Saturday, January 31, 2009

Monthly Review - January 2009

January saw the new year start off badly for my investments. While the mark to market assets were mixed to slightly down, the currency effects were heavily adverse with all materials currencies depreciating against the US$.

In spite of being unemployed, savings were positive due to the fact that I cashed out a long service entitlement from my previous employer. Also, I continued to enjoy full rental income from my properties and low interest rates on my mortgage loans.

Here are the details: actively managed funds were mixed with a net decrease during the month. I am holding losses on many of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam;

2. my equity were also mixed with a net decrease during the month. I currently have exposure to Hong Kong, India and Taiwan;

3. my residual equity portfolio appreciated in local currency terms but lost money due to adverse currency movements;

4. my commodity investments went sideways. I have small positions in the Lyxor Commodities ETF, nickel and lean hogs;

5. all my properties are all fully rented and the 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). One has moved out and will cease paying rental at the end of April;

6. currency movements were heavily unfavourable as the USD gained against a number of currencies.

One portfolio investment was made near the beginning of the month (HK Tracker ETF). Income was not meaningful due to the combination of being between jobs and cashing out my long service payment from my old job. My spending was moderate.

For the month, my net worth increased by 10.40%. The year to date decrease is 10.40%. Without the cash out from my old job, I would have experienced a decrease in net worth - largely due to the adverse currency movements.

Tuesday, January 27, 2009

Kung Hei Fat Choi

Welcome to the year of the ox.

For entertainment value only I read the annual Feng Shui Index prepared by CLSA. The Feng Shiu Index has become something of an institution in Hong Kong since it was first published in 1992. In terms of track record it boasts something of a mixed performance record (not much different from analysts).

For this year, the Hang Seng Index is expected to be volatile in the early months before bottoming out in June or July and then beginning an uptrend in August which will continue for the rest of the year.

My own fortune for the year of the ox looks equally mixed. Of particular interest is that my love life will be somewhat lacking this year - while Mrs Traineeinvestor's will flourish. Should I be worried?

Some of the more entertaining predictions:

  • a virus will disable blackberries for 48 hours;
  • Japan fails to introduce any workable reforms (no different from every year from 1992-2008);
  • Iceland challenges India's dominance of the call centre industry;
  • Britain declared an economic basket case - Zimbabwe offers aid;
  • Hong Kong's air quality improves due to factory closures.

And no, I do not take any of this seriously.

Friday, January 23, 2009

Scarcity of motivated vendors

The property market has retreated by anywhere between 25% and 30% since the first quarter of 2008 (depending on which sector of the market you are looking at). The local stock market has retreated even more (down by more than 50% from its high). Rents are also coming under pressure and falling. With every pundit and analyst in town forecasting lower prices, I decided it would be a good time to take a look at some properties.

After looking at a number of properties in the Mid-levels, I was struck by a number of factors:

1. rents have declined only a little less than capital values - yield expansion has been very limited (and I suspect that whatever yield expansion has taken place will be offset by longer vacancy periods);

2. genuine vendors are willing to accept some discount to their asking prices - but not much. This is an improvement over the common experience of raising asking prices the moment you expressed an interest in a property;

3. bait and switch advertising is all too common. A property will be advertised at a low price but when you ask to see the property, the agent will say that the vendor is not serious and show you a similar property at a higher price;

4. there are still plenty of owners in fantasy land asking prices which are at or above last year's highs;

5. motivated vendors are scarce. I hope that this will change as leases expire and vacancy rates increase and rental levels fall below the previous levels. Given the very low interest rates and the abundance of liquidity in Hong Kong, this may take a while.

It is still very much a buyer's market and I am in no hurry to buy anything unless is is a very good deal.

Sunday, January 18, 2009

A nice problem to have

I have quit my job and will get paid out my long service benefit in cash. As a result, the amount of cash on hand has doubled from the equivalent of about two years of living expenses to just over four years of living expenses. With interest rates with the banks approaching zero, this money needs to be invested somewhere where it will generate a better return.

I could, of course, pay off some of our mortgage debt. In fact, I have enough cash to pay off the home loan (our biggest debt) completely. However, with the most expensive loan currently costing me 2.25% pa (tax deductible - at a 15% tax rate) this is still a pretty low rate of return. Also, given that a new mortgage will likely cost upwards of 3.1% pa, if I borrow to buy another property, about half of the return on paying down an existing mortgage will be lost. A pre-tax return of 1.15% is pretty pathetic (although it would have made me a financial superstar in 2008).

Shares and property can be acquired with (net) yields above 4% (after allowing for dividend cuts and declines in current rental levels). This is attractive (although not spectacular). The issue is a timing one - the markets have the potential to fall even further so if I go with this option, I have to be prepared to ride out what could be a lengthy period of falling capital values.

I quite like the idea of buying more property during a recession and am arranging to view some flats next week. That said, I am not committed to buying right now - a number of people have told me that they expect the market to drop after Chinese New Year (not sure why?). In any case, I am in no hurry and, in this market, time is on my side.

PS: I haven't completely lost the plot - I start a new job next month, so my period of unemployment will be relatively short. This also means that I have no real need for a substantial cash reserve fund.

Wednesday, January 07, 2009

2009 Budget

I have drawn up my annual budget for 2009.

The expenses side was quite straightforward as I expect little change in most areas. The noticeable exception is our holidays where we spent relatively lightly in 2008. This year I have budgeted for a slightly more expensive Christmas holiday for the family and also a short, children free holiday for mr & mrs traineeinvestor. I have assumed small increases in school fees and that the rates waiver given by the HK government will not be repeated. Overall I have budgeted for a 4.9% increase in expenses. My tax burden will be higher this year (I have just paid the first installment).

As I do not earn a fixed salary, there is always an element of uncertainty associated with my budgeted income. The degree of uncertainty in 2009 will be higher than in previous years due to a change in jobs which will take place shortly. Quite frankly, it is difficult to predict my level of income in 2009 with any degree of confidence. Accordingly, I have arbitrarily assume it will be the same as in 2008 (which may prove to be either conservative or an exercise in optimism).

My savings rate is likely to depend more on my income than my expenses. Given the uncertainty associated with my income, my savings rate is also something of a guess but I have (again arbitrarily) set my self a mental target of 50% or more of pre-tax income.

Tuesday, January 06, 2009

Savings Rate For 2008

As part of the final sign off on 2008, I completed added the December spending numbers to the spreadsheet to work out my overall savings rate for 2008. I was surprised to find that during the course of the year I managed to save 57% of my pre-tax income. I had initially assumed I would save less than the 55% achieved in 2007.


My income in 2008 was slightly higher than 2007. My monthly income fluctuates a bit and was higher in the first half of the year before generally declining in the second half. This is effectively where the improvement in the savings rate came from.


My expenses in 2008 were slightly lower than in 2007. This was a case of higher school fees and general household expenses (in spite of the rates relief and partial electricity bill subsidy from the HK government) being offset by lower discretionary spending on holidays, wine and collectibles.


My provision for tax increased by more than the reduction in expenses.

Other provisions

I accrue provisions for various anticipated expenses and treat these as an expenses as and when they are provided for. Year end provisions were increased sightly as I anticipate some expenses in 2009 (e.g. our old style TV set is beginning to die on us and will need replacing soon and I will need to get a couple of new suits made for work).

Thursday, January 01, 2009

2009 Financial Goals

One of the positive things which I took from 2008 was that it is now possible to acquire assets that offer considerably better yields than could be obtained 12 months earlier. Even if a fall in distributions (rent, dividends) of around 20% is assumed, the current yields on both real estate and equities remain attractive.

Given my retirement model and the current market conditions, would it make sense to acquire assets and minimise the holding of cash? To a certain extent, I have been doing this already (I purchased some ETFs in November and December) and my cash position has been reduced to about 2 years worth of living expenses (with no attempt to economise) or 3 years (if we cut back in certain areas). I also have a high degree of confidence in my ability to generate income from employment which gives me confidence that I do not need a wasteful emergency fund.

Accordingly, my financial goals for 2009 are:

1. maintain my employment position and the high income and high savings rates it allows me to generate. Due to some changes in what I do and the way I am remunerated my income in 2009 (and after) is likely to be much more erratic than in previous years (although overall at least as good). Accordingly, if this objective is met then I should be able to retire at around 50 years old even if the markets perform badly for a few more years. That said, I am still hoping for a 2012/2013 retirement date. Target savings rate is 55% of pre-tax income;

2. maintain a low cash position by investing most of my cash flow into the equity markets. Yields are the cornerstone of my retirement plan. I cannot afford to pass up opportunities to invest at prices which generate yields higher than are required for my retirement objective. Unless I am saving for a property purchase (see #3 below), cash should seldom be more than 3 years of budgeted living costs + accrued tax reserve;

3. at some point, I would like to acquire another property in 2009. I like cash flow. The issue will be obtaining mortgage finance from the banks which have shown themselves to be increasingly reluctant to lend (and, when they do, they require higher deposits and charge higher interest rates). While I am sure that I will get the finance, the terms are unlikely to be as favourable as my current mortgages;

4. I will continue to do some active trading - but only with small sums of money. I more or less broke even on active trading in 2008 and have no illusions about day trading for a living. Trading is fun but should be nothing more than a minor diversion.

Simple isn't it? It's the execution that will require effort. I'll do a separate post on

I have also set myself a number of non-financial objectives for 2009. Some of these will get more attention than in previous years (where financial consideration have dominated).

Financial Review 2008

Looking back on 2008, it is difficult to remember that the year actually began rather well with my net worth growing in each of the first five months of the year. It was only during the second half of the year that the declines in equity prices began to outstrip the net rentals on my properties and the savings from my income. The final result for the year was a decrease in net worth of 1.37%. While a decline of 1.37% may not seem that significant, after netting out the effect of net rentals and savings, my assets declined by about 15% during the year.

What went wrong?

The strategy that produced such impressive returns from 2003-2007 effectively went into reverse. With emerging markets being the primary focus of my non-property investments the combined effect of major declines in all of those markets and the rise of the US$ resulted in horrendous losses for some positions (in particular Vietnam). The smaller positions in developed market equities and commodities also suffered from the global bear market.

What went right?

Even though property prices have fallen 20-30% off their peaks, they still continue to generate net cash flow. Given that property is my largest asset class (by a considerable margin), this is reassuring.

I maintained a high savings rate (estimated at about 59% of pre-tax income). In part this was due to cut backs in some luxury expenses and a couple of anticipated expenses not eventuating at all.

I increased my allocation to cash/deposits.

I stopped buying high cost actively managed funds and purchased lower cost ETFs (lower cost being a relative term).

Lessons learned?

My "no draw down" approach to my retirement income was fully vindicated by the events of 2007. If I had been a retiree relying on withdrawal of capital to fund my living expenses I would be in serious trouble at this stage. Following my plan of only relying on income generated from my assets (rents, dividends) would have seen me end the year with an increase in income and no draw down of capital.

In spite of failing to achieve my target return, I am still on schedule to retire in 2012/2013. Why? Simply put, I am now able to acquire assets at higher yields than I could a year ago. So, yes the losses hurt, but its a good type of hurt.