Friday, December 31, 2010

Monthly Review - December 2010

December was a month of excellent financial progress. Equities and commodities appreciated and those gains were supplemented by favourable FX movements as the AUD/NZD appreciated against the USD. Cash flow on the properties was negative (although still a positive contribution to net worth) due to a combination of repair bills and a two vacancies (now filled). Savings were excellent.

Here are the details:

1. my Hong Kong equity portfolio appreciated. This was in spite of a sharp drop in China Gas (HK:384) ahead of the arrest of two executives. The stock is currently suspended and I have arbitrarily marked it down to HK$3.00 to provide against further falls once the suspension is lifted. This month I took up my rights entitlement in CCB (HK:939), my shares in Hua Han (HK:587) went ex-bonus and I purchased shares in Automative Holdings (ASX: AHE);

2. my ETFs were up with gains in Russia, Taiwan and India more than compensating for a decline in China. Hong Kong was flat. I purchased units in a Vietnam index tracker this month;

3. my commodities appreciated with silver making a significant jump and HOGS and NICK making much more modest gains;

4. two of my properties were vacant but the portfolio is still making a positive contribution to my net worth. There were a few repair bills to be paid and I had a small negative cash flow for the month. That said, as the biggest component of the monthly payments is principal on the mortgages, the properties remained profitable even with two vacancies for most of the month and the bills. The situation will be better in January with both vacant units now rented out, a net increase in rents and a drop in repair bills;

5. currency movements were favourable, as the AUD, NZD and RMB appreciated against the USD;

6. my position in bonds remains small. I purchased a token amount of RMB bonds this month;

7. a put option I had written against the NZD was exercised against me early in the month;

8. savings were strong with high income more than offsetting the additional end of year expenses (not including a holiday in Thailand over Christmas for which I had accrued a provision).

My cash position remains modest. HKD cash on hand and deposits now represent about 11 months' worth of expenses (up from ten months, in spite of new investments). This will jump significantly in January and February when I receive my end of year bonus.

For the month, my net worth increased 3.73%. The year to date increase is 29.55% (this is the full year end number). Needless to say I am very happy with this result.

My target retirement window remains sometime between early 2012 and early 2013. While the possibility of a one year extension exists, it will take some adverse market conditions or other unexpected event to require that. Every passing month brings me closer to my retirement goal.

A write up on the financial year as a whole will follow in a separate post.

Another milestone

Although my monthly net worth calculations do not reflect either (i) changes to the values of our properties or (ii) mrs traineeinvestor's assets and liabilities, I do run a separate consolidated balance sheet which reflects both of these factors and which is updated less frequently.

As part of my year end review, I updated the property valuations and outstanding mortgage balances and found that we have now reached the position where all of our properties have more than 50% equity (i.e. the amount of outstanding principal owed on each mortgage is less than half the value of the underlying property). This result is due to a combination of monthly principal payments and higher valuations as the local property market has risen this year.

The range of gearing ratios is 0% (i.e. no mortgage) to 49%. Assuming no further changes in valuations, the gearing ratios will continue to fall each month as additional mortgage payments are made.

Back to 100% occupancy

Our last vacant unit has now been let, with a provisional lease agreement being signed last night and the first half of the security deposit being paid into our bank account today. The rent was slightly lower than the previous rent by about 4.7% (give or take a bit depending on how much we get for renting out the car parking space which the new tenant does not want). The lower rent is a reflection on the fact that the previous rent had been set at above market levels rather than a fall in market rents.

We have a couple of repair jobs to do (which is only to be expected) before the tenant moves in of which the most important is to replace one of the window frames which is in danger of falling out.

Our cash flow will now go from positive to positive with a healthy margin. A good way to end a good (financial) year.

Wednesday, December 29, 2010

Vietnam ETF purchased

Prior to heading off to Thailand for a great Christmas holiday with my family, I placed a limit order for the locally listed Vietnam ETF. Given the pace of Vietnam's development, it's very favourable demographics, progress on economic liberalisation and relatively modest valuation metrics my expectations are that, over time, Vietnam's stock market will reflect that potential.

My limit order was hit at HKD286 per unit - the day before the country's credit rating was downgraded. Since the credit downgrade was well anticipated, the impact on the share market has been minimal and the greater risk to this investment remains currency devaluation.

Tuesday, December 21, 2010

2010 - looking back

Back in January, I listed a number of things that I would like to achieve during 2010 . The year end is now close enough that I can assess how many of them I achieved or progressed:

1. savings rate >40%: achieved. I will not know the exact rate until sometime in January when the December income and expense numbers come in, but even if I have zero savings in December (which will not happen), I will have achieved a savings rate greater than 40% of gross income.

2. aligning investments with my retirement asset allocation: some progress was made. We continue to make payments on our mortgages with a view to having our home paid off when I retire, I purchased a few more bonds (all RMB) , added to the equity portfolio and got rid of all but two of the "too small to be worth the effort" investments.

3. I now have precise spending data for a full year and have spent a considerable amount of time thinking about how this will change once I retire. Achieved.

4. miscellaneous tasks. Fail. My firm's insurer has a discretion whether or not to extend coverage to retirees. I won't find out until after I retire. No progress on the tech skills and I have done nothing to expand teh social circle.

5. my life insurance policy has been changed to a non-US policy. Done.

6. Trailwalker. Fail. I injured my right knee in early May and am still getting physiotherapy. There is a possibility that this may be permanent (in which case I need to rethink a number of my retirement plans).

7. continuing the novel. Fail. I have probably written less than 50 pages this year.

8. a children free holiday with Mrs Traineeinvestor. Done and done twice. We went to New York in March and Japan in October. Neither was cheap but given our savings rate, both trips were very affordable.

9. photography. Fail.

To round matters out, work life balance was something of a mixed bag with good balance at the beginning and end of the year and no real balance during the rest of the year. It could have been worse.

On the whole it has been a good year. Financially, it was all I could have reasonably wished for (although the year is not quite over). In other areas, it was more mixed, but that is only to be expected given the demands of my job. The biggest negative was my sports injury.

Wednesday, December 15, 2010

Two slightly late updates

I have made two investments over the last month which I managed not to post:

1. I made a small FX investment in the NZD, believing that it was undervalued (both in general and, in particular, relative to the AUD). Specifically, I was expecting the Reserve Bank to implement an interest rate rise which had been delayed because of the Christchurch earthquake. I was proved wrong, and have realised a loss of 1.4% on my investment as of last week when the contract closed. As I received NZD when the contract closed, I now need to decide what to do with that money;

2. I purchased shares in Automotive Holdings (AHE), listed on the ASX. This is a company which should benefit from a robust Australian economy and should not be adversely affected by the strong AUD. The company has reasonable growth plans in place for both its main car retailing business and its smaller logistics business. While I initially had concerns about the debt levels, a material part of the debt is the floor plan (i.e. inventory financing). The company sells on a FY2011 expected PE of less than 10x and expected dividend yield of more than 7%. I paid AUD2.35 per share.

Saturday, December 04, 2010

Stress testing for inflation (2)

Inflation is an issue which I need to be highly confident that I will be able to manage once I leave the working world. Previous posts explained why I worry about inflation and just how vulnerable the private portfolio is to the impact of inflation.

So, how do I get comfortable with the inflation issue?

1. know my expenses: I've been running detailed monthly expense accounts since December 2009. A year into this exercise, I have a pretty good idea where my money is going;

2. budget for post retirement changes: I'll travel a bit more, go out more and increase expenses in a few other areas. I'll also cut back in a few places;

3. create sinking funds: I'm putting aside an allowance for some of the larger one off items, of which the largest is refurbishing our apartment;

4. over engineer the budget: I arbitrarily added 20% to our expenses. I made no allowance for the fact that at some stage in the distant future our young children will become financially independent (I hope);

5. have a few emergency sources of funds which are not in the financial plan: a small whole of life policy which matures when I am 55, some Bordeaux which is way too expensive to drink and debt free home (our mortgage will be paid off shortly after I retire);

6. work longer: if I retire now the portfolio passes Firecalc with inflation at 3.7% or less. If I work for one more year the inflation threshold rises to 4.2%. I will be working at least one more year;

7. allocate assets to protect against inflation: most of our money is in real estate or equities. There is a very small allocation to bonds (which will probably be a bit bigger when the time comes). Since the cost of mortgage finance is below the inflation rate, I will carry some debt on our investment properties into retirement;

8. constant vigilance: I will continue to monitor expenses and income post retirement. If a problem is identified, I will take action sooner rather than later - asset reallocation, cutting expenses, finding a job or other actions;

9. mental preparation: I have a massive list of things to do once I retire. Keeping myself mentally and physically busy will prevent me from spending excessive amounts of time brooding about an issue which I believe I am well prepared for. Have had at least three years advance notice of my retirement target date, I hope to have no difficulties making the adjustment when the time comes.

As things stand, I'm pretty sure I will be ready to pull the trigger in early 2012 - both financially and emotionally.

Stress testing for inflation (1)

When I retire, my expectation is that my cost of living will continue to increase due to inflation. Since I won't have employment related income, I need to be very confident that the private portfolio will continue to support our lifestyle over a lengthy time period. The point can be easily illustrated by using a spreadsheet (even for the semi-numerate such as myself) or one of the many calculators available on the internet. I used Firecalc at Early Retirement to illustrate the point.

If I plug in our current net assets, projected retirement budget, a 50 year retirement period and exclude the value of our home, Firecalc gives me the following results:

1. inflation at 3.7% pa or less: 100% success rate

2. inflation at 4.0% pa: 97.8% success rate

3. inflation at 5.0% pa: 75.6% success rate

The success rate falls very quickly as inflation climbs above 5% pa.

I also made an adjustment to reflect the fact that Firecalc assumes very low cost mutual funds as the investment vehicle of choice. Those funds are difficult to access from Hong Kong.

Even accepting that the calculator is using an average rate and that 3.7% is above the US CPI, these results do not give me the necessary level of comfort - CPI is not a satisfactory basis for estimating future cost of living increases. History tells us very clearly that extended periods of high inflation do happen and their impact can be devastating - the impact of the high inflation 1970s and early 1980s was an awful time to be relying on fixed incomes.

In any case, this is one of the reasons why I am still working (there are others).

There are a number of ways to gain the necessary level of comfort which I have written about before and will revisit in a future post.