Annual Report 2024

We are still waiting for the Aura venture funds to report, but I am guessing their values will be unchanged. So, now we can compute reasonably accurate annual accounts. All $ signs in this report indicate Australian Dollars. I'll do a separate report on individual investments. I do a report breaking down spending after the end of the financial year. I'll probably do another report on our SMSF performance then.

Overview 

Investment returns were positive and net worth again increased. We did a lot better than in 2023. This was a direct result of my dis-satisfaction with the 2023 result and my determination to do better. We came in way ahead of the best case net worth projection I made in the 2023 report of $6.7 million with an end of year total of $7.4 million. We took a vacation in Maroochydore, Queensland in July and in December we travelled overseas for the first time since before the pandemic to China and Thailand. I did some short business trips to Sydney during the year as well. My 60th birthday was in December and I started a transition to retirement pension in that month.

Investment Return

In Australian Dollar terms we gained 23.1% for the year while in USD terms we gained 12.1%. The big gap is because the Australian Dollar fell. The MSCI gained 18.0% and the S&P 500 25.0% in USD terms while the ASX 200 gained 13.2% in AUD terms. The HFRI hedge fund index gained 9.6% in USD terms. Our target portfolio gained 19.2% in AUD terms. The new Vanguard 60/40 AUD benchmark only returned 12.4%. So, we under-performed the US Dollar stock indices but outperformed the other benchmarks. 

This chart compares our portfolio to the benchmarks in Australian Dollar terms over the year:

 

I can be happy with this. Beating US tech stocks is hard! The following chart shows monthly returns in Australian Dollar terms:

 

This shows that our out-performance mainly came towards the end of the year. We beat the target portfolio in seven of the twelve months and the 60/40 portfolio in eight of the months.

 

Here are our annualized returns over various standard periods:

 

There is a big improvement over last year. We beat the ASX 200, HFRI, the target portfolio, and the 60/40 portfolio over the last 5 years. We also beat HFRI over the longer time horizons and are close to the target return over 10 years. But we performed much worse than the US stock indices over all time horizons and the ASX 200 and the target portfolio over the 20 year time horizon. The positive news is that our performance is better in the last 10 years than in the previous 10 years. Though not shown here, we also match the target performance over the last 15 years since the GFC. As a result, I have begun to use the returns of the target portfolio over 20 years to project our future returns. I lost big in the GFC due to using too much leverage. I now use only 10-15% leverage and much of that is our mortgage.

Here are the investment returns and contributions of each asset class in 2024 in currency neutral and unlevered terms:

 

The contributions to return from each asset class sum to the total portfolio return. The portfolio shares are at the beginning of the year. Rest of the world stocks did best, because of the performance of Defi Technologies, followed by futures, which includes bitcoin, and gold. These three also made the largest contributions to the total return. All asset classes had positive returns but real assets, private equity, and hedge funds did not perform that well despite some strong individual performers in those asset classes.

Investment Allocation

There were significant changes in asset allocation over the year:

 

Cash, futures, and rest of the world stocks increased their shares, while hedge funds, Australian small cap, US stocks, and bonds reduced their shares by quite a lot. Other asset classes changed their shares by 1% or less.

Accounts

Here are our annual accounts in Australian Dollars: 

Percentage changes are for the total numbers. There are lots of quirks in the way I compute the accounts, which have gradually evolved over time. There is an explanation at the end of this post. 

We earned $208k after tax in salary etc. Total non-investment earnings including retirement contributions were $240k, up 14% on 2022. I'm quite surprised by that increase! Part of it seems to be from timing of payments as well as larger tax refunds.

 

We gained (pre-tax including unrealized capital gains) $577k on non-retirement account investments. A chunk of the gains were due to the fall in the Australian Dollar (forex). We gained $562k on retirement accounts with $32k in employer retirement contributions. The value of our house is estimated to have risen by $51k. As a result, investment gains totaled $1.194M and total income $1.435M.

 

Total spending (doesn't include mortgage payments, life insurance, margin interest etc.) of $169k is up 13% on last year. Again, I am surprised by the size of the increase. Our spending including mortgage interest (but not principal repayments) seems to be up by only 5%. We did reduce our mortgage interest a lot by increasing the cash in our offset account.

 

$20k of the current pre-tax investment income was tax credits – we don't actually get that money so we need to deduct it to get to the change in net worth. We saved $38k from salaries etc. before making contributions of $26k to the SMSF. I also record an $8k "inheritance", which are gifts we received, mostly on our trip to China. Current net worth increased by $577k.

Taxes on superannuation returns are just estimated because, though we know the tax paid by the SMSF, our employer superannuation funds only report after tax returns. I estimate this tax to make retirement and non-retirement investment returns comparable. The total estimated tax on superannuation was $20k. Net worth of retirement accounts increased by $600k after the transfer from current savings. With the gain in the value of our house, total net worth increased by $1.228M.

Projections

Last year my best case scenario for 2024 was for an increase in net worth of $500k to $6.7 million. We actually reached $7.4 million. For this year, my base case scenario is simply a 10% increase in net worth to $8.2 million. The bear case is for a 10% decline to $6.7 million. In 2022, our net worth only fell by 0.7%, so this is very bearish. What about the best case scenario? This is going to seem crazy but I project double the percentage increase of 2024 for a net worth of $10 million. Told you it was crazy.

Notes to the Accounts

Current account includes everything that is not related to retirement accounts and housing account income and spending. Then the other two are fairly self-explanatory. However, property taxes etc. are included in the current account. Since we notionally converted the mortgage to an investment loan, mortgage interest is counted in current investment costs. So, the only item in the housing account now is increases or decreases in the value of our house. This simplified the accounts a lot but I still keep a lot of cells in the spreadsheet that might again be used in the future.

 

Current other income is reported after tax, while investment income is reported pre-tax. Net tax on investment income then gets subtracted from current income as our annual tax refund or extra payment gets included there. Retirement investment income gets reported pre-tax too while retirement contributions are after tax. For retirement accounts, "tax credits" is the imputed tax on investment earnings which is used to compute pre-tax earnings from the actual received amounts. For non-retirement accounts, "tax credits" are actual franking credits received on Australian dividends and the tax withheld on foreign investment income. Both of these are included in the pre-tax earning but are not actually received month to month as cash.... 

 

For current accounts "core expenditure" takes out business expenses that will be refunded by our employers and some one-off expenditures. This year, I didn't bother to note these, which amounted to about $1,000. "Saving" is the difference between "other income" net of transfers to other columns and spending in that column, while "change in net worth" also includes the investment income.