Saturday, January 01, 2011

Financial Review 2010 - another great year

2010 was another year of excellent progress towards my objective of achieving financial independence and early retirement. I remain on track to be able to retire sometime between early 2012 and early 2014. (The variation in potential retirement dates depends on market conditions and the on-going review of a number of assumptions which I have used to model the financial aspects of my retirement.)

Getting back to 2010:

1. equity markets delivered positive returns. As I am more concerned with absolute returns than relative returns, I do not track performance against a benchmark index. However, a quick look at my five biggest individual stock holdings (Hutchison, CNOOC, CCB, Sinopec and Hua Han) showed all of them outpacing the Hang Seng Index by a considerable margin. Of the other stocks, most gave positive returns. The four losers (China Gas, Nufarm, China Zhongwang and Amvig) had relatively little impact although I am somewhat annoyed with myself for not selling Nufarm when the problems began. Of the ETFs (all emerging markets), there were positive returns across the board;

2. Hong Kong real estate continued to do well. Hong Kong property prices continued to advance in response to demand from owner occupiers and investors, tight supply and interest rates that were very low in absolute terms and negative in real terms. (My net worth statements do not reflect changes in the values of real estate.) While I had some vacancies during the course of the year and more repairs than I would like, cash flow was still positive and the net margin between revenues and expenses was high;

3. currencies moved in my favour. The AUD, NZD and RMB all appreciated against the HKD/USD providing an additional uplift to asset values;

4. my overseas properties produced positive cash flow. My very small investment in property in New Zealand produced positive cash flows with 100% occupancy and few repair bills during the year;

5. commodities did well. My investment in silver soared. HOGS, NICK and a commodity ETF all gained during the year. I am still sitting on losses for the HOGS and NICK and learnt a lesson about the impact of contangos on commodity linked products which rely on roll over of derivative positions. I will take the loss on these shortly;

6. bonds produced positive returns. My very small allocation to bonds produced positive returns;

7. miscellaneous investments were largely a waste of time. I did a number of small investments in warrants, equity linked deposits and currency linked deposits. These either produced a small gain or a small loss depending on how you do the maths. While I will most likely continue to put small amounts of money into these, they are more for entertainment than serious investing;

8. my savings rate was excellent. I will have to wait a few months to get exact numbers (due to complexities on my tax returns, some still unknown expenses and the size of my bonus), but there is a good chance that I will have kept my savings rate above 50% for the year. The higher than expected savings rate was largely driven by income being higher than expected. Unfortunately, spending was also high than expected but most of the excess was due to "investing" in a few cases of over priced Bordeaux that I hope I am never silly enough to actually drink.

In terms of approach to investing, with inflation being higher than borrowing costs and much higher than interest rates on bank deposits and short term debt instruments, I stuck with my policy of keeping most of my money in either the property market or equities and not accelerating repayments on any of my mortgages.

My net worth grew in 10 out of 12 months in 2010. My investments generated positive returns in 8 out of 12 months (and two of the loss making months were very trivial). Ending with a gain in net worth of 29.55% for the year was a great result. (This result does not include changes in the values of my real estate.) As mentioned, 2010 represents excellent progress towards meeting my FIRE goal. The consolidated balance sheet, which reflects mrs traineeinvestor's assets and liabilities and changes in the values of our real estate, showed a greater percentage increase (about 37%) but I will have to wait for some additional data before finalising that number.

I remain cash light with only about 11 months of living expenses held in the form of HKD cash or near cash. Going forward, as and when I retire, I will need to build he cash or near cash buffer to between two and three years of living expenses. There is no need for it to be in HKD and I am in no hurry to get to that position.

There were three negatives for the year. The first is that it now looks unlikely that I will have the option of working part time for a couple of years to transition into retirement. That is unfortunate but, in the overall scheme of things, not that big a deal. The second is that a knee injury suffered early in 2010 may or may not have a long term effect. If it does, this will adversely impact a number of my retirement plans. The third negative is the return of inflation, in particular the increases in the cost of school fees and travel costs (which represent a meaningful chunk of our budget) are of concern and I will be paying close attention to these (and other) costs and adjusting the retirement budget as required to ensure that they are properly provided for.

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