Thursday, January 31, 2008

Thank You Mr Bernanke

Hong Kong banks cut interest rates today following the reduction in interest rates by the United States Federal Reserve. It was slightly disappointing that the banks only cut their lending and deposit rates by 25 basis points compared to the 50 basis point cuts by the Federal Reserve and the Hong Kong Monetary Authority.

To some extent the more limited interest rate cut in Hong Kong reflects the fact that interest rates in Hong Kong are already very low (due to the very high level of liquidity in the Hong Kong economy). With deposit rates for small deposits and short term deposits getting close to zero, it is simply not possible to cut deposit rates much further for call and short term deposits. The banks would suffer reduced margins if they cut lending rates by more than the reduction in deposit rates. Since many deposit rates simply cannot get much lower, this makes the banks reluctant to cut lending rates.

In any case, the effect of the successive interest rate cuts mean that over the last 14 months the average interest rate on my loans has fallen from a little bit over 5% to about 3% (or a little less). For a property investor who uses leverage this represents a significant increase in cash flow and profitability. The cash flow should improve even further as leases fall due for renewal, giving me an opportunity to adjust rents upwards in line with the market. Unfortunately, I think only two of my leases will expire in 2008 and both towards year end (I should check this).

The equity parts of the portfolio may be hurting at the moment but the properties are doing very nicely, thank you.

Monthly Review - January 2008

January saw considerable volatility in financial markets, mostly negative, and this was reflected in my portfolio's performance.

It was not a surprise to find that my investments (at least the ones which I mark to market) declined during the month. The surprise was that the decline was less than the falls in the underlying equity markets. Here are the details:

1. my actively managed funds declined sharply. I currently have investments in actively managed funds investing in Thailand, Taiwan, Vietnam, Eastern Small Companies and European Small Companies. This month I made my last contributions to these funds. All of them fell in value by meaningful amounts;

2. my equity ETFs declined sharply. I curently have exposure to Hong Kong only. I added to this position during the month and (whether by luck or judgement) managed to buy at close to the month's low point;

3. my residual equity portfolio declined but by a very small amount, due to the largest holding going against the market and rising very slightly;

4. my commodity investments rose during the month. I currently have exposure to silver and a commodity ETF. The commodity ETF was purchased during the month;

5. my properties are all fully rented and tenants are paying the rent on time. I now have a positive cash flow and the surplus of income over expenses represents an increase in net worth. The cash flow and the surplus will grow next month as the interest rate cuts take effect;

6. a weaker US$ was positive for the portfolio.

In total, the falls in asset values were partly offset by a rise in the price of silver, net income from my properties and favourable currency movements. There was still a net decline for the month, but it was surprsingly small.

My income was at the low end of expectations this month (which was expected). Fortunately, my spending was also quite low this month as well and the resulting savings were enough to push the net worth change into positive territory. This was against my expectation when I started putting the numbers into the spread sheet tonight.

The final result was an increase of 0.5% for the month.

Monday, January 28, 2008

A Tenant At Last (2)

After a lot of negotiation on the terms of the lease, the prospective tenant for my only vacant property has finally become an actual tenant (about a week after I had hoped to sign them up).

Not surprisingly, the most difficult part of the negotiation related to whether the tenant could leave early should the exterior renovation works take longer than the management office is telling owners. My position was that this was wholly outside my control and I would not be held accountable should it be delayed. In the end the compromise was to simply leave in the usual break clause after 12 months (although in a market where rentals are steadily rising, landlords are starting to remove them from leases). In effect, the risk lies with the tenant for the first 12 months and with me after that.

In any case, they have signed and have paid the deposit and the first month's rent. The only open issue is to get them onto auto pay to reduce the risk of late payment.

I am now back to 100% occupancy and no tenants in default. This will have a positive effect on my cash flow and, combined with the interest rate cuts now starting to be reflected in my mortgages, will leave the portfolio with a healthy positive cash flow. Amid the downturn in the equity markets, this is a welcome development.

Thursday, January 24, 2008

Decoupling As A Matter Of Policy?

One of the many interesting features on the financial landscape at the moment is the very different actions being taken by central banks and governments to address actual or perceived economic problems. Here are some examples:

1. United States: a very large fiscal stimulus package from the government (presumably financed by more borrowing) and a large cut in interest rates by the Federal Reserve. There is talk of a bail out of bond insurers. The primary concern is expressed to be the risk of a recession rather than the risk of accelerating inflation;

2. Europe: the European Central Bank has thus far declined to follow the US Federal Reserve in cutting interest rates, being more concerned with the risk of inflation than the risk of recession;

3. Australia: the Reserve Bank is maintaining a high interest rate policy to combat inflation. The government has also expressed an intention to combat inflation but cutting government spending to take money out of the economy (in spite of running a surplus in 9 of the last 10 years);

4. Hong Kong: interest rates were cut in response to the cuts in US interest rates (which had to happen to some degree or another due to the currency peg). The government has announced that it will take steps to reduce a very large surplus through a combination of tax cuts/rebates, spending initiatives and increasing the pay of the already grossly overpaid civil servants. So we have lower interest rates and more money being injected into the economy in spite of rising inflation.

Four very different economic policies which would suggest that each of the four economies mentioned is dealing with different economic concerns. Could this be taken as evidence that decoupling is happening to a greater extent than once believed?

Wednesday, January 23, 2008

Hong Kong Banks Follow The Fed

Most of Hong Kong's leading lenders followed the Federal Reserve and cut lending rates by 75 basis points today. Given the peg to the US dollar, this was not surprising. Deposit rates are also being reduced but by lesser amounts given how low they are already.

With inflation expected to move higher from last quarter's 3.2%, the cuts in interest rates mean that borrowers will definitely be paying negative real interest rates. As a corollary, depositors will be even worse off than at present as the gap between inflation and deposit yield widens further. It is not hard to imagine both inflation and investment in real assets both being given a boost as a result. Stock yields and rental yields will appear more attractive as a result.

In terms of perception, reactions were very mixed. Some investors remain wary of continued volatility and the risks of a global slowing of economic growth. Others view the market downturn as an opportunity. A senior executive of Centaline (a leading real estate agency) interviewed on TV today predicted that Hong Kong property prices would rise 50% this year. Some of the bears have predicted economic calamity. In the tussle between the bears and the bulls, I have no idea who will prevail but have effectively put my money on the bulls by remaining close to fully invested.

At a personal level, I purchased some units in the Hong Kong Tracker fund today (an ETF that tracks the Hang Seng index). As the interest rate cuts filter through to my existing mortgages the cash flow from my properties will improve.

Hong Kong Tracker ETF Purchased

I jumped on the recovery bandwagon this morning and added to my position in the Hong Kong Tracker Fund (an ETF which tracks the Hang Seng Index).

My decision was partly motivated by a belief (not that strongly held) that the sell down in the market from last year's highs has reduced the market to the point where valuations are reasonable (but not cheap) and it makes sense to add to my positions. I also had an expectation that there would be a short term bounce in response to Wall Street's failure to follow the Asian markets sharply lower on Tuesday. In effect, I felt that the investment made sense from both a day trading perspective and a longer term investing perspective.

Given the meteoric rise of the Hang Seng Index today (up 10.7%), I now have the option of selling tomorrow (assuming the market does not open lower) and taking a reasonable profit (slightly more than the holding loss on the Commodity ETF purchased last week) or sitting on the position for longer. I'll sleep on that one.

Tuesday, January 22, 2008

The Jury Is Still Out On Decoupling

As we continue to work our way through a period of increasing economic uncertainty, I have been considering the extent to which the world's major economies are either interdependent or have decoupled. From the perspective of my own investments, the question is relevant to assessing whether the current sell down in Hong Kong and other markets is justified on economic grounds or is an overreaction which provides a buying opportunity.

Of course, trade, capital flows and other matters mean that there is a degree of interdependence. The question is how much? During the early stages of the current credit crisis, my unscientific sampling of opinion was that Asian economies were much less closely linked to the US economy than in the past. The growth of domestic economies in countries such as China and India was the most frequently cited reason in support of the arguments for at least a degree of decoupling. This was a view I was beginning to share.

A related question is the extent to which the current credit crisis will spread from its origins in the US sub-prime mortgage lending sector to other sectors of the United States' economy and to other countries. As recently as December a large number of people were suggesting that the effects of the credit crisis would be largely confined to the US mortgage market, the US housing market and the financial institutions who had taken on credit risk relating to sub-prime mortgages. In effect people were believing that there would be little impact on the "real" economy. If the view that the credit crisis will have only a limited impact on the US economy is correct, it would logically follow that the impact on economies of other countries would be even less and the current sell down represents a buying opportunity rather than the beginnings of an economic downturn.

Looking closer to home, there have yet to be any economic data released that would suggest a slow down in the local Hong Kong economy. That said, since the data would only be released well after the fact, economic statistics are not very useful for present purposes.

Unfortunately this leaves with not clear view as to whether or not the economies of the countries where most of my investments are held will be impacted by a recession in the United States. I keep coming back to two contradictory thoughts. The first is that markets have historically proven to be leading indicators of economic conditions. The second thought is that the rise of consumer spending, infrastructure investing and other trends in emerging markets have reached a size and built a degree of momentum that will provide at least a degree of support to a number of economies for some time to come.

Monday, January 21, 2008

A Margin Facility I Didn't Ask For

As part of the process of diverting more money to ETFs, I had to open a brokerage account with my bank's broking subsidiary. I received back a number of documents today, including a notice that I have been given a pre-approved margin facility - equal to about 2.5x the amount of money I deposited for my first investments.

At no point during the account opening process did the subject of margin trading ever come up, for the simple reason that I had no intention of trading on margin. If I want to borrow money, I will draw down more on one of the mortgages on my properties. The cost of borrowing is cheaper and I am not subject to the risk of margin calls. However, since it costs me nothing to keep the margin facility in place, I'm not exactly objecting and will simply leave the facility in place. That said, I really have to wonder about the bank's credit control practices.

More Optimisim On Hong Kong Property

The South China Morning Post carried an article about rising housing prices in Hong Kong. The chief analyst of Midland Realty (one of Hong Kong's largest agencies) was quoted as saying that he expected prices to rise by 25% over the next two years. This would leave average prices at around HK$6,000 per square foot, which is still lower than the HK$6,200 per square foot peak achieved in the 1997 boom.

UBS had a more optimistic forecast, predicting prices to rise by 50% by the end of 2009.

There are a number of differences between today's market and the one that prevailed in 1997:

1. demand is being led by end users with buy to let investors making up a significant but smaller percentage of buyers. The number of buy to flip transactions (called "confirmor" sales in Hong Kong) is relatively insignificant;

2. at 3.6 - 4.2% interest rates are less than half the rates prevailing in 1997 (8 - 9%). This means that buy to let investors have much better cash flow. It also makes a massive difference to affordability for both end users and investors;

3. economic fundamentals are better today. In particular the unemployment rate is much lower, the Government is running a huge surplus (likely to lead to tax cuts next month) and the GDP numbers (current and predicted) are solid. Put another way, the current economic boom is based on real economic and financial factors. In contrast, the boom that ended in 1997 was characterised by a lot of speculative froth;

4. investor expectations and sentiment are much more realistic this time around. In 1997 it was hard to find people who believed that property prices could fall. Ultimately they ended up declining 50 - 60% over the following six years. Today, people are much more cautious. By analogy, I know a few investors who are either realising some of their property investments now or who plan to do so later this year. Among my (admittedly very small) sample, they are in the minority. Most are still looking to add to their portfolios.

There is of course the possibility that the rosy forecasts may not come to pass. A change in sentiment is the single biggest factor that could hurt the market. As we have seen with the stock market, worries about the US economy sliding into recession have had an impact here. Whether that spills over to the property market remains to be seen.

Saturday, January 19, 2008

Commodities ETF Purchased

I have previously written about my long overdue decision to stop investing in actively managed funds .

At the same time I have decided that I do wish to keep making regular (or at least reasonably regular) investments using a portion of my savings rather than attempt to make a large scale effort to time the market. This week I made a small investment in the Lyxor Commodities ETF listed on the Hong Kong stock exchange (code: 2809). The ETF tracks the Reuters/Jeffries CRB index which is a basket of 19 commodities ranging from oil (23% weight) to orange juice (1%). The management fee is 0.35% which is a fraction of what most active fund managers charge in Hong Kong. Other expenses are also much lower than for actively managed funds.

Friday, January 18, 2008

A Tenant At Last (1)

I have mentioned in my monthly reviews that the last property I purchased has been vacant since the refurbishment project was completed in November. The reason is that the exterior of the building and external common areas are being upgraded. Practically, this means that the air conditioning units have been pulled out and are sitting on newspaper in one of the bedrooms, the windows are taped up and the views and light are largely blocked by scaffolding and green safety netting. I was expecting that the property would be vacant until the project was completed in April or May.

I have been proved wrong. My agent has managed to find a tenant who will move in at the end of the month and will pay a rent level that is slightly above the upper end of my expectations at the time I signed the provisional agreement for sale and purchase in the middle of 2007.

I had to ask myself why they would want the flat when they are faced with at least three months of limited natural light and some other disruption? They have seen the flat and are aware of the timing for the completion of the exterior work (and the possibility of delay). I considered the possibility that they may be setting me up for some kind of squatter scam, but the tenants are an executive at a reputable company and his wife. The lease will be in the name of the company (not the executive). I can only assume it is a combination of a scarcity of good apartments in the Mid-levels area and the very nice/new fit out.

They have not actually signed anything, so I am pushing to get the provisional agreement prepared and signed as quickly as possible - hopefully on Tuesday next week. It would be nice to get back to 100% occupancy again. The cash flow from the portfolio once fully leased will be quite good given the declines in interest rates recently and this will help me build up the deposit for my next purchase more quickly.

Thursday, January 17, 2008

Hong Kong Unemployment Falls (again)

Hong Kong's unemployment rate fell to 3.4% during the three months ending December 2007. This is the lowest unemployment rate since 1998. The underemployment rate fell to 2.1%. The flip side is that the total number of persons in paid employment rose 25,700 to a record 3.5 million.

The continued strength of the employment data is more evidence of the strength of Hong Kong's economy. Lower unemployment has a number of consequences: increased consumer spending, increased revenues for retailers, increased demand for housing (both by first time buyers and those looking to upgrade) and increased savings (helping to keep interest rates down).

The negative consequences of higher employment also exist: upward pressure on wages and difficulties in sourcing staff limiting businesses ability to expand, increased inflation, greater pressure on services (e.g. road congestion) and greater pressure on employees to work ever longer hours at the expense of their personal lives.

Still, all in all, low unemployment is better than high unemployment - especially for those who would otherwise be unemployed or underemployed.

HK Budget Eagerly Anticipated

Government revenues have surged and the budget surplus is expected to considerably exceed the estimate made at the time the 2007/8 budget. Given the huge size of the government reserves and the upbeat outlook for the Hong Kong economy, there is widespread expectation of tax concessions being made when the 2008/9 budget is released on 27 February. Among the rumours (at least the ones relevant to my own circumstances):

1. a reduction in the standard rate (the effective tax rate for high income earners) from 17% to 16%. From my perspective, this would be the most meaningful of concessions. A 1% reduction in my tax rate would be very nice indeed and would be quite meaningful if aggregated over the remaining years to my retirement;

2. an extension of the partial waiver on rates for residential properties. Given that most of our wealth is held in the form of Hong Kong residential property this is a meaningful concession;

3. a rebate of some of the tax paid in for the 2006/7 tax year or provisional tax paid in the 2007/8 tax year. It is also rumoured that the rebate will be deposited into tax payers' MPF accounts rather than paid in cash to avoid fueling an already rising inflation rate. I'd rather have the cash, but even a small addition to my MPF fund is, as Monty Python once said, better than a poke in the eye with a burnt stick.

There will of course be concessions directed at middle income earners (who pay very little tax) and spending initiatives directed at lower income groups (who pay no tax) and special interest groups (who gouge the tax payers). I do not expect to benefit from those concessions. As a side note the already massively overpaid and grossly under worked civil service has already put its snout in the feeding can for a 5% pay rise from the taxpayers.

Wednesday, January 16, 2008

Credit Cards Are Wonderful

Credit cards have to be one of the best financial inventions of the twentieth century. They offer:

1. convenience shopping locally: I do not have to go running to the bank for cash every time I want to buy something;

2. convenience when travelling: the exchange rate may be awful, but it is still a better deal to use a credit card than either travellers cheques or converting cash;

3. discounts: occasionally I still come across a merchant who tries to charge me a premium for using a credit card. This is rare and usually in remote/less developed countries. More commonly, a discount will be offered for using a credit card;

4. reward points: points build up. I turn most of mine into Asia miles. As difficult as it is to redeem Asia miles, I have managed to get some free flights and upgrades. Alas, there is no cash back in Hong Kong;

5. no fees: I pay no fees on any of my three credit cards;

6. use of money: depending on the timing of a purchase, I can continue to leave my money sitting in the bank earning interest (admittedly at very low rates). Since I pay in full each month there is no interest charge;

7. low security risk: credit cards carry security risks. People can add unauthorised purchases to your card. This is rare (it has never happened to me) and most card issuers will offer you a substantial degree of protection against fraudulent misuse of your credit card. The use of photo ID on a credit card helps reduce this risk even further for face to face purchases;

8. emergency fund: if I every really really need cash, in most of the countries I am ever likely to visit I can get a cash advance against my credit card. It is very expensive money, but its nice to know that it is there in an emergency.

Life without a credit card would be less convenient.

The downside? For people with no self control, they are an invitation to spend more than they can pay off in full each month (resulting in very high interest charges) or more than they would otherwise spend (resulting in reduced savings). I have no problem with either of these issues which makes credit cards an all win no downside arrangement for me.

Tuesday, January 15, 2008

HK Property Prices To Soar

So says Goldman Sachs. This morning's HK Standard carried an article on Goldman Sach's prediction that Hong Kong residential property prices would increase by an average of 20% this year (25% in the luxury sector).

The article cites the following factors as driving the expected price appreciation:

1. inflation rising to 4%;

2. the US Federal Funds rate falling by 175 basis points (from 4.25% to 2.5% this year) with Hong Kong following suit (the HK$ dollar is pegged to the US$). At least one other economist has predicted the Federal Funds rate dropping to 1.5% by the end of 2008;

3. rising inflation combined with lower interest rates will result in negative real borrowing costs. (We are actually quite close to this point already);

4. the household debt burden is still substantially lower than in the 1990s. This is reflected in the massive rise in the level of bank deposits in Hong Kong over a period of several years;

5. households spend on average about 40% of their incomes on mortgage payments. This is a very affordable level.

Of course there were a few factors not mentioned in the press article and no negatives at all, which I assume is a function of space constraints rather than omissions from Goldman Sach's analysis.

Maybe I should go and buy another property?

Monday, January 14, 2008

The Upside of the Downturn

Sub-prime. Credit crisis. Inflation. Earnings downgrades. Falling real estate prices. All the things that have made the headlines for the last few months. Sitting in Hong Kong, I can read the headlines and feel the pain in my unit trusts. But there is an upside: real estate prices may be falling in parts of the United States but they have gone up in Hong Kong.

Mortgagee valuations have risen this year already. Based on recent sales data, the mortgagee valuations are still below market. There are several reasons why real estate prices are still rising here (in spite of all the negative news). The obvious one is interest rates. The cost of mortgage funding is now around 3.8% for new loans (+/- a bit depending on HIBOR on the day). The very low cost of borrowing is driven by two factors. The first is liquidity. Hong Kong is drowning in the stuff. The banks can't lend it out quickly enough. The second is the peg. The Hong Kong dollar is pegged to the US$. In order to keep the peg, whenever US interest rates fall, Hong Kong rates should, in theory, follow reasonably closely.

When a number of other factors are also making positive contributions, it is easy to see why property prices have been rising. We have low and falling unemployment, rising real wages (especially for middle and upper class wage earners), some inward investment from China, tax cuts in the form of partial waivers of government rates and a government that has learned from its mistakes in 1997/1998 and kept the supply of new land at a sensible level (currently slightly below historic take up levels).

The only foreseeable negatives are the potential for a loss of confidence stemming from either the problems with the US economy (credit crisis) or a downturn in the all important PRC economy. Any others?

That said, the increase in property prices has been quite rapid and I have become increasingly cautious in my attitude to further investment in the sector. Any further potential investments in Hong Kong property will be considered with greater scepticism than in the past. But, if not property, what else?

Fund Manager Sacked

This is long overdue, but I have finally got around to terminating the monthly payments I have been making to two actively managed funds. This is something that I should have done a long time ago and I must confess that my procrastination has cost me money.

By way of background, when I first invested in actively managed funds, it was difficult for Hong Kong domiciled investors to invest in funds in many markets outside Hong Kong. In some instances the withholding taxes were sufficiently high (30%) to make actively managed funds better than passive funds for a Hong Kong tax payer. In other cases, the fund managers simply would not let Hong Kong domiciled persons invest or imposed a very high minimum investment. As a result, if I wanted an equity investment, I had two choices (i) an actively managed fund with a front end load or (ii) the HK Tracker fund (an index fund which tracks the Hang Seng Index). This is one of the reasons why my portfolio is heavily weighted towards property. However, I still put some of my money into what funds were available (a) to achieve some diversification and (b) to have some assets in liquid form.

The position gradually changed over the last couple of years. Specifically, the front end load charged by fund managers has been progressively reduced and it is possible to negotiate low (or occasionally zero) front end load with at least some fund managers. Even if the front end load is zero, the MER (management expense ratio) still favours passive funds and I now have the ability to access enough of these to make it unnecessary to tolerate the high MERs of actively managed funds. Specifically, there is a limited choice of ETFs listed in Hong Kong (tracking the Hang Seng Index, NASDAQ, Korea, India, Russia, a commodities basket, China, Asia ex-Japan and the MSCI world index) and there are plenty of index tracking ETFs listed on the London Stock Exchange which are not subject to punitive rates of withholding tax. This eliminates any need to use an active fund manager.

The procrastination part is two fold. Firstly, London listed ETFs have been around for a while. Second, the additional Hong Kong ETFs have also been in place and had adequate volumes since about the middle of 2007. I should have done this a long time ago.

How much has the use of active fund managers cost me? As a group the funds have shown positive returns and those returns have been materially better than bank deposits. However, the combination of front end load and high management fees has probably resulted in returns about 2.0 - 2.5% per annum less than I would have obtained using passive index funds. Painful to admit.

Saturday, January 05, 2008

The Problems With Cash

At the height of the dot com boom in the late 1990s, a popular saying was that "cash is trash". While I do not regard cash (including bank deposits, CDs and similar instruments) as being trash, I view cash as a very poor form for holding wealth. My main objections to cash as an asset class are:

1. the returns are unacceptably low. In fact, in real terms they are currently negative. (Inflation in Hong Kong is currently above 3% and you will not get deposit rates much better than this without locking you money up for several years, and then not by much.). For all practical purposes, cash sitting around in a bank account is a depreciating asset;

2. if you have a target rate of return for your assets as a whole, every dollar that is locked into a low return asset class like cash forces you to take greater risks with the balance of the portfolio in order to achieve the overall target return. In my own case, earning a given rate of return (6.7%) on my assets as a whole is necessary in order to retire on schedule. Having a portion of my assets held as bank deposits earning 2% means that I have to take more risks with the rest of my portfolio;

3. temptation to spend. Having meaningful amounts of cash sitting in the bank could easily tempt some people to go on a spending spree. So far I have managed to avoid this, although every time I walk past the art gallaries of Hollywood Road I start thinking about some of the empty spaces on the walls of our home.

Of course, cash does have its good points. The most important is giving you the means to seize opportunities as and when they occur. As appealing as this rationale sounds, I suspect that the number of occasions on which an exciting investment opportunity is missed for want of ready cash would not, in most market conditions, compensate for the opportunity cost of leaving the money sitting in the bank while you waited for that opportunity to present itself. For some people, an emergency fund may be a reason for keeping some money in cash. I view emergency funds as wasteful and, in my own circumstances, unnecessary.

The reason this issue has arisen is that I have not made a significant investment since I completed the purchase of a property in July last year (and the fit out in August - October). In fact the only investments I have made since then have been monthly contributions to some unit trusts and token additions to my position in silver. The cash has been building up and the difficulty in identifying attractive opportunities has become frustrating.

Thursday, January 03, 2008

2008 Financial Goals

My financial goals for 2008 are relatively straight forward. I have set myself the revised objective of retiring in 2012/2013 when I will be about 47 years of age. To achieve this I need to do three things:

1. maintain my current well paid employment. While I am quietly confident that I will continue my current position, I do not take this for granted and must devote the very long hours my job requires;

2. maintain a savings rate of about 55% of pre-tax income. I achieved a savings rate of 57% in 2007. I expect my savings rate to fall in 2008 due to (i) higher expenses in some categories (primarily utilities, school fees and holiday costs) partially offset by cutting back on some of the discretionary spending (wine, art) and (ii) my income fluctuates a bit from month to month and I have budgeted for a slight contraction in earnings in 2008;

3. achieve a net return on my investments of at least 6.7% per annum. At first sight a return of 6.7% seems easy and it should be. However, there are a number of assets that will return less than this (bank deposits) which means the remaining assets have to do better. In order to produce higher returns it will be necessary to take on higher risk. Given that I have the option of deferring retirement, I can accept the risk of chasing higher returns to achieve my objective.

A secondary set of objectives can be summarised as time management. Specifically, I want to spend less time administering my investments (property investment is not nearly as passive as I would like it to be) which will allow me to spend more time on other things (such as family, work, exercise and researching investments). Even a couple of hours a month would be a big plus. Some specifics:

1. put as many of my own bills as possible on auto pay;

2. get an many income sources as possible on auto pay. I have done this with all but one of my tenants and it has saved me time as well as improving my cash management;

3. process the payments which are not on auto pay and do the filing less frequently. I will try once every two weeks and see how that works out.

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.