Monday, February 11, 2008

Reviewing My Investment Decisions

One of the things I spent some time on over the Chinese New Year holidays was reviewing all my investment decisions since the begining of 2007. Specifically, I wanted to understand why the private portfolio had survived the downturn in the equity markets so well. Here is the scorecard:

1. Hong Kong Property Upgrade: We sold one small residential property and purchased a much larger one in June/July 2007. The unrealised gain on this transaction is sufficiently large to outweigh the effects of the other transactions listed below

2. Silver: I made small incremental purchases of silver during 2007. I then sold a significant part of my position in January 2008. The purchases were good profitable investments. So far the sale has been a bad call (although I still hold the rest of the position)

3. Vietnam Fund: I purchased this in January 2007 as part of an attempt to diversify my investments. This has been the worst performing investment decision I have made for several years and is currently showing a loss of about 17%. I would have to go back at least seven or eight years to find an investment that has shown such a big loss. Worse, there is a significant cost to exit due to the Vietnamese foreign exchange controls.

4. European and Eastern Small Companies Funds: I began making monthly contributions to these two funds in early 2006. I kept making the contibutions right through 2007 and only stopped them in January 2008. These were high cost actively managed funds. While the Eastern small companies fund has made me money, the European small companies fund has not. Collectively, I was making good returns through to the third quarter of 2007 but am now showing a small net loss. My capital would have been better deployed elsewere

5. Hong Kong Tracker: this was purchased in January 2008. Althought the fund is showing a small gain, it is too early to evaluate the wisdom of this investment

6. Lyxor Commodities ETF: this was purchased in January 2008 and is showing a small gain. Again, it is too early to say whether this was a good investment decision or not

7. Lean Hogs ETC: this was purchased in February 2008 and is showing a small loss. It is too early to know whether this was a good decision or not

8. Hang Seng Index Put Options: this was a trade I made in a couple of days in November 2007. While a 7% net return on an investment in a few days is nice, subsequent attempts to make small short term trades have failed due to tight limits on orders preventing execution. I do not want to become a day trader, so I will not be doing this too often.

I am wary of playing "what if" games with the investment decisions I considered but did not make, but for the record:

9. Commodities ETCs: I considered investments in ETCs for lean hogs, sugar, natural gas and soyabean oil in early November. These would have showed a net return of 11.6% over three months

10. Hong Kong Property: I looked at a renovation project
before Chinese New Year but decided not to due to caution about taking on additional gearing and concerns over the age of the building and the state of the exterior/common areas

The other factors which have significantly affected my financial position over the period under review were (i) a high and rising income from employment (ii) favourable exchange rate movements (iii) falling interest rates in Hong Kong (partly offset by rising interest rates on my overseas property mortgage) and (iv) the fact that over 60% of our total assets are invested in Hong Kong real estate.

The factors set out above explain why the steep falls in equity markets have had such a limited effect on my financial position: the declines in my equity funds have been offset by gains in other areas, underweighting equities and favourable foreign exchange movements. I do not expect this situation to continue for ever, but it gives me considerable comfort to know that my finances have performed very well in times of moderate uncertainty.

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