Sunday, July 13, 2008

June 2008 Report

This was the worst month since the 2000-02 bear market performancewise and in terms of absolute dollar loss of net worth the worst ever.

The MSCI index matched its January performance (-8.18%), but this time we underperformed the market on a risk-adjusted basis. In the chart, month's above the red line have risk adjusted excess returns, while those above the blue line have above average risk adjusted returns:

And July is not shaping up very well either yet. (Lack of) progress on meeting our annual goals is assessed in the first part of this report. Other statistics appear towards the end of the report. All amounts are in U.S. Dollars unless otherwise stated.

1. Net Worth Goal: Reaching $505k In US Dollars we fell back $48,878 to $433,409, while in Australian Dollars we lost $A51,751 to decline to $A453,262. We are down on the year so progress on this goal is very negative. I'm lowering the goal again to $500,000.

2. Alpha Goal: Alpha of 8.5% The point of this goal is to earn at least an average wage from risk-adjusted excess returns. Using my preferred time-series method our returns had a beta of 1.12 and an alpha of 7.02% with respect to the MSCI World index, which lags our annual goal. The risk adjusted excess return for June based on this analysis was -1.05%. Multiplying this by net worth gives a loss of $4,814. For the year so far the risk-adjusted excess return in dollar terms has been $21,508. Using the estimate of alpha the smoothed annual income is $32,129. In Australian Dollars terms returns are somewhat lower, while they are higher using the S&P 500 as a benchmark.

3. Increasing Non-Retirement Net Worth by More than the MSCI Index The point of this goal is to make sure that we only spend out of non-investment income and excess returns and don't use the normal market return on investments to fund spending. In other words, this makes sure we have positive saving. So far this year these accounts have grown by 1.97% in excess of the MSCI return.

4. Achieving Break-Even on U.S. Taxable Accounts After reaching this goal in May we fell back steeply this month. At the end of the month we were $8,861 below the breakeven point with a loss of $9,613 for the month. The rate of return on these accounts was -11.39%.

5. Make at Least $15,000 from Trading Realised gains this month were $231 and so far this year $3,873. I've now had five positive months in a row, which is a record. I doubt July will be positive. I'm lowering the goal to $10,000.

Background Statistics

Income and Expenditure

Investment Performance

Investment return in US Dollars was -10.24% vs. a 8.18% loss in the MSCI (Gross) All Country World Index, which I use as my overall benchmark and a 8.43% loss in the S&P 500 total return index. Returns in Australian Dollars and currency neutral terms were almost identical as the AUD hardly moved over the month. So far this year we have lost 5.43%, while the MSCI and S&P 500 have lost 10.41% and 11.91%, respectively. Over the last 12 months we lost 5.18% while the MSCI lost 8.79% and the SPX 13.12%.

Asset Allocation

Allocation was 43% in "passive alpha", 69% in "beta", 4% allocated to trading, 10% to industrial stocks, 6% to liquidity, 3% to other assets and we were borrowing 35%. Our currency exposures were roughly 57% Australian Dollar, 20% US Dollar, and 23% Other and Global. In terms of asset classes, the distribution was:

Due to the use of leveraged funds, our actual exposure to stocks was 119% of net worth.

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