My First Professional Salary

Back in 1989 I got my first full-time professional job after I completed my master's degree. The salary was initially £10,500 p.a. I was a property market researcher/analyst. At a rough guess that would translate to about £18-19k today. At today's exchange rate that would be around AUD 28k p.a. which is about the minimum wage in Australia. Does this mean that I was really badly paid? Or that economic growth has resulted in all wages rising in real terms? Or that the Australian Dollar is really over-valued at the moment? Or have I underestimated inflation?

I don't think I was really badly paid as that was roughly the amount that a government department was willing to pay me at the time. I soon got a rise though to £12,500 p.a. when I found out that one of my colleagues was earning that higher amount while doing the same job. That's the reason that private employers don't like people to discuss salary. I've assumed an average of 2.7% p.a. of inflation. So I think it is a bit of a mixture of the effects of economic growth and the overvaluation of the AUD when I look at current UK salaries.

In my new job my salary will be AUD 144k. It's a pretty crazy number when translated into Sterling (£95k). Though I'm only at mid-career I don't think I will earn much more than this in real terms for the rest of my career, though there are a couple of pay points above this level on the academic pay scale. The only ways up would be to either go into a very high level admin role in the public sector, switch to private industry or get a similar job at a top US private university. I'm not at all keen on the first and doubt the latter is going to happen. At the moment, I'm not interested in the middle option either unless it was for a limited period of time.

But actually it is pretty typical for salary to peak at this point in life. People with a high level of education typical plateau from here on while this is the summit for people with lower levels of education.

Health Insurance

In Australia, individuals who earn more than $A75k a year and households who earn more than $A150k per year need to pay an extra 1% of tax on their total income if they don't have private health insurance. Assuming my new job all works out as planned we'll need the insurance to avoid about $A2,200 in extra tax (1% of our joint income). I'm thinking about this already because the new financial year here is about to start on 1 July. I quickly looked up a quote calculator online and found that taking into account the 30% rebate offered by the Federal Government we could get health insurance for $A1,800 year though it doesn't cover much. For example, if you need to go to hospital you have to pay $A500 out of pocket. I need to understand a bit more about how this works and how it interacts with the government's Medicare service. Does this really pay off? Or does it add more complications for not much gain? Or would it be worth it even if it cost more than $A2,200? I don't know the answers at this stage.

Job Offer

I got an offer of a continuing/permanent job. It's only an informal offer at this stage but a formal offer is guaranteed pretty much. We don't have to move either. Let alone to Cloud Cuckoo Land :)

New Watch

The bracelet on my old watch kept breaking - it was made of aluminium - getting it fixed cost $5 a time. So I gave up and bought a new watch made of steel instead. Both are Swiss watches - the new one was AUD 265, which is a bit more than twice what the old one would cost now (it was a metal Swatch). The new one is pictured here. I guess this is my take on frugality. I don't buy a new thing until the old one is effectively bust but I'm happy to spend a decent amount of money to get something of reasonable quality. I don't care at all what other people think of it, that's not a motivation at all. I'm only mentioning the latter because some personal finance blogs seem to argue that that is almost always the motivation to spend more than the minimum possible.

North Korea, Not Really

Been trying to book a trip to visit the DMZ/JSA while I'm in Korea. I was too late for the USO tour. So now I'm trying with this operator. Chris Guillebeau says he can claim to have been in North Korea because he visited the JSA, so I think I will too :) He will try to visit North Korea for real later in his attempt to visit all countries in the world before his 35th birthday. But if he doesn't manage that he'll count this trip. I could claim I've been to Egypt (I was in an Israeli controlled area that is no longer controlled by Israel), Palestine (ditto, but then Palestine probably isn't on Chris' list either as it is not a UN recognised state), Syria (still under Israeli control)... *

Anyway, I have just been invited to a very real country I haven't been to - India - but don't know if I'll go, given my heavy travel schedule already.

Monday, I have another job interview. My chances are very high, but I could still blow it.

* My real list of countries so far: Canada, USA, Mexico, Ireland, UK, France, Belgium, Netherlands, Denmark, Sweden, Germany, Switzerland, Italy, Vatican (that's a stretch as a real country), Austria, Hungary (only at the airport), Tunisia, Greece, Israel, Thailand, Singapore, Malaysia, Australia, China, and Hong Kong (is that really a country too?).

Further Portfolio Changes

Following up on the post on changes to my Mom's portfolio. The bank suggested some more investments. Two funds of REITs:

UBS Global Real Estate Securities. This fund is very new and as far as I could work out has an expense ratio of 1.92%. As there isn't much of a track record one can't know if the high expense ratio is worthwhile. So I passed on this one.

AXA WF Frm Europe Real Estate. This fund also invests in REITs and has a high expense ratio but its track record shows that it has outperformed the relative index with less volatility. So I am recommending to invest in this one.

Then they recommended a bunch of long-only commodity funds. I do like the look of a UBS CMCI Composite Index fund. It invests in futures across a wide range of commodity markets and of different maturities. The track record is good relative to conventional indices and the expense ratio is low. This is a risky bet, so we won't bet much on this.

Bottom line is I am now recommending these two funds, as well as the convertible bond fund and the UK equity fund I discussed last time and GTAA and CHN. As a result, we won't invest all the available cash right away. The AXA fund is the only slightly attractive real estate investment I've come across through this process, so we won't go big into real estate. If we make these moves the cumulative effect on the portfolio will be:



A large move out of cash and a smaller one out of bonds and into mainly non-US equities, commodities, and real estate. This moves the portfolio closer to typical endowment style portfolios.

Non-Retirement Savings

Following on from yesterday's post on retirement savings, here is the chart of our non-retirement savings:



Again, it's not adjusted for inflation and does not include any investment returns or losses and is in Australian Dollars. These savings differ in several ways from our retirement savings:

1. It's much more volatile. Not only does the positive scale cover twice the distance there are also negative numbers - dissaving. The same overall ups and downs are apparent though.

2. In yesterday's post I found our current retirement savings were not a lot higher than in various periods in the past. Here we see that 2003-2007 and 2009-2011 have a higher rate of saving than the 1990s.

The biggest period of dissaving was when I didn't have a job in 2001-2. I was travelling a lot and then I moved to the US. Together with the stock market crash this really depleted my net worth at the time. I was down to AUD 36k outside retirement accounts at the worst point. The all time peak monthly saving that immediately preceded this period was the redundancy payout I got when my job ended.

The more recent two big negative spikes are in 2007 out move to Australia and in 2010 booking our trip to Europe. We got some comments then about how we shouldn't spend beyond our means. As you can see from the chart, though our saving did dip during this period, the 12 month moving average never dipped below $1400 per month. So I think these expenditures were definitely something we could afford.

In 2008 we did hit negative saving briefly. But we are just able to live on one income.

Retirement Savings Over the Years

I was curious how our current retirement saving rate compared to past years. Digging into my account spreadsheets I came up with this. This is just contributions. It doesn't include investment gains or losses. The bars are the monthly amounts in Australian Dollars. They're not adjusted for inflation. The dark green line is the 12 month moving average.

The first few years I was in a steady job in Australia and the contributions are very consistent with a slight upward trend. Then I was unemployed for a while and there are no contributions. I moved to the US and the amounts now fluctuate more, partly because of changes in the exchange rate (I was now paid in USD but the chart is in AUD) and partly because of various extra earnings I made, typically in the summers when professors in the US can make extra money typically. In the final year there are consistently higher levels. I decided to max out my 403b contributions in this period plus I open a Roth IRA.

Then in 2007 I merged my accounting with Snork Maiden and we moved to Australia. For the first year or so after that the contributions are all Snork Maiden's alone. Then we both had jobs and the rate rises to $2,000-$3,000 a month. Following that there are another several months of contributions from just Snork Maiden and finally the last 5 months of around $2,500 a month as we were both working again.

The two of us together though are only managing to contribute what I contributed when I maxed out my 403b in 2007. The Australian Dollar was not that weak in that period (about 82 US cents, so that doesn't explain it). And back in the 1990s I managed to make more retirement savings myself in Australia than Snork Maiden on her own now. Certainly, when adjusted for inflation that is the case.

Next time, we'll look at non-retirement savings.

Credit Suisse Broad Hedge Fund Index: May 2011

The broad Credit Suisse/Dow Jones Hedge Fund Index did not perform as badly as the more narrow indices in May:

Exchange Traded Actively Managed Funds - the Big Deal is that Foreign Investors Can Buy Them

This Wall Street Journal article goes on about how an exchange traded managed fund like the proposed PIMCO Total Return ETF is not big deal. It is, however, a big deal to foreign investors. Only US residents can buy units in unlisted US mutual funds. But anyone can buy US stocks in the secondary market. It would be nice if there were more of these.

Early Hedge Fund Report: May 2011

According to the Credit Suisse/Dow Jones Core Index, hedge funds performed almost as badly as stocks in May:



The MSCI World Index lost 2.06% by comparison. Managed futures almost exactly reversed the previous month's gain and everything else went down too. The story was very similar at HFRX:



The flash update of the HFRI monthly indices shows a little more green still in come fixed income strategies.

How Much Money Do You Need for Retirement?

I went to a seminar by our superannuation (retirement fund) provider at my employer today. The presenter referenced a recent Australian survey that tried to define how much income retirees need based on surveying actual retirees. They found that for a "comfortable" retirement a couple need after tax $A54k ($US58k) per year after tax, assuming that they own a house 100%. In Australia there is no tax on retirement accounts once they are in pay out mode after age 60 and so the before and after tax numbers are the same. The presenter said: "That means you need $1 million. If you want to take a bit more risk or run down your capital then you could get away with less than that." The article I linked above says you need $A815k to provide that level of income. The presenter at today's seminar was assuming a withdrawal rate of 5.4% p.a. and the article is assuming 6.6%. But it is a well-known rule of thumb that 4% of the initial amount (adjusted upwards over time by inflation) is the most you can withdraw annually without risking running out of money. And that rate assumes a moderate amount of risk (like 60% stocks and 40% bonds). Also, the advice by the presenter today made no allowance for inflation between now and the date you retire (the linked article does note that the $A815k is in today's money).
Why is this dangerous advice being given out in Australia?

Based on current expenditure we could live OK on less than $A54k a year if we didn't pay rent. $A42k would be enough - halfway between the modest and comfortable levels. But then there are property taxes and house maintenance so we can't just take our rent away to find the comparable number. So I think $50k a year is a reasonable number. But to find the required net worth you need to multiply by 25 and then adjust for inflation. If I retired at age 60 and prices rise by 3% p.a. between now and then I will need 51% more capital than now. The lump sum I get is $A1.89 million + a house. A house costs currently about $A700k near where we live. Adding the same inflation adjustment to the house gives a total required net worth of $A2.9 million ($US3.2 million) in 2024.

Something I learned which I didn't know about the tax rules for Australian Superannuation. If a non-dependent (not spouse or child under 18) inherits your superannuation account they will have to pay 15% tax on funds derived from concessional contributions (contributions taxed at 15% from pre-tax income) but no tax on non-concessional contributions (contributions from after tax income). I knew that tax could be payable in these circumstances but didn't know the details. This is a reason that you don't want your superannuation to be paid to your "estate" in the case of your death. 15% tax will be charged on the concessional contributions.

Outrageous Offer for EAIT Shares

Holders of units in the EAIT fund of hedge funds recently received an offer to buy their shares for $0.70 a share:

As you can see, the units are currently valued at $1.37 each. The units are not liquid because the underlying hedge funds have lock-up periods. Even if the value of the underlying funds does not increase until we receive our distributions you'd need a pretty high discount rate to accept this offer. Of course, I won't be doing so.

Buying a Few Shares

On Friday I bought about 5000 shares in Platinum Capital (PMC.AX) at $1.21 which is close to the net asset value. Usually this closed-end fund trades at a premium to NAV, so seemed a good idea. I probably will buy some shares in my US account too in the near future. When I buy shares it isn't direct saving, of course, as I use a margin loan and then gradually pay down the margin loan with savings afterwards.

We continue to put $A1,000 into each of our accounts with Colonial First State here in Australia each month as well as investing in our superannuation on top of the employer contribution. Snork Maiden adds $A225 every two weeks and I add $A431 (my salary is higher and my employer only contributes 9% of salary (the legal minimum) whereas her's contributes 15.4%). On top of that I added another $A2,000 to Snork Maiden's account last month.

More Adjustment to my Mom's Portfolio

We have now made a bunch of moves in my Mom-s portfolio. First we sold down two bond funds and increased our investment in the Man-AHL diversified futures fund. And we moved £100k to her home country and invested in a bunch of stuff there. That reduced the allocation to Sterling investments. But we still have a lot of money left over from the bond sales.

The bank suggested various funds including some Swiss real estate funds (including this one), the Jefferies Global Convertible Bond Fund, a UK stock fund, and a fund invested in the Rogers Commodity Index. I don't feel like taking a long only bet on oil and other commodities (Rogers is 40% petroleum) and the problem with the Swiss real estate funds was that they are very concentrated on residential property in Zurich and are trading at around a 25% premium to NAV. So I ruled all of these out. But I think we will invest some money in the other two funds. Convertible bonds are interesting because they provide some potential inflation protection compared to a regular bond by being potentially convertible to equity.

I have now suggested to invest the rest in ETFs and closed end exchange traded funds. As an investment in real estate I propose VNQ and DRW. VNQ is a US REIT ETF managed by Vanguard, which means it has a lower management expense ratio than other funds. DRW is a non-US fund from Wisdom Tree which is based on a dividend weighted index. It seems to be the best performer of various international REIT ETFs I checked out. I think we should increase our overall exposure to stocks and particularly to Asian and emerging market stocks, where we are probably underweight. So I'm recommending VWO and DGS- again one Vanguard and one Wisdom Tree fund. Finally, two stocks that I own personally - GTAA and CHN (The China Fund). I think these are two well-managed actively managed funds.

Another asset class that isn't in the portfolio is private equity, but it is a challenging asset class to invest in as a small investor in an effective way. I personally own shares in Leucadia National (LUK) and 3i (III.L), which I think are somewhat better than average exchange traded approximations to this asset class. I'm not impressed by the available ETFs, which I did just check out. So, I think we'll pass on this for now.

When we have all these changes in place I plan to report back on how we have transformed the portfolio. One result is that it is more similar to typical endowment and pension fund portfolios, which has been my long-term goal here.

Moominvalley May 2011 Report

As usual everything is in USD. The AUD fell for a change to 106.6 US cents from 109.4 US cents. This reduced our returns in USD terms and increased them in AUD terms. World stock markets fell a little in USD terms with the MSCI World Index losing 2.06% for the month. Here is the summary account for May:



As you can see about a third of the investment loss in USD terms was because of the rise in the US Dollar. Expenditure was $7,753 because we spent about $A2,500 on a plane ticket to China for Snork Maiden. We spent about $A4,700 not counting the ticket which is OK. Net worth fell in USD terms by $24k (fell by $A9k in AUD terms) to $551k ($A517k). The rate of return was -5.27% in USD terms strongly underperforming the market. The return was -3.39% in currency neutral terms, and -2.80% in AUD terms. Almost all asset classes lost money with a particularly strong decline in private equity. allocation saw a small increase in private equity due to gains in OCP.AX. and a small reduction in Australian stocks due to market movements. Investment allocation saw a decline cash as well as large cap Australian stocks and private equity due to market movements and a shift towards all other asset classes.

Moominmama Portfolio Performance May 2011

Lot of moves this month reflected in these figures. World stock markets fell and the US Dollar rose negatively affecting Moominmama's returns and the portfolio fell by 2% in value. We increased the allocation to bonds again by transferring Sterling currency and converting it into the local currency and buying into four separate local bond funds and a balanced local bond fund. Also a local stock fund invested in European shares (my brother did all this). Some of these bonds are inflation-linked and some not. Some are short term, I don't know if any are long term. This is really the living/emergency fund for my mother. We also increased our investment in the Man-AHL managed futures fund by about 150%. As a result with have a lower allocation to both Sterling and Dollar cash this month than less. The local real estate market is very strong and so we uprated the value of Moominmama's apartment by 19%. At $276k it is still a bargain by Australian standards :). It is still cheaper than Snork Maiden's parents' apartment, though theirs is bigger but they live in a supposedly much poorer country which has really crazy real estate prices.

I noticed that the UBS A&Q hedge fund that we bought early in the financial crisis in April 2008 is finally worth more than we paid for it. We also bought a UBS agribusiness certificate which is almost back to its purchase value. It more than halved at the worst point in November 2008. The hedge fund never lost more than a quarter of its value.