Tuesday, January 01, 2019

Annual Review – 2018

The best word to describe 2018 was unsatisfactory.


Financially speaking, we ended the year with a 1.3% decline in net worth with the decline being split more or less evenly between real estate values and equities/bonds with FX also making a contribution to the loss. Measuring performance is sightly complicated by the fact that Mrs Traineeinvestor is still working and, or course, as a retiree I was drawing on our investments to pay for living expenses and other outgoings. In any event, given where markets ended the year, I should be reasonably happy with this result.

It was disconcerting that every major asset class declined in value during the year. The only asset class in our portfolios that showed positive returns was cash and, even then, the return was below the rate of inflation. Diversification was still important, but not as valuable as I had hoped.

One things that stood out was that a small number of shares in the portfolio delivered unexpected bad news which hit their share prices hard: Fletcher Building in New Zealand, Lend Lease in Australia and Sinopec in Hong Kong. While these sorts of issues will happen from time to time (and may even represent opportunities), they do highlight the importance of diversification.

On a more positive note, income from all sources (rents, dividends etc) hit a record post-FIRE high which is encouraging – if I can keep the income streams coming in then day-to-day market fluctuations are of lesser concern than if I was dependent on selling assets to fund expenses.

The other noticeable feature about out portfolios is that, between us, we have a lot of cash/term deposits which currently earn very little – less than the interest rate we are paying on our margin facility and mortgages. I remain of the view that modest amounts of debt are a positive element of our portfolio because (i) debt provides an inflation hedge and (ii) interest cost is generally lower than the returns which can be expected from investments over the longer term. However, it makes no sense to maintain large cash balances over long time periods instead of paying down debt. Accordingly, we have decided to reduce the level of cash/deposits held and pay of some of our debts. In December, I made a partial pay down of a margin facility and when some term deposits mature in May, we intend to pay off one of our mortgages in full.


In other areas, I also more or less did not meet expectations. I did less exercise than planned (in part due to recurring back problems and in part due to additional travel), my research degree is on schedule to finish but likely towards the end of 2019 rather than mid-2019 and, the novel needs quite a bit more work, but I should have it up Amazon by the end of 2019.

* Note: the numbers for the annual review differ from the monthly reviews because they include (i) changes in real estate values and (ii) an update on Mrs Traineeinvestor's position.

Financial Review – December, 2018

December saw a further reduction in net worth with losses in equities compounded by adverse currency movements. The end result was a 2.12 percent decrease in net assets.

For the year to date, the portfolio is down 3.96 percent. The adjusted change from when I retired in September 2013 is a 21.61 percent increase. Hong Kong liquidity stands at 39.90 months of estimated outgoings, significantly increased from the start of the year's 26.68 months due to net asset sales and a new mortgage loan.

Here are the details:

1. my Hong Kong equities fell. I added a few more shares in CK Assets (HK:1113) to the portfolio;

2. my AU/NZ equities were were down ... again. There were no new transactions;

3.my equity ETFs were down (India, Hong Kong and China) in line with the local markets;

4. my position in silver was more or less unchanged. I slightly increased my position in silver;

5. all tenants are paying on time and all properties are let;

6. the AUD and NZD were down against the USD/HKD;

7. my position in bonds remains modest. There were no additional purchases this month. Recent interest rate increases have pushed the holding values of some of my bonds to  below par - since I intend holding to maturity (other than a solitary perpetual) this is not a problem. I have a margin facility in place and my carry trade is doing its thing and generating a small amount of additional income;

8. expenses were moderate as I low as we did not take a holiday this Christmas.

My HK cash position rose during the month due to full occupancy on the properties and a number of dividends being received. I currently hold 39.90 months of expenses in HKD cash or equivalents (up from 26.68 months on 1 January). 

Total household gearing ((debt+accruals)/assets) is 8.85% of total assets – with a partial pay down in a margin facility offsetting declines in asset values. Property prices are as at 1 January, 2018 and will not be marked-to-market until year end and I do not net off cash. With a mark-to-market of equities, bonds and FX this number will fluctuate even if the amount of debt is being slowly amortised.