencement of the current lease. At the time the Hong Kong property market was just begining its recovery and the SARS epidemic was still fresh in peoples' minds. Since then the property market has moved up strongly. After looking at a number of comparable recent lettings and speaking to an agent, I was expecting to get a 10-12% increase on the open market. However, I have decided to accept the tenant's offer of an 8% increase for an extension of six months (with the usual right of early termination) for the following reasons:

1.he is a reliable, no hassle tenant;
2.I will not have to pay agent's commission (half a month's rent);
3.I will not have a vacancy on expiry of the current lease;
4.I will not have my cash flow disrupted - this is actually quite important to me as I will be settling the next purchase on 23rd June and expect it to take 4-8 weeks before I complete the redecoration and have a tenant paying rent on the new property.

While this is not an optimal result, it is one that I am satisfied with.

Wednesday, June 14, 2006

A hostage to fear and greed

The recent market declines have hit a lot of investors where it hurts most - in the balance sheet.

The emotional reaction to the declines actually has me more worried than the declines themselves. I have been around long enough to see volatile markets and sharp declines several times and know that a disciplined and realistic investor with good cash flow (whether from investments or employment) can not only survive the downturn but take advantage of it. From an academic perspective I understand this and believe that unless we are heading for a period of extreme hyperinflation (Germany in the 19020s, Zimbabwe today etc) or prolonged deflation (1930s) my balance sheet will recover, and grow during the recovery.

This belief has been tested severely over the last few days as I have watched the price of silver slide below US$10 per oz. At times I have found myself cursing because I did not sell when the price was $14. This is simply a reflection of greed. When I considered whether I should sell I found myself torn between the worry that if I did not sell the value of my investment would deteriorate further and worry that I would be selling at the low point and would miss a significant gain should the price recover. This is both fear and greed speaking.

Where was the dispassionate analysis? I did not have these thoughts regarding any of my other investments (mostly funds and property). Why is it that my investment in silver alone seems to have affected my decison making ability? I do not have an answer to this. Maybe it is time to read some books on investor psycology.

For the time being procrastination has won the day and I have decided to hold.

Decisions on Debt #2

The previous post looked at the factors that should be taken into account in deciding whether to take on debt or to repay debt. The conclusion was that assumptions and subjective factors play a significant part in the decision making process and these factors deserve at least as much consideration as the mechanical calculations.

I recently decided that another residential property should be added to my DIY retirement fund. Leaving aside the thought process that led me to consider that residential property was a suitable investment, I then had to consider whether I wanted to gear the investment and, if so, by how much. Since I did not have enough cash on hand to purchase a property outright, I had to consider:

1.whether I should sell other assets to avoid borrowing?

2.if I borrowed to purchase, how much should I borrow?

With interest rates at about 5.5%, I answered the first question by assuming that the other assets (funds and silver) that would have to be sold should return more than 5.5% pa over the life of the loan and, therefore, I would be better off keeping the investments and borrowing to complete the purchase. I did assume that interest rates had the potential to rise further (possibly up to 7.5%). Needless to say, the subsequent dramatic declines in both stock markets and silver have shown this to be a staggeringly bad decision.

Next, I had to decide how much to borrow and on what terms. The amount of cash I had available dictated the minimum amount of the loan needed. After that, I considered the following:

1. I prefer not to have debt on retirement;
2. I do not anticipate needing any cash from my investment before retirement;
3. I should allow for some more increases in interest rates and outgoings;
4. I should be conservative in estimating the likely rental income;
5.I do not want more than (at worst) a small negative cash flow each month.

I concluded that I should gear to the point where I had a small projected cash surplus each month (to allow for rises in interest rates) and that the term of the mortgage should be close to my intended retirement date. I ended up with a target gearing ratio of 44% and a term of 12 years. If the rent is at the low end of my expectations, I will show a small negative cash flow each month. At the high end I will show a small surplus. If, after renting, the result is a negative cash flow, I can consider making a partial prepayment to address the problem.

Monday, June 12, 2006

Decisons on Debt #1

Debt is something that provokes very different feelings in different people. For some, it is a burden - an obligation that needs servicing and an obstacle to many other things. For others it is a wonderful tool that can be used to build wealth or achieve an objective sooner than if debt were not available. For many it is a bit of both.

Most of us will face at least two important questions about debt in our lifetimes (often on several occasions):

1.should I use debt to acquire something or to do something?

2.if I have surplus cash available, should I use that surplus cash to repay debt or to invest?

Evaluating these questions is not always a straight forward exercise. It goes beyond simply pulling out a calculator and punching in some numbers. The key factors to take into account in reaching a decision are:

1.what are the range of expected financial outcomes from my decision?
2.what assumptions did I make in predicting the range of expected outcomes?
3.what are the risks to those assumptions?
4.what is my risk tolerance - how will I react if things do not go according to plan?

Only one of these four factors involves a mechanical calculation. That is the easy part.

Two involve assumptions. Assumptions by their nature are not certain facts. They are either guesses about unknown present or past facts or predictions about an uncertain future. No one (least of all me) can predict the future with any degree of certainty. Also, I know that my predictions will be subject to bias as a result of my past experiences, near term external influences and other factors that I may not even recognise.

The last factor also involves looking into the future and thinking about how I will deal with the situation if things go wrong - both financially and emotionally. Put differently, what is my risk tolerance?

In conclusion, decisions on whether to take on or repay debt are not matters of simple calculation and, very often, non-financial matters can have a significant, if not decisive, influence on the decision making progress.

Sunday, June 11, 2006

What a difference a month makes

In the first quarter of this year I, along with many others, was filled with optimisim about the short to medium term outlook for the markets in which I was looking to invest. The only clouds on the investment horizon were the spectre of further rises in interest rates and the return of inflation in spite of which I went ahead and committed to purchase another small residential property (due to settle later this month).

In the space of about a month, things have changed dramatically. Equity markets in most countries have fallen significantly - declines of 10% or so from peak levels have not been uncommon. Precious metals have fallen by even more and the Hong Kong property market (at least for residential properties) has softened. Most significantly, investor sentiment has taken a knock.

The question I keep asking myself is whether what we are seeing is a short term technical correction or the begining of the next economic downturn. A quick and very unscientific look around town shows no obvious sign of a slowdown in business activity. An even briefer look over the border in China, suggests that there is no sign of a meaningful reduction in expansion. Significantly, China is still proceeding with the liberalisation of its economy (foreign exchange controls were eased again last week) and measures to cool an overheated property market are still in place (but underlying demand remains).

My tentative conclusion is that if there is a meaningful economic slowdown in Hong Kong, it will be a consequence of external factors. The obvious candidates are (in no particular order):
1.further increases in interest rates - the Fed and the ECB have both indicated that further rises are expected;
2.central banks tightening liquidity - having fuelled asset price inflation for several years we are seeing evidence that central banks may be starting to tighten liquidity;
3.consumer spending slowing down - increases in interest rates, falls in housing prices in some markets and rising costs of non-discretionary expenses like petrol have to have an impact on discretionary spending in other areas;
4.slowdown in the rate of capital formation/inflows - not sure about this one, but if economic growth slows it would be logical to expect capital formation to slow as well;
5.further increases in inflation - much harder to predict and assess. My long term view is that financially stretched governments have little choice but to inflate away a significant portion of their obligations. In the shorter term, a slowdown in the rate of commodity price increases and a tightening of liquidity (among other things) could slow the rate of inflation.

These are tangible items that are relatively easy to identify (although often after the event). Less easy to assess are changes in sentiment and confidence. Even harder to predict are event driven factors such as protectionist legislation, internatonal tension, terrorist attacks and medical pandemics - all of which have played a role in previous down turns - which are by their very nature difficult to predict both as to occurance and as to timing (remember SARS?)

I am starting to worry that we are headed for a global economic slowdown as opposed to just a shorter term correction in financial markets. If so, I need to formulate a strategy that will see me through the downturn and position myself to take advantage of the opportunities it will present.

Saturday, June 10, 2006

Book review - The First Crash

The First Crash by Richard Dale

This is a short book (184 pages) which documents the South Sea Bubble in the early 1700s. As one of the earliest examples of a financial mania and the aftermath I found it an informative and entertaining read.

The author manages to cover the origins of the bubble and the causes of the inevitable crash and resulting consequences. Along the way it gives an explanation of the evolution of London's securities market, the formation of the South Sea Company in 1711 and the Mississippi Bubble. In addition to covering the roles of the leading protagonists (including the government of the day and characters such as John Blunt and John Law), there is plenty of information about how average investors became swept up in the mania and eventually suffered when things came apart.

One of the entertaining features of this period of financial history is some of the other schemes and scams of the day. Perhaps of more important note were the similarities with the dot com era with companies that had no sensible prospect of success (or even a coherent business plan) attracting huge sums of money from investors who were often able to on sell their initial speculations for staggering gains - until the music stopped.

Friday, June 09, 2006

It's safe if you don't inhale

It's safe if you don't inhale.

Hong Kong is a city that people tend to either love or hate.

Two articles in today's SCMP that grabbed my attention relate to air pollution and the crime rate.

Hong Kong's air has been assessed as exceeding World Health Organisation standards by more than 200% and is much worse than Los Angeles, New York, London or Paris. Of course nobody (except the government and the power companies) needed a study to tell them that the air pollution in Hong Kong is awful and is having an adverse impact on health. The question is whether anything will ever get done about it? A spokesperson said that the government would "consider" WHO's findings.

The other side of the ledger contains some more positive data on Hong Kong's crime rate. The overall crime rate was 1,188 per 100,000 people. This is less than a tenth of the crime rate in London (13,784) or Paris (12,448) and about 42% of the crime rate in New York (2,800).

By most standards Hong Kong is a safe city….just as long as you don't inhale.

Thursday, June 08, 2006

Effect of market declines on investment strategy

Asian equity markets took big losses today. Some of the lowlights:

1.Taiwan: - 4.25%
2.Hong Kong: - 2.3%
3.Thailand: - 1.83%
4.Japan: - 3.07%
5.India: - 4.72%
6.Korea: - 3.45%

Silver has declined another 1.3% to US$11.73. Other commodities have also declined with the CRB Index down about 2.3%.

Today's declines follow meaningful declines over the last month for most of these markets. Many are expecting further declines.

The declines seem to be largely due to two factors: rising interest rates and valuations that were becoming stretched.

How does this affect my investment strategy?

I am currently dollar cost averaging aportion of my savings into Asian and European smaller company funds. The lower prices are a plus for this strategy over the longer term.

For investments which are not part of the dollar cost averaging strategy (most of my existing investments) the decline in prices is certainly painful in the short term. Much of the gains from the early part of this year have been wiped out. However, I have decided not to attempt to aggresively time the market by selling either my equity or my property holdings.

The question is whether I use savings not committed to the dollar cost averaging strategy to acquire additional investments at these lower prices or to accelerate the repayment of some of my mortgage debt as a response to rising interest rates? Watch this space.

Wednesday, June 07, 2006

Property purchase update #3

The bank finance is approved subject to providing a few more pieces of paper showing that we have made all the recent payments on our other mortgages.

I have also decided to renovate the apartment and will arrange for a contractor to draw up some specifications and give a quote before completion.

Expense review - food and drink

This is one of the weaker areas of our financial management. Quite frankly we subject ourselves to a rather lax discpline in the food and drink department.

For eating at home the majority of the food we buy is unexceptional and cannot be viewed as extravagant. The exceptions are wine (one of my many vices) where we (i.e. me) tend to stock the wine fridge with reasonably good wines. chocolates (at the expensive end of the price scale) and a few other odds and ends. On the whole eating at home falls into the "not too bad but could do better" rating (much like my old school reports).

It's the eating out which fails the economy test. As a couple or family, we eat out quite a lot, probably averaging 2-3 evenings a week and lunches most weekends. Most of the places we go to could be described as being in the middle price bracket (not cheap) and some are at the more expensive end of the scale (especially after taking into account the price of a bottle of wine). I have no qualms about eating out quite often (especially with the family) but have some reservations about the cost of the some of the meals.

The other weak area is the food I eat in the office (breakfast, lunch and dinner with snacks in between some days). I do not make much effort to economise here - in fact none at all. Given the rather frenetic pace of work, convenience takes priority over cost. Also, where I work the options if I want to go cheaper are a bit limited unless I opt for more food which is fried, deep fried or otherwise unappealing on taste or health grounds (and I have enough problems in that area as it is) or pay a price in terms of convenience.

In summary, not a lot of restraint is exercised in our expenditure on food and drink. Some discipline is needed.

Tuesday, June 06, 2006

Inflation and the Fed

I was somewhat bemused to hear Federal Reserve Chairman Ben Bernancke say yesterday that recent increases in measures of inflation were "unwelcome" and that he intends to ensure that the trend (of rising inflation) is not continued.

Given that one of the primary causes of inflation is the rate of increase in the money supply which is oveseen by the Federal Reserve itself one could be pardoned for thinking that this implied that the Federal Reserve was intending to reduce the rate of increase in the money supply?

Somehow I don't think so. In any event, the Federal Reserve stopped publishing M3 data earlier this year effectively depriving the public of the easiest means of knowing what the rate of increase in the money supply is.

Sunday, June 04, 2006

Expense review - transport part 2

The previous post rationalised the case for using public transport over owning a car. This post will fail to fully rationalise the case for using taxis over buses to the extent that we do.

Taxis are more expensive than buses. The cost of a taxi ride to the office is about HK$30. The same journey by bus is about HK$5. This is a big difference. Over the course of a month or a year the difference adds up to a meaningful sum of money. So I take the bus all the time? Right?

No. I take a taxi about 70% of the time. Why? The answer is combination of convenience and practicality. At some times of the day (off peak traffic) a taxi is quicker. At other times (peak traffic or raining), finding a taxi can take a while so I take the bus. The difference in commuting time is anything from 10 minutes to half an hour and is usually difficult to predict in advance.

I value that 30 minutes more than I do the HK$25 price difference. If I finish work early (say 7:30-8:00 it is the difference between spending some time with the children before they go to bed or not seeing them at all. If I work late, it is extra time with my wife or just unwinding before going to bed or, in some cases, extra sleep - all of which are very important to me.

While there are times when I think I am just being lazy, the non-economic price of switching to buses is just too high for me.

Saturday, June 03, 2006

Expense review - transport part 1

The first item of household expenditure for review is transportation. This entry discusses the decision to rely on public transport rather than to own a car

For most households transportation is a major expense, primarily because of the cost of owning and maintaining one or more cars. In Hong Kong it is even more so because of the exhorbitant first registration tax on motor vehicles and, also, the cost of renting or buying a parking space (most apartments do not come with a parking space).

The first registration tax is on a progressive scale from 35-100% of the cost of the vehicle. A carparking space in a middle class housing estate could be about HK$3,000 per month. Parking at work is even more and the hourly rates for casual parking vary depending on where you wish to park but can add up quite quickly. Insurance, maintinance, petrol and the other costs need to be factored in. Lastly there is the opportunity cost on the purchase price which could be invested elsewhere.

The cost of renting a car parking space in our development alone would equal about 80% of the cost of using taxis for all transportation needs. If parking at the point of destination is factored in then parking cost alone would comfortably exceed the cost of using taxis at all times (even more if we use buses). Not owning a car is one of the easiest financial decisions to make.

There are some non-financial factors:

1.convenience: actually this favours using taxis in almost all circumstances;
2.child safety: taxies do not come with child safety seats. This is an issue for us and the only factor that favours buying a car (although offset by the fact that taxi drivers are better and drivers than either myself or my wife and therefore less likely to have an accident in the first place);
3.pleasure: I enjoy driving - but not as much as I enjoy investing the money I am saving by not having a car;
4.drinking: if I drive I wll not drink at all. I like to drink.

We thought quite a lot about factor 2 but decided that the trade off between better drivers and child safety seats was not something we could evaluate. In conclusion, not owning a car is saving us a huge amount of money each year.

Next up: the taxi-bus trade off.