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.

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