Saturday, January 30, 2010

Monthly Review - January 2010

January was another positive month for financial progress with small losses on my investments being outweighed by positive cash flow on my properties, a good savings rate and the receipt of my annual bonus to produce a solid gain in net worth. It was particularly pleasing that the HK equities actually increased in value (if only marginally) in a month when the local index fell.

Here are the details:

1. my Hong Kong equity portfolio appreciated slightly, in spite of a minor pull back in the overall market towards the end of the month. This was surprising. There were no transactions this month

2. my ETFs declined in line with their respective indexes (Hong Kong, Taiwan, Russia and India)

3. my commodities declined slightly

4. all of my properties are let and all tenants were paying on time producing a positive cash flow and contributing to the gain in net worth

5. currency movements produced a small loss

6. I did not do any ELDs

7. I did one small day trade on Friday which will settle next week and show up in the February review.

8. savings were positive with income at the high end of expectations and expenses more or less in line. I also received part of my annual bonus this month (the other part will be paid next month)

For the month, net worth increased by 3.2%. A good start to the year.

Thursday, January 21, 2010

100% occupancy again

The renovation project on my last property purchase was completed in mid-December. Unfortunately, the Christmas/New Year period is a bad time to be looking for tenants for residential property and I had, at best, limited expectations of being able to secure a tenant quickly. I had to wait until last week to have a tenant signed up and start paying rent. The rent was in the middle of the expected range.

Now that I am back to 100% occupancy on the portfolio I can start thinking about whether I want to look for another property this year. I have been building up cash since early December and will receive a bonus in early February. Given that I currently get close to zero on cash in the bank, finding a productive use for the money is something of a priority. Unfortunately, property prices remain high and yields consequently low making further property acquisitions relatively unappealing. The stock market as a whole is not the bargain it was a year ago. This may be one of those times when being patient and waiting for an opportunity will pay off.

Sunday, January 17, 2010

Book Review - The Myth of the Rational Market

In "The Myth of the Rational Market" Justin Fox traces the history of the development of various theories about how financial markets work, how efficient (or not) they are and the applications of those theories to investment management.

From a historical perspective, the book was a great read.

In terms of conclusions, Fox ends up supporting the notion that markets are quite efficient in distributing information but that neither market participants as individuals nor market participants as a whole are entirely rational. This conclusion is at odds with a lot of the popular academic theories such as the efficient market hypothesis as well as the logic of game theory. It is also well supported by argument and evidence.

Fox makes a clear distinction (which is often missing from (or glossed over) other writings on the subject) between the efficiency of markets and their rationality.

Fox covers issues like the inability of active fund managers to "beat the market", the case for hyper rational investors (like Buffett) to do so and makes some very accurate condemnations of Alan Greenspan (and other market regulators) for facilitating the economic (and regulatory) conditions which precipitated the credit crisis.

Fox also deserves praise for writing in terms which are easy for a lay person to follow and avoiding the trap of getting bogged down on technical issues.

An excellent read.

Wednesday, January 06, 2010

2010 - Moving forward

For the most part, I have little interest in either new year's resolutions or in making financial predictions. That said, I do have a set of goals or objectives which are subject to on-going review and the start of a new year is a good time to review them. I also have to recognise that it is next to impossible to plan financially without making some guesses or assumptions about the future.

I now have two years to go before I hit my number and am in a position to retire. It is time to start getting myself prepared for life outside the work force.

1. I need to keep my finances on track. Savings are still critical to this. My savings rate will need to be monitored. Given that we are now a one-income household, this is more important than ever. I hope to maintain a 40%+ savings rate this year

2. I need to start aligning my investments more closely with the intended asset allocation post retirement. While I do not have a fixed asset allocation in mind, I am overweight real estate so should focus on building up the equities side of the portfolio. There are also some investments which are now either too small or which otherwise serve no purpose which I should get rid of as a house cleaning exercise

3. I need to get a more exact estimate of our post-retirement spending. Starting 1 December, I have been recording my expenses on a daily basis and intend to continue this until at least the end of the year

4. there are a number of other tasks which need to be done to prepare for retirement. Upgrading my pathetic tech skills is high on the list. Sorting out medical insurance which will continue following my retirement is also a priority (life insurance will lapse at that point). the part of my social circle which is independent of work/clients/competitors could do with some maintenance as well

Independently of retirement linked activities, there are a few things to attend to this year:

5. change the life insurance policy to a non-US policy to avoid the uncertainty over withholding taxes

6. I would like to complete the Hong Kong Trailwalker this year

7. I would like to restart the novel I began writing during the Asian crisis (but without intending to finish it - I don't have that much free time)

8. a short holiday with mrs traineeinvestor without children. We try to do this every year, but missed in 2009. Since I will be in New York for business in March, we have decided to add a few days and spend the time there

9. spend more time doing photography. This is something I enjoy, but never seem to spend time on. I should get into the habit of carrying my camera with me more often. I am also thinking of spending some of my budget on another lens or two. Even though my EOS 5D mark 1 is now a bit dated and has a relatively slow auto focus speed, I see no need to upgrade - it is perfectly adequate for my needs

In other areas, I am hoping that work will not start to intrude on family time - 2009 was good in terms of work life balance. An improving economy could put that balance in danger.

Friday, January 01, 2010

Financial Review 2009 - As good as it gets

As good as it gets, pretty much sums up 2009 from a financial perspective. Just about every thing that could go right did go very right.

To recap:

1. I started the year with a meaningful amount of cash which I had begun deploying into the markets in late 2008. I also received the first of two lump sums from exiting my previous job in January and the second in June. With markets at depressed levels (and knowing that the money was coming), I made a decision to go to zero cash;

2. I looked at buying a property early in the year, but thought that prices had further to fall. I was wrong, which turned out to be a good thing as it meant I purchased more equities than I would otherwise have been able to do;

3. In June, I elected to borrow against my home equity to put capital into my employer's business rather than reduce the amount of money invested in equities. So far this has proven to be a good decision;

4. I maintained full occupancy on my property portfolio with only one short vacancy and very little impact on rental levels. Interest rates continue to remain low (below 1%);

5. I started buying individual equities (instead of index ETFs) in May. Apart from a small unsuccessful attempt at day trading (which produced trivial losses), my direct equities have performed well. There is a strong value tilt to the individual equity portfolio (low gearing, positive cash flow etc);

6. I eventually purchased a property later in the year. The renovation has been completed and I am looking for a tenant (which may take a few weeks given the holiday season);

7. The job shift effectively meant that I received about a year and a half of income in 2009. My savings rate (ignoring the one off effects of the pay outs from my old job) was around 50%.

The markets pretty much all worked in my favour this year:

A. Equity markets rose strongly, with emerging markets leading the way;

B. Hong Kong residential property prices rose 28%. They are close to regaining their pre-crisis levels (although still well short of 1997 peak levels);

C. Currency movements were in my favour - a weak US$ benefits the privateportfolio;

D. Interest rates remain low - I pay less than 1% on my mortgages;

E. The Hong Kong tax regime remains moderate - there is no reason to expect the adoption of higher tax rates.

My net worth increased every month in 2009. My investments generated positive returns in 11 out of 12 months (February was the only exception). By year end my net worth had increased by 75.3%. It is difficult to imagine a better result.

The net effect is that I am still on track to hit my retirement number by the end of 2011. At that stage (and assuming I do hit my number), the current plan is to spend two more years working on a reduced hours basis while living off our investments as I transition to retirement.