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Archive for May, 2007: Enoughwealth's Personal Finance Blog
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Archive for May, 2007

Keeping Up with the Uber-Joneses

May 31st, 2007 at 10:53 am

One of the benchmarks I use to evaluate the progress of my net worth is to compare it to 1% of the amount required for entry to the annual Business Review Weekly "Rich List" of the 200 wealthiest Australians. Last year the cut-off was A$130m. This year it has leap up to A$180m, largely due to the mining boom and surging financial services sector. This represents an increase of 38.5% in just 12 months.

By comparison my net worth increased from A$847K to A$1.033m during 2006 - an increase of "only" 22%. So, it seems that I'm not keeping pace with the Maga-Rich at the moment. This is largely due to the fact that nearly half my net worth is tied up in Sydney real estate, which has been in the doldrums for the past couple of years, and my stock portfolio is a bit underweight the mining sector. But overall I'm still pretty pleased with the performance of my investment portfolio.

Anyhow, although the cut-off point for entry to the Rich List rose by 38%, the estimated total wealth of the people making the list only increased by 27% from A$101.5b in 2006, to A$128.6b today. It appears that while accumulating wealth get easier after you've made your first million, it starts to get harder again after the first billion - those at the top of the Rich List (excluding the miners) are growing their wealth less rapidly than the others in the list.

Text is Enough Wealth and Link is http://enoughwealth.com
Enough Wealth

Frugal living: Running Your Car on Air.

May 31st, 2007 at 07:13 am

The

Text is Air Car and Link is http://green.yahoo.com/index.php?q=node/315
Air Car runs on compressed air, managing speeds of 68 mph (109 kph) and has a range of 125 miles on one tank of air. A duel-fuel version that can use petrol-powered compressor in the country would have a range of up to 2,000 miles between refills.

The tank can be filled for around $2.00 (but only at specially equipped gas stations), or can be plugged into your home power socket to fill the tank in around 4 hours.

I'd love to see an off-road version developed based on the old
Text is Haflinger and Link is http://www.4wdonline.com/Steyr/Haflinger.html
Haflinger AWD vehicle (I have an old haflinger that is patiently waiting restoration). Combined with a removable air tank (so you could recharge one tank using solar power while driving with the other), I think this would be the perfect "post apocalypse" transportation. And while waiting for WWIII you could drive it around town Wink

AU shares - portfolio update: 30 May 2007

May 30th, 2007 at 02:07 pm

I had planned on selling off my portfolio of Australian stocks during the next financial year to reinvest the proceeds within our SMSF, but I've decided against this course of action as the realized capital gains would minimize the benefits of shifting the investment into the tax-sheltered SMSF. Instead I'll just salary sacrifice a large part of my salary into super each year (up to the A$50K deductible contributions limit). Since I'm not planning on selling off my portfolio in the next year I've decided to prepay 12 months interest on the bulk of my margin loan balances, so that I can take the usual tax deduction this financial year. For my Comsec loan I've sent in the paperwork to prepay $100K out of the $116,612.16 loan balance, at an interest rate of 8.75%. If I have any spare income during the year (eg. from takeovers) I'll pay off the remaining $16K of variable rate loan remaining. I'll also prepay $120K of the $150K loan balance on my Leveraged Equities margin loan before the 30th June.

For the next two years I'll be supplementing my salary income with the $34K I withdrew from my superannuation account. This will allow me to salary sacrifice at a high rate for those two years. After that time I'll look at slowly selling some of my Australian stock portfolio each year to allow me to continue salary sacrifice into our SMSF. If I get enough pay rise in the next couple of years to offset the amount I wish to salary sacrifice, I'll retain the existing stock portfolio holdings until I retire, at which time I'll have a very low assessable income (under the new Simpler Super rules pension income isn't taxed after you turn 60) and I could then sell off a portion of my holding each year without accruing much CGT liability. Until 75 I would still be able to contribute the proceeds into super while drawing a pension. After 75 I wouldn't be able to contribute into my own super, but I could start to contribute any excess funds into the super accounts of DS1 and DS2. Under current rules up to $150K a year of undeducted contributions could go into each of their accounts each year. As they will be in their 30s by that time I don't expect that they would be contributing that much into their super accounts yet.

All this planning assumes that the superannuation tax rules don't change much in the next 30 years - a most unrealistic assumption! This plan will obviously have to be updated as the rules and our financial situation changes over time.

Current holdings:
Leveraged Equities Account (loan balance $150,000.00, value $316,303.73)
stock qty price mkt value margin
AAN 295 $15.22 $4,489.90 70%
AEO 1,405 $2.04 $2,866.20 65%
AGK 510 $15.32 $7,813.20 70%
AMP 735 $10.01 $7,357.35 75%
ANN 480 $12.00 $5,760.00 70%
ANZ 1,107 $28.78 $31,859.46 75%
BHP 748 $31.06 $23,232.88 75%
BSL 781 $11.27 $8,801.87 70%
CDF 6,943 $2.02 $14,024.86 70%
CHB 118 $51.01 $6,019.18 65%
DJS 2,000 $5.13 $10,260.00 65%
FGL 3,751 $6.27 $23,518.77 75%
LLC 481 $19.82 $9,533.42 70%
NAB 316 $42.40 $13,398.40 75%
QAN 2,175 $5.06 $11,005.50 70%
QBE 983 $31.56 $31,023.48 75%
SGM 830 $27.08 $22,476.40 70%
SUN 963 $21.16 $20,377.08 75%
SYB 2,880 $4.37 $12,585.60 70%
TLS 5,000 $4.78 $23,900.00 80%
TLSCA 3,000 $3.31 $9,930.00 80%
VRL 1,500 $3.20 $4,800.00 60%
WDC 783 $20.77 $16,262.91 75%

Comsec Account (loan balance $116,612.16, value $229,848.59)
stock qty price mkt value margin
AGK 240 $15.32 $3,676.80 70%
AAN 139 $15.23 $2,116.97 70%
APA 4,644 $4.22 $19,597.68 70%
ASX 200 $48.39 $9,678.00 70%
CBA 130 $55.03 $7,153.90 75%
CDF 43,997 $2.02 $88,873.94 70%
IPEO 54,000 $0.019 $1,026.00 0%
IPE 8,000 $0.995 $7,960.00 60%
IFL 1,300 $10.25 $13,325.00 60%
LDW 1,350 $7.81 $10,543.50 0%
NCM 300 $21.68 $6,504.00 60%
OST 2,000 $6.52 $13,040.00 70%
QBE 607 $31.60 $19,181.20 75%
RIO 60 $94.55 $5,673.00 75%
THG 4,000 $1.02 $4,080.00 50%
WBC 300 $26.03 $7,809.00 75%
WPL 220 $43.68 $9,609.60 75%


Changes to portfolio since last update:

I sold my Qantas shares on the market for $5.39 on the last day before the takeover offer closed. I guessed correctly that the APA offer would fail to reach the required acceptances to proceed, and over the next few days the QAN share price dropped, as had been expected. However I had expected the price would drop to under $5.00. In fact the stock price has since increased after the Qantas management released an upbeat assessment of their prospects, and is now trading around $5.60. The proceeds of the sale reduced my loan balance below the $150K I had prepaid interest on for this financial year, so Leveraged Equities automatically moved the surplus amount into the linked Cash Management Account so I'm at least getting some interest on this bit of borrowed money.

My AMP holding increased by 15 shares due to a dividend reinvestment. I no longer enrol in DRP for new stocks I buy as there is little if any price discount and the hassles of keeping records for CGT calculation outweighs the benefits. I simply use dividends to help pay the interest on my margin loans.

My QBE holding increased by 17 shares due to a dividend reinvestment.

My SUN holding increased by 113 shares due to a Share Purchase Plan offer I took up.

My SYB holding increased by 32 shares due to a dividend reinvestment. This company is currently subject to a take over offer, which pushed the price up from $3.70 to $4.37. As the offer is a cash plus stock mix I may decide to sell my holding on the market rather than accept the offer.

Is it Better to Invest 100% in Stocks or to Gear a "balanced" Portfolio?

May 29th, 2007 at 09:59 am

I happened to come across the website for

Text is Shearwater Capital and Link is http://www.shearwatercapital.com/portfolios.html
Shearwater Capital the other day. Their investment approach seems sensible and their published fees reasonable, but that isn't what caught my eye. I was more interested in their model portfolios and using the data on the 20-year performance to evaluate the effectiveness of gearing as an investment strategy.

Looking at their "Aggressive" portfolio (80% stocks/20% bonds, which is similar to my target asset allocation) you have a Twenty Years Annualized Return of 12.3% with a Thirty Three-Year Model Annualized Standard Deviation 11.8%. The "Very Aggressive" portfolio (100% stocks) has a Twenty Years Annualized Return of 13.7%, but the Thirty Three-Year Model Annualized Standard Deviation shoots up to 14.6%.

This shows that, as can be expected from modeling of the efficient frontier of a portfolio composed mainly of stock and bonds, the optimum return-risk outcome is achieved from a portfolio comprised mostly of stocks, but with some bonds included. The mix within the stock component is usually around 60% domestic:40% foreign, although in various ten-year periods you would have done better with the opposite ratio (so a 50:50 split may be a good bet).

Moving from the "Aggressive" to "Very Aggressive" asset mix boosted returns by 11.38%, but the "risk" (variability of returns, as measured by the Standard Deviation) increased by 23.73%.

For this reason, if you are seeking higher returns over long time periods, it seems a better strategy to use gearing of an "Agressive" portfolio, rather than moving to a "Very Agressive" portfolio.

Taking the Twenty Years Annualized Return of the "Very Conservative" portfolio (100% bonds) as a proxy for the interest rate cost of gearing (via margin loans or a real-estate backed investment loan such as a HELOC), one can make a rough estimate of the Twenty Years Annualized Return and Thirty Three-Year Model Annualized Standard Deviation that would result from a 100% geared (50% LVR) "Aggressive" portfolio:
20-year 33-year
Annualized Annualized
Return Std Devn
Ungeared "Aggressive" 12.3% 11.8%
Estimated Cost of Loan 5.9% 2.4%
Estimated 100% geared 18.7% 23.6%
Estimated 22% geared 13.7% 14.4%
Ungeared "Very Aggres." 13.7% 14.6%


Using gearing could therefore increase your average returns by 52.03% at the cost of increasing standard deviation by 100%. This is somewhat better than shifting your asset allocation from "Agressive" to "Very Aggressive". However, the absolute "risk" has increased 100% compared to 23.73%, so the strategy of making use of 100% gearing ratios should probably be called "Hyper Aggressive". A more modest use of gearing (say, 22%) would produce similar average return as a "Very Aggressive" asset allocation, but with a slightly lower standard deviation.

It was interesting to see that the returns for the 100% geared "Aggressive" portfolio are very similar to the long-term increase in value of my own investment portfolio. When I started out I didn't use gearing and had a more conservative asset allocation, but this was offset by the relatively large impact my savings had at that stage. These days my savings have a more modest impact on my overall increase.

One final note, when using gearing the cost of funds (interest rate and any annual fees) can have a major impact on the long-term performance of this strategy, so it is worth shopping around.

Text is Enough Wealth and Link is http://enoughwealth.com
Enough Wealth

Get A Perpetual Income Stream for just 3% of Salary

May 28th, 2007 at 03:29 pm

What happens if you save "too much" for your retirement, as a recent MSN Money Article suggested was a possibility following conventional financial planning "rules of thumb" such as the 4% retirement withdrawal rate? Nothing too disasterous it turns out - just an accumulation of wealth and a perpetual income stream for our descendants, and/or a legacy to leave to one's favourite charity.

Plugging some "typical" figures into a retirement savings planner from AMP, it turns out that someone on a reasonable salary of $50K from 20-65, who saved the 9% SGL plus an extra 3% via salary sacrifice would end up with a retirement income of $33,333 that would last well beyond their expected life span - until the ripe old age of 150 years!

Calculator data entered:

Current retirement savings $ 0
Your age now years: 20
Your expected retirement age years: 65
Expected annual contribution increase: 3%
Expected rate of return before retirement: 8%
Expected rate of return after retirement: 7%
Expected annual inflation rate: 3%
Current gross annual salary $ 50,000
Your yearly contribution: $ 0
Your employer's yearly contribution: $ 4,500
Yearly retirement income required (% of current salary): 65%

Output:
Amount saved upon retirement $ 2,217,233 ($ 586,322)
Which would provide the required retirement income of $33,333 until age 94, which is considerably more than the expected life expectancy (81 years for a male).

But wait, just saving an extra 3% of salary each year via salary sacrifice (ie. pre-tax) would result in the following:
Output:
Amount saved upon retirement $ 3,086,723 ($ 816,249 in today's dollars)
Will last almost indefinitely (until over 150!)

Any higher savings rate would result in the retirement account actually accumulating wealth during retirement at a rate greater than 65% of pre-retirement income, so you would leave a perpetual income stream for your descendants.

In reality you're unlikely to get a steady 8% return pre-retirement and 7% during retirement, even if you invest in an asset allocation that is expected to average these rates. Similarly, inflation won't stay at 3%. For these reasons most people will choose to be conservative in their modelling, and the chances are good that you'll end up with an even larger perpetual income stream, plus the ability to draw a larger income stream during your retirement years.

Enough Wealth

Surrounded by Million-dollar Suburbs

May 27th, 2007 at 02:27 pm

The area in which we have both our home and our investment property (coloured green in the diagram below (adapted from a recent

Text is SMH article and Link is http://www.smh.com.au/news/national/march-of-the-milliondollar-suburbs/2007/05/25/1179601676958.html
SMH article) is surrounded by suburbs where the average house price is now over A$1m. This is quite reassuring as in Sydney it seems that the higher-priced suburbs have been the most resilient in the recent property downturn, and over time experience the greatest gains. Apparently while it is hard for the average worker in Sydney to afford a house with average prices approaching the half-million dollar mark, executives working for investment banks are awash with cash and snapping up any multi-million-dollar houses that come up for sale.



Text is Enough Wealth and Link is http://enoughwealth.com
Enough Wealth

Contented Retirement is a State of Mind

May 26th, 2007 at 05:06 pm

Canadian Financial Stuff has a post Retirement? Not Likely for me that seems to suggest that only the baby boomer generation will be lucky enough to get to enjoy a real "retirement". I must admit that I think this view comes from a perception that most modern consumers combine of lack of taking ownership for their own retirement funding with an inflated expectation of what lifestyle retirement should offer them. From personal experience "retirement" has been enjoyed by most people in the developed countries for the past couple of generations, and isn't about to disappear for anyone that makes a serious effort during their working lives to fund their retirement years:

My grandfather was a plumber, retired at 65 and lived on the UK government pension until he died at age 92 - 27 years of "retirement".

My father was an pilot, retired at 58 and lives as a self-funded retiree. He's 75 and going strong - so far 17 years in "retirement".

I'm a scientist/middle manager, and will probably be able to "retire" any time after 58, though I'll probably choose to work 'til 65 or 70, and then spend my time managing my investments. Hopefully I get to spend 20-30 years in retirement.

My kids already have retirement funds setup by me, and adding a thousand dollars a year into their accounts from birth until 18 will mean they're very likely to be able to "retire" any time after 58 that they choose, without having to sock too much away during their working lives. I've no idea how long they'll spend retired. Advances in health care may extend their healthy lifespan so much that retirement is postponed indefinitely by choice. Adding just a few extra years to your working life makes it MUCH easier to accumulate enough for a very comfortable retirement lifestyle - just compare the results you get from any retirement calculator with a retirement age of 60 vs. 65 or 70...

I think the only thing stopping many people in the current and future generations in the developed world from having a comfortable retirement will be "consumption inflation". Like locusts many modern consumers gorge on current consumption and put nothing aside for their own retirement.

Another aspect is that people these days often aim for a "lifestyle of the rich and famous" in their retirement. In my grandparents day all you needed for a "comfortable" retirement was a one bedroom house with a roof that didn't leak, enough money for food and utilities, and membership of the local library and church. Throw in a radio and a small garden to tend and they were more than happy. These days this existence would be labelled as living "below the poverty line"!

Text is Enough Wealth and Link is http://enoughwealth.com
Enough Wealth

Frugal living: Computer Games

May 26th, 2007 at 02:44 pm

Yesterday I discussed saving money by buying good quality, used computer hardware. Computer software is another area where there is a huge saving to be made by not buying the latest and best. Today I bought three computer games for my new PC - Doom III, European Air War and Lords of the Realm III. As these originally came out several years ago, they were available brand new from the store for prices of $5, $10 and $20. Two of them work just fine under Vista, although European Air War had a glitch with the mouse when running, so I'll have to check if there's a patch available. Overall, these are still great fun, and I can't see the point of buying the latest releases that are on sale for $70 or more.

Text is Enough Wealth and Link is http://enoughwealth.com
Enough Wealth

Frugal Living: Computers

May 25th, 2007 at 01:29 pm

After yesterday's fiasco trying to get a clearance sale 17" LCD monitor from DSE, today I decided to check the yellow pages for suppliers of used computer equipment. There was one located close to our home, so I called them to check on prices for 2nd hand monitors. They quoted $20 for a 17" CRT, $50 for a 15" LCD and $90 for a 17" LCD. They only had a CRT in stock, so I decided to pick that one up at lunch time and drop it off home for DS1 to be able to use his old PC again over the weekend, while he's still very enthusiastic working through the Kid's programming tutorial in QBasic.

Although the CRT was ex-lease, it was in excellent condition and the picture quality is superb. As his PC is located on a PC workstation unit there is plenty of room for the CRT on top of the computer, so an LCD really wouldn't have been any advantage. I asked the supplier to contact me when an LCD screen does become available, as I'd still like to add a second screen to my Dell PC in my loungeroom, so I can track CFD trading on the small screen while playing games or browsing the pf blogs on the main screen.

They also have ex-lease computer systems available from time to time, so I'll eventually pick up a "new" 2nd-hand PC for DS1 to use when he's getting towards high school age. Although I've been guilty in the past of buying bleeding-edge technology and paying top dollar for the latest computer gear, it's really much more sensible to buy ex-lease equipment in good condition that is only a couple of years old.

Text is Enough Wealth and Link is http://enoughwealth.com
Enough Wealth