August was the third successive month in which my investments declined in value. It was scant comfort to note that the loss was entirely attributable to adverse currency movements (in local currencies, my investments recovered a token amount of the losses of the preceding two months). My savings were sufficiently robust to tip the net result for the month into positive territory.
Here are the details:
1. my actively managed funds were mixed. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund was reduced by a strong recovery in the Vietnamese stock market;
2. my equity ETFs generally went sideways. I currently have exposure to Hong Kong and India. My exposure to Hong Kong was increased during the month;
3. my residual equity portfolio appreciated in local currency terms but ended up losing money due to adverse exchange rate movements;
4. my commodity investments lost money, a situation that was compounded by my attempt to pick a short term bottom in silver;
5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). That happy situation will come to an end in September when one tenant vacates. I also got stuck with a large bill (due next month) to replace two air conditioning units in another property. Even with the vacancy and the additional expense, the portfolio should still be close to break even on a cash flow basis and make a positive contribution to my net worth each month;
6. currency movements were adverse (the USD recovered some of its losses) and were the biggest single factor in the net loss on my investments this month.
The only investments made this month were a purchase of HK Tracker units and some silver. My income was in at the high end of expectations this month. My spending was in the low range. The resulting savings were more than previous months and helped to produce an increase in net worth of 0.3% for the month. The year to date increase is 6.1%.
Looking forward, a slowing global economy is starting to impact my earnings and I have revised my estimated income down by a slightly arbitrary 10% going forward. Unless I decide to cut back on loving expenses, this will result in a reduced savings rate in the future.
Sunday, August 31, 2008
Saturday, August 30, 2008
Should I carry a mortgage in retirement?
The standard advice is that all debts (possibly excepting a reverse mortgage) should be repaid in full before retiring. My own take on this issue also tended towards the conclusion that retirement should be debt free. My reasoning is here: A debt free retirement?
Given where interest rates are today (all but one of my mortgages is currently costing me less than 3% pa) it is not difficult to persuade myself that investments in either real estate or equities should be able to produce total returns which are meaningfully above the cost of debt. There is no such thing as a free lunch, and investing rather than paying off the mortgages carries with it a higher degree of risk. The question is whether the potential for higher returns is sufficient to justify the additional risk involved. In particular, could I live (both financially and emotionally) with the possibility that the investment would show a return which was below the cost of servicing the debt?
My conclusions are as follows:
1. if there is enough margin in my budget and/or my lifestyle so that I should never need to be be a forced seller of any investments (either to make the mortgage payments or to meet lifestyle expenses), then the additional risk is reduced to the point where I would be willing to carry debt in retirement (but probably not as much as at present);
2. if there is insufficient margin in my budget and/or lifestyle to be highly confident that I would never be a forced seller of investments, then the potential for better returns is not sufficient to justify the additional risk involved.
In the latter situation, the retirement numbers are probably going to be a bit marginal in the first place and (in my case) I would prefer to work for an additional year or two to ensure that I would start in the former situation. It follows that there is a strong logical case for maintaining at least some debt in retirement (although not as much as I carry at present).
There is one other advantage of carrying some debt in retirement. The total pool of assets will be larger which allows for greater diversification and will, to a greater or lesser extent, mitigate the additional risk involved in carrying a mortgage.
There is also one very obvious risk involved. Interest rates are currently very low. In a situation where interest rates rise, it is easy to expect investment values to fall. This creates a rather unpleasant situation where expenses are rising and the ability to cut those expenses by selling investments to pay off the debt is being challenged by falling investment values. This is a very real risk and suggests that, without the back up of earned income, retirement debt should be used in moderation.
In practical terms, I could see myself keeping P+I mortgages on one or two properties in amounts that would allow the mortgage payments to be covered by the rental on those properties. If the remaining portfolio can meet our needs then, in the longer term, I would expect to gain financially as a result without needing to be materially concerned about the risks involved.
Given where interest rates are today (all but one of my mortgages is currently costing me less than 3% pa) it is not difficult to persuade myself that investments in either real estate or equities should be able to produce total returns which are meaningfully above the cost of debt. There is no such thing as a free lunch, and investing rather than paying off the mortgages carries with it a higher degree of risk. The question is whether the potential for higher returns is sufficient to justify the additional risk involved. In particular, could I live (both financially and emotionally) with the possibility that the investment would show a return which was below the cost of servicing the debt?
My conclusions are as follows:
1. if there is enough margin in my budget and/or my lifestyle so that I should never need to be be a forced seller of any investments (either to make the mortgage payments or to meet lifestyle expenses), then the additional risk is reduced to the point where I would be willing to carry debt in retirement (but probably not as much as at present);
2. if there is insufficient margin in my budget and/or lifestyle to be highly confident that I would never be a forced seller of investments, then the potential for better returns is not sufficient to justify the additional risk involved.
In the latter situation, the retirement numbers are probably going to be a bit marginal in the first place and (in my case) I would prefer to work for an additional year or two to ensure that I would start in the former situation. It follows that there is a strong logical case for maintaining at least some debt in retirement (although not as much as I carry at present).
There is one other advantage of carrying some debt in retirement. The total pool of assets will be larger which allows for greater diversification and will, to a greater or lesser extent, mitigate the additional risk involved in carrying a mortgage.
There is also one very obvious risk involved. Interest rates are currently very low. In a situation where interest rates rise, it is easy to expect investment values to fall. This creates a rather unpleasant situation where expenses are rising and the ability to cut those expenses by selling investments to pay off the debt is being challenged by falling investment values. This is a very real risk and suggests that, without the back up of earned income, retirement debt should be used in moderation.
In practical terms, I could see myself keeping P+I mortgages on one or two properties in amounts that would allow the mortgage payments to be covered by the rental on those properties. If the remaining portfolio can meet our needs then, in the longer term, I would expect to gain financially as a result without needing to be materially concerned about the risks involved.
Thursday, August 21, 2008
Inflation Rises - Growth Slows
Hong Kong's consumer price index rose by an annualised 6.3% in July (up from 6.1% in June). The primary drivers of the continued high levels of inflation were:
1. food (up 11.7%);
2. residential rents. (6.7%);
3. utilities (up 7.9%).
The rise was accompanied by predictions from economists that inflation may have peaked with commodity prices coming off their peak and economic growth showing signs of slowing.
Also released today was a number of revised forecasts for Hong Kong's GDP growth. Lehmans was quoted as cutting their forecast for Hong Kong's 2008 GDP growth from 4.5% to 2.8%.
With borrowing rates for residential property buyers still below 3% (although up from the lows seen earlier this year) and bank deposit rates still generally below 1% (unless you are prepared to lock up a meaningful sum of money for a long period of time), it is still an environment were it should pay to minimise holding cash and resist the temptation to accelerate debt repayments.
The difficulty (as I have painfully discovered) is that an asset like cash which shows a negative real return (and a very low nominal return) is still better than assets which are actually declining in price. In some respects, the current market is rewarding patient investors who are prepared to accept small losses as the lesser of the evils represented by the various investment choices available.
1. food (up 11.7%);
2. residential rents. (6.7%);
3. utilities (up 7.9%).
The rise was accompanied by predictions from economists that inflation may have peaked with commodity prices coming off their peak and economic growth showing signs of slowing.
Also released today was a number of revised forecasts for Hong Kong's GDP growth. Lehmans was quoted as cutting their forecast for Hong Kong's 2008 GDP growth from 4.5% to 2.8%.
With borrowing rates for residential property buyers still below 3% (although up from the lows seen earlier this year) and bank deposit rates still generally below 1% (unless you are prepared to lock up a meaningful sum of money for a long period of time), it is still an environment were it should pay to minimise holding cash and resist the temptation to accelerate debt repayments.
The difficulty (as I have painfully discovered) is that an asset like cash which shows a negative real return (and a very low nominal return) is still better than assets which are actually declining in price. In some respects, the current market is rewarding patient investors who are prepared to accept small losses as the lesser of the evils represented by the various investment choices available.
Sunday, August 17, 2008
Catching the falling knife - it's dumb and it hurts
I purchased a small position in silver early last week, paying US$15.02 per oz. The reasoning was a rather simple case of having believed that the very quick drop was over done (in percentage terms silver had dropped far more than the other precious metals) and that the bounce from close to US$14 would continue. I was expecting a quick return to somewhere above US$16.
I was proven wrong the next day when I woke up to find that silver had dropped below US$13 in overnight trading, leaving me sitting on a quick and ugly loss (as well as feeling stupid). The question is whether I should (i) take my losses and sell now (ii) buy more (if it was worth buying at US$15 it should be even more attractive at under US$13) or (iii) do nothing and treat it as a longer term portfolio investment.
I have no particular views on which is the best course of action at this point. I have no pressing need for the money so do not expect to be a forced seller at any point.
I was proven wrong the next day when I woke up to find that silver had dropped below US$13 in overnight trading, leaving me sitting on a quick and ugly loss (as well as feeling stupid). The question is whether I should (i) take my losses and sell now (ii) buy more (if it was worth buying at US$15 it should be even more attractive at under US$13) or (iii) do nothing and treat it as a longer term portfolio investment.
I have no particular views on which is the best course of action at this point. I have no pressing need for the money so do not expect to be a forced seller at any point.
Sunday, August 10, 2008
Reviewing My Investment Decisions (2)
Back in February I reviewed my investment decisions over the preceding 12 months . Given the poor return on investments so far in 2008, I have decided that it is time for another review of the private portfolio and my decisions so far this year. A periodic review process is a healthy part of any financial planning exercise, so long as it does not end up as a case study in damaging confidence through second guessing or introducing an avoidable emotional element to future decision making it should be a healthy and productive exercise.
Here is the scorecard:
1. Hong Kong Property: This is our biggest asset class by far. The only activity this year has been the completion by Mrs traineeinvestor of a property purchase agreement which was signed in December 2007. The portfolio remains fully occupied with no tenants in default. Cash flow remains positive due to low interest rates with a modest boost from the waiver of rates and maintenance expenses being much lower than budgeted. All mortgages are P+I and are steadily being amortised. The only decision made this year were to decline a fix and flip opportunity out of concern over declining liquidity. In effect, the real estate provides a modest positive wealth effect every month (without taking into account capital fluctuations).
2. Overseas real estate: I have two small properties overseas. I have not purchased or sold an overseas property for several years although I did discharge one small high cost mortgage which no longer served its original purpose earlier this year. These are now debt free and rented. Although the yields are not great, they are reliable cash flow generators. Capital values have probably fallen this year, but are still well above cost.
3. Residual equity portfolio: Two shares account for about 90% of the value. The remaining four shares have little value and probably should be sold as the amounts are not meaningful and it will cut my administration time. As a group these shares have appreciated this year. No decisions have been made or are contemplated.
4. Actively managed equity funds: These include Asian small cap, European small cap, Thailand, Taiwan, Vietnam and a very small managed portfolio. I stopped making monthly contributions to the two small cap funds in January. That was a good decision. The investment in the Vietnam fund in early 2007 was a very bad decision. Not only did I buy near the top of a rather frothy market but I purchased a fund which featured a partial lock up and very stiff exit costs which have inhibited thoughts of cutting my losses. It is the worst investment I have made for several years. As a group these funds have declined in line with the markets they invest in.
5. Index equity funds: These are limited to Hong Kong and India. I have had exposure to Hong Kong since Tracker was launched. I have added to the position a few times and purchased the India fund in March 2008. While the timing of my investments earlier this year was poor, as a group I am happy with these investments.
6. Commodities: As a group this has been a very successful investment class over the last three years. My investment in silver started at around US$6 per oz. I exited (after a short term repurchase) with a net sale price above US$17 per oz. Although I missed the top by quite some distance, the decision to exit currently looks quite good. The Lyxor commodities ETF purchased earlier this year also shows a healthy gain. Much smaller investments in platinum (since sold), lean hogs and nickel show losses which are, collectively, much smaller than the gains on silver and the ETF. If I was a disciplined trader I should have taken the loss on the nickel some time ago.
7. Cash: I am not a fan of holding cash. The rates of return are simply too low (well below the rate of inflation). Still in a declining market not investing has been a pretty sensible decision. As things stand I have enough cash on hand (factoring post termination pay outs) to meet all living expenses for about three years should I lose my job tomorrow.
8. Currencies: I have not set out to trade any currencies (apart from building up a token position in RMB which is more about cash management than currency speculation), although I did consider it. However, with assets priced in a number of currencies, FX fluctuations have had a material impact on my balance sheet. The decline of the USD was a positive factor for some time. Over the last few months the USD has started recovering and this is now working against me.
In conclusion, while I could beat myself up for not exiting my equity positions late 2007 or early 2008, that would be somewhat unfair given that I did reduce purchases, did shift to lower cost funds and have built up cash. My commodities have done well and as a whole my decisions here have been pretty good. It also has to be remembered that I remain a beneficiary of the decisions in 2003-2007 to aggressively purchase Hong Kong real estate using leverage. The resulting portfolio with its positive cash flow and amortising mortgages makes a steady positive monthly contribution to our net worth.
The two decisions I should be flogged for were the decision to buy the Vietnam fund and not cutting my losses on the nickel investment. In the overall scheme of things, the resulting losses are not large and I have learned a lesson from the Vietnam fund.
On the whole, I am happy with my decisions so far this year. After five years of fantastic returns, the set backs of the last seven months are relatively minor and it would be a mistake to be overly critical of my investment management during that time.
Here is the scorecard:
1. Hong Kong Property: This is our biggest asset class by far. The only activity this year has been the completion by Mrs traineeinvestor of a property purchase agreement which was signed in December 2007. The portfolio remains fully occupied with no tenants in default. Cash flow remains positive due to low interest rates with a modest boost from the waiver of rates and maintenance expenses being much lower than budgeted. All mortgages are P+I and are steadily being amortised. The only decision made this year were to decline a fix and flip opportunity out of concern over declining liquidity. In effect, the real estate provides a modest positive wealth effect every month (without taking into account capital fluctuations).
2. Overseas real estate: I have two small properties overseas. I have not purchased or sold an overseas property for several years although I did discharge one small high cost mortgage which no longer served its original purpose earlier this year. These are now debt free and rented. Although the yields are not great, they are reliable cash flow generators. Capital values have probably fallen this year, but are still well above cost.
3. Residual equity portfolio: Two shares account for about 90% of the value. The remaining four shares have little value and probably should be sold as the amounts are not meaningful and it will cut my administration time. As a group these shares have appreciated this year. No decisions have been made or are contemplated.
4. Actively managed equity funds: These include Asian small cap, European small cap, Thailand, Taiwan, Vietnam and a very small managed portfolio. I stopped making monthly contributions to the two small cap funds in January. That was a good decision. The investment in the Vietnam fund in early 2007 was a very bad decision. Not only did I buy near the top of a rather frothy market but I purchased a fund which featured a partial lock up and very stiff exit costs which have inhibited thoughts of cutting my losses. It is the worst investment I have made for several years. As a group these funds have declined in line with the markets they invest in.
5. Index equity funds: These are limited to Hong Kong and India. I have had exposure to Hong Kong since Tracker was launched. I have added to the position a few times and purchased the India fund in March 2008. While the timing of my investments earlier this year was poor, as a group I am happy with these investments.
6. Commodities: As a group this has been a very successful investment class over the last three years. My investment in silver started at around US$6 per oz. I exited (after a short term repurchase) with a net sale price above US$17 per oz. Although I missed the top by quite some distance, the decision to exit currently looks quite good. The Lyxor commodities ETF purchased earlier this year also shows a healthy gain. Much smaller investments in platinum (since sold), lean hogs and nickel show losses which are, collectively, much smaller than the gains on silver and the ETF. If I was a disciplined trader I should have taken the loss on the nickel some time ago.
7. Cash: I am not a fan of holding cash. The rates of return are simply too low (well below the rate of inflation). Still in a declining market not investing has been a pretty sensible decision. As things stand I have enough cash on hand (factoring post termination pay outs) to meet all living expenses for about three years should I lose my job tomorrow.
8. Currencies: I have not set out to trade any currencies (apart from building up a token position in RMB which is more about cash management than currency speculation), although I did consider it. However, with assets priced in a number of currencies, FX fluctuations have had a material impact on my balance sheet. The decline of the USD was a positive factor for some time. Over the last few months the USD has started recovering and this is now working against me.
In conclusion, while I could beat myself up for not exiting my equity positions late 2007 or early 2008, that would be somewhat unfair given that I did reduce purchases, did shift to lower cost funds and have built up cash. My commodities have done well and as a whole my decisions here have been pretty good. It also has to be remembered that I remain a beneficiary of the decisions in 2003-2007 to aggressively purchase Hong Kong real estate using leverage. The resulting portfolio with its positive cash flow and amortising mortgages makes a steady positive monthly contribution to our net worth.
The two decisions I should be flogged for were the decision to buy the Vietnam fund and not cutting my losses on the nickel investment. In the overall scheme of things, the resulting losses are not large and I have learned a lesson from the Vietnam fund.
On the whole, I am happy with my decisions so far this year. After five years of fantastic returns, the set backs of the last seven months are relatively minor and it would be a mistake to be overly critical of my investment management during that time.
Thursday, August 07, 2008
HK Tracker Fund Purchased
Having decided that I have too much cash on hand and being paranoid about inflation eating into the value of cash, I decided to make a small additional investment in the HK Tracker Fund. HK Tracker Fund is an ETF which tracks the Hang Seng Index. The purchase price was $22.80 which was, unfortunately, close to the high for the day.
Wednesday, August 06, 2008
Interest rates creeping up
A quick review of the latest interest rate fixings on my mortgages shows that the cost of debt financing has crept up off the low points set in the second quarter. The increases are not large and even the highest rate is still well below both the net yield on the underlying properties and the rate of inflation. In other words, debt finance is still cheap.
The interest rates I am currently paying range from a low of 2.1286% to a high of 3.0014%.
As an aside, given that deposit rates have not moved (still close to zero), this effectively represents margin expansion for the lending banks. New loans are currently available on less favourable terms than some of the more recent loans I have taken out, which will also help the banks' profitability.
The interest rates I am currently paying range from a low of 2.1286% to a high of 3.0014%.
As an aside, given that deposit rates have not moved (still close to zero), this effectively represents margin expansion for the lending banks. New loans are currently available on less favourable terms than some of the more recent loans I have taken out, which will also help the banks' profitability.
A typhoon and an attempted scam
The typhoon #8 signal was hoisted early this morning which means that offices, schools (it was summer holidays anyway) and most shops will be closed and services suspended until the signal is lowered. Depending on the severity of the weather, a reasonable number of people will go to work anyway. It is usually possible for those like myself who do not live on or close to an MTR station to find a taxi although you may get quite wet in the process.
The first taxi I flagged down wanted to charge me a HK$30 premium because of the typhoon. This would have roughly doubled the fare. I have been living in HK for well over a decade and this is the first time a taxi driver has tried to extort more than the metered fare from me. It's illegal for them to charge more than the metered fare. In any case, with two other taxis coming down the street behind him, it was a rather pointless exercise and I had no hesitation in telling him to foxtrot oscar. My only regret is that I forgot to make a note of his licence plate.
The first taxi I flagged down wanted to charge me a HK$30 premium because of the typhoon. This would have roughly doubled the fare. I have been living in HK for well over a decade and this is the first time a taxi driver has tried to extort more than the metered fare from me. It's illegal for them to charge more than the metered fare. In any case, with two other taxis coming down the street behind him, it was a rather pointless exercise and I had no hesitation in telling him to foxtrot oscar. My only regret is that I forgot to make a note of his licence plate.
Monday, August 04, 2008
Monthly Review - July 2008
July was another ugly month. While not as awful as June, it was the second month in a row that my net worth declined. This is the first time this has happened since I started keeping monthly records in January 2007.
As a group, my mark to market investments largely went sideways and showed a small net loss. Adverse currency movements amplified the losses and were the biggest contributor to the overall decline.
Here are the details:
1. my actively managed funds were mixed. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund is now approaching 50% of the capital invested. It is unlikely that I will invest in another fund that effectively locks me in for several years;
2. my equity ETFs recovered some of last month's losses. I currently have exposure to Hong Kong and India
3. my residual equity portfolio fell;
4. my commodity investments showed very marginal decline with a loss on my commodities fund slightly outweighing small gains in my Nickel and Lean Hogs ETCs;
5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). Although some of the reductions in interest rates have been slightly reversed with the rise in HIBOR, the cash flows remain positive;
6. currency movements were adverse (the USD recovered some of its losses) and were the biggest single factor in the net loss for the month.
The only investment made this month was a small subscription for an RMB bond issue. My income was in at the low end of expectations this month. My spending was in the mid range. The resulting savings were less than previous months but still helped to offset the effects of the losses on my investments.
The end result was a decrease in net worth of 0.3% for the month. The year to date increase is 5.8%. Looking forward, it has been several months since I made any meaningful investments and my cash holding has been building up. With inflation running at 5.4% officially and deposit rates still at close to zero, cash is depreciating quite rapidly and finding suitable investments is something of an imperative. The difficulty is finding somewhere attractive to invest the money.
As a group, my mark to market investments largely went sideways and showed a small net loss. Adverse currency movements amplified the losses and were the biggest contributor to the overall decline.
Here are the details:
1. my actively managed funds were mixed. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund is now approaching 50% of the capital invested. It is unlikely that I will invest in another fund that effectively locks me in for several years;
2. my equity ETFs recovered some of last month's losses. I currently have exposure to Hong Kong and India
3. my residual equity portfolio fell;
4. my commodity investments showed very marginal decline with a loss on my commodities fund slightly outweighing small gains in my Nickel and Lean Hogs ETCs;
5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). Although some of the reductions in interest rates have been slightly reversed with the rise in HIBOR, the cash flows remain positive;
6. currency movements were adverse (the USD recovered some of its losses) and were the biggest single factor in the net loss for the month.
The only investment made this month was a small subscription for an RMB bond issue. My income was in at the low end of expectations this month. My spending was in the mid range. The resulting savings were less than previous months but still helped to offset the effects of the losses on my investments.
The end result was a decrease in net worth of 0.3% for the month. The year to date increase is 5.8%. Looking forward, it has been several months since I made any meaningful investments and my cash holding has been building up. With inflation running at 5.4% officially and deposit rates still at close to zero, cash is depreciating quite rapidly and finding suitable investments is something of an imperative. The difficulty is finding somewhere attractive to invest the money.
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