Thursday, May 30, 2013

Living with volatility after retirement

Since graduating from university and entering the workforce, I have spent less than I earn from employment almost every year. In other words, not only have I always had money coming in with which to make new investments, but I have never had to consider selling assets in order to fund my living costs. One consequence of this is that I have never been in a position where I have to consider what would happen to our ability to fund our retirement should we see an extended period of economic contraction, high inflation, deflation or higher taxation which result in the real value of our pool of assets shrinking.

Since I will be (more or less) leaving the workforce at the end of September, I am now starting to think differently. I have to. With no income coming in each month, I have to consider how I will deal with the times when the value of our assets decreases, possibly for several years in a row. I no longer have the luxury of just waiting for my savings to repair the damage done when the investments lose money.

A few points to guide me:
  • markets are volatile - they will go down as well as up and a twenty percent fall in price is normal and not something to panic over. Most of the time such falls are an opportunity
  • individual equities carry greater risk of causing a permanent loss of value than individual properties or index funds. Allocate carefully
  • cash may be a losing asset, but it is also insurance against bad days and a means of taking advantage of lower prices. I aim  to keep at least two years' worth of expenses in cash/near cash at all times
  • I am not smarter than the market
  • the residual post-retirement payout from my firm and Mrs Traineeinvestor's part time earnings should meet our family's expenses (including mortgage payments) until at least the end of 2014. Dividends from now until the end of 2015 will cover at least one more year's expenses and take us to the end of 2015
  • all my mortgages are P+I. In the course of time, they will be fully repaid and each time one is paid off my cash flow increases
  • when it comes to properties, cash flow is king. It is better to cut the rent in bad times than have a vacancy
  • if things get really bad, we can downsize our home, cut some of our discretionary spending or even go back to work
  • FIRECalc tells me it will work, as do my own spreadsheets (at least they did before my computer disaster)

Tuesday, May 14, 2013

New lease signed - 12.8% increase

One of my tenants has decided to vacate at the end of May. The agent was instructed to advertise the property for rent on Thursday and a new tenant signed a provisional agreement last night.

The good news is that the new rent is 12.8% higher than the old rent.

The bad news is that I am not actually any better off because:

  • there will be a five week vacancy between tenancies
  • I have to pay the agent
  • I have to pay the stamp duty
  • I have to pay for the flat to be repainted, for the airconditioning units to be cleaned and some other minor touch up work
It will take approximately 22 months of the higher rental to absorb these costs - and that is before tax or discounting the fact that the costs are up-front while the revenues are in-arrears. In one simple lesson, this explains why I try very hard to keep existing tenants in place even if it means receiving less than full market rent.

I would have been better off keeping the existing tenant at the old rental (which was not an option).

Still, it could be worse - I could have had an extended vacancy or a smaller rent increase.

Monday, May 13, 2013

Sinopec purchased

This morning I added some more shares in Sinopec (HK:386) to the portfolio. With a single digit pe and a dividend yield above 4%, the shares represent good value in both absolute and relative terms.

I paid HK$8.62 for the additional shares.

Wednesday, May 08, 2013

Five paydays to go*

With retirement at the end of September now less than five months away, it's time to check off a few items. I have been taking a long hard look at our expenses and we have taken steps to reduce a few:

1. as posted, I have cancelled my term life policy - this saves HK$41,000 in annual premium;

2. we will complete the switch from my unsubsidised medical insurance to my Mrs Traineeinvestor's partly subsidised medical policy. While our current policy provides higher coverage, the premium is many times what we will be paying going forward. Based on a look at our actual medical bills for the last few years, we will be better off by several thousand dollars a year unless we have a major incident. In effect we are reducing costs by taking on a bit more risk;

3. my disability insurance will fall away at the end of September saving us HK$12,729 in annual premiums;

4. I have been shedding management responsibilities which has shortened my working hours. As a result, there is less pressure on me to get to and from work quickly and I have begun substituting bus for taxi. Depending on my overall commuting usage post retirement, by the time the process completes, I expect my annualised savings will be around HK$8,000;

5. my SCMP subscription was up for renewal this week and I have switched to the on-line version saving HK$1,239 per annum;

6. we have decided to spend Christmas in Hong Kong this year. Last year we went to Australia which cost multiples of the cost of the previous year's Christmas holiday in Thailand. This year we are going to the other extreme and cutting from three family holidays to two (Easter and summer). Holiday plans in future years will depend on the state of the finances;

7. we have decided to defer our home renovation project for one or two years.

Of course, I do have some planned and unplanned expenses in the pipeline, including my university enrolment fees, the cost of a new computer (I had originally budgeted to replace my lap top every three years but due to a HD failure will be doing it a year early and switching to a more expensive Apple product) and the cost of recovering data from my failed HD (about HK$5,000).

Among other items in my "to do" list is updating my will and cleaning out my office.

There really isn't much else to do.

* previous "X paydays to go" posts were based on a 30 June retirement date.

Monday, May 06, 2013

A small speculation - China Starch

I have recently done my financial housekeeping and got rid of almost all my "too small" and speculative investments. Going forward, I am allowing myself a maximum of three small speculative investments at a time.

Until last week, I had none*. I have opened a small position in China Starch (HK:3838). The company has around HK$0.16 in net cash per share, is selling on a mid-single digit PE and has a 3.3% trailing dividend yield. Some of that cash will (I expect) be used to fund their new factory premises. The reason why I have classified this as "speculative" is that the trading volumes are extremely low. Some days it would be very difficult to sell out of a position.

I paid HK$0.212 per share.

* My holding of Tontine Wines (HK:389) is currently "too small".

Dell really sucks

I have written about my computer problems. The latest is that about 70% of my documents, photos etc will be recoverable. The forensics experts are still working on it so the recovery rate may well go up but I am told that it is very unlikely to get close to 100% and I will have to wait another two weeks to get it back with whatever has been recovered and a new hard drive. Realistically, I will be faced with the loss of at least some data that cannot be replaced.

While I do not blame Dell for selling me a laptop that fails after less than two years, I do blame Dell for providing zero customer support:

  • the help line is well hidden and when I "press 3 for English" the result is a recorded message in Cantonese. Attempting to speak to the people who eventually answer the Cantonese or Mandarin help lines only results in being told that I must use the (non-existent) English help line. This is consistent with my experience with my previous dell laptop when the motherboard failed and had to be replaced
  • e-mails to the (also well hidden) support e-mail address generated no response whatsoever*
  • a message posted on their feedback site with an invitation to contact me produced no response whatsoever*
Dell has sent a very clear message that it does not give a ^$%#$ about its customers. Once you have purchased one of their products you are entirely on your own (even within the warranty period).

There are two Dell's that are currently in use in our home (and two older ones that we no longer use). By Q3 this year, that number will be reduced to zero. Dell has finally persuaded me to switch to Apple #. The only reasons for the delay is that Apple offers a small discount to students which I will be able to take advantage of later in the year. In the meantime, I am getting by with a combination of my work computer, iPhone and one of the original iPads.

The big decision is now - which Mac to get? I like the portability of the MacAir but I have a lot of photos and anticipate that I may need the larger flash memory that comes with the MacPro.

* and, yes, I have been checking my spam folder
# I gave some thought to getting a Lenovo Thinkpad given how reliable they have been for office use