Get Done What You Want to Do Now

I just heard that Steve Jobs died at age 56. I felt sad but my immediate thoughts were that he got on with doing the big things he wanted to do and it's good he did because he died relatively young. I've often commented (in contrast to some but not all personal finance bloggers) on not worrying too much about saving for retirement over more immediate life goals and not putting off dreams until you "retire". This just reinforces it. Also in the news is the Nobel Prize in Physics awarded to ANU astronomer Brian Schmidt (and two Americans). He is just over two years younger than me and the key paper that won the prize was published in 1998 when he was just 31. Of course, this is the advice that Steve Jobs himself gave in his graduation address at Stanford.

Moominmama Portfolio Performance September 2011

The portfolio got slammed this month by a double whammy - stock markets fell with the MSCI World Index falling 9.4% and the US Dollar rose sharply with the Euro falling more than 9% and other currencies by smaller amounts. The loss was 6.55%. The least badly performing areas were hedge funds and commodities. The Man/AHL managed futures fund actually gained just under 1%.

Google Plus

Google finally opened Google Plus to anyone who wants to join rather than by invitation only. So I joined to see what it was about. I get this one even less than Facebook so far. It invites me to add names to circles, but I get no indication of whether people I know are already on Google Plus. I'm mystified. I guess I'm "doing it wrong". Any enlightenment?

Rome

I was just invited to come and talk in Rome. But I turned it down. I think I will have done enough traveling for the year and I don't feel particularly expert in the specifics that they are interested in. I don't see it adding a lot professionally in other ways. It's more like a training session for the participants (from developing countries) from what I can understand. It's a pity because I like Rome and I have a friend I could visit there and even in theory visit family from there. But that's a big trip and would take me away from Snork Maiden for a long time and she isn't very keen on that. So, I think I'll stay home this time. I expect only to get more such invites in the future.

Consulting

How much should I charge as a consultant? My employer allows us to spend 20% of our time on consulting. So I figure I should take my salary + employer retirement contributions and divide by 4*52 days to work out a daily rate. And add on any expenses too, of course. Snork Maiden thinks that is too low. And it seems to be lower than what one of my colleagues quoted. I'm not really interested in making money from this project but more about developing a long-term relationship with the client which would be valuable in terms of science and policy impact. I wouldn't really spend time consulting for a purely commercial client as I think we don't need the money. Unless they offered a really large amount of money of course :)

Four Years in Australia

We arrived in Australia four years ago today. From today Snork Maiden can apply for Australian citizenship, though now she doesn't seem to be in so much of a hurry to do that now. She just got a visa to visit the US (Australian citizens don't need visas) so won't bother with the citizenship until getting back from the US. We're still living in the same apartment as we were when we got here. We're now earning a lot more money but our net worth is about the same due to the financial crisis that intervened. I got a permanent job though Snork Maiden hasn't yet. There is still plenty of demand to hire her on a temporary basis for the next couple of years. But she hasn't looked for a permanent position outside her current employer and they are taking their time. Lots else has happened in the last four years too. We got married. We've travelled to Europe and Asia and around Australia. We've had people come visit here...

Cambria to Offer More Actively Managed ETFs

Cambria manages the GTAA ETF. Manager Mebane Faber also writes an interesting blog. Now they have filed with the SEC to offer more ETFs.

Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work

A recent paper by Wade Pfau really overturns some standard ideas about retirement planning. The usual story includes picking a "number", planning how much you need to save to get to the number and starting early with saving in order to benefit from compounding interest. This table from the paper:



shows what percentage of final retirement assets could be explained by accumulated wealth a given number of years before retirement for a bond-stock portfolio simulated over the last century or so for the US. Even with an all bond portfolio only 43% of final wealth could be explained by accumulated assets 10 years from retirement. For stock oriented portfolios very little of the variation could be explained. It's all down to the luck of the market returns in the final 10 years. So tracking net worth doesn't really help much in telling you how much you'll have to retire on after all... Early compounding doesn't make much difference because there isn't much wealth to benefit from compounding.

So what does Pfau recommend? Calculating a minimum safe savings rate based on age, accumulated assets, and allocation. For someone of 55 years old who has saved 4 times their salary and wants to replace 50% of their salary and retire in 10 years and has 60% in stocks, the minimum safe savings rate is 52% of income! For a 50% chance of success of achieving a sustainable retirement only an 18.2% savings rate is needed. Having more wealth earlier does help reduce these rates. Not because of compounding but just in terms of piling up more savings. There are more analyses in the paper of the effect of retiring later etc.

Superannuation Trends

This is a graph of our three Australian superannuation (retirement accounts). The green is Snork Maiden who has now been working for four years and accumulated $A50k. The blue is my current account where I worked one part-time job in 2009-2010 and then a full time job from the beginning of 2011 and accumulated about half as much. The red is the account from when I worked in Australia previously that is heavily invested in Australian stocks. So it fluctuated dramatically through the GFC and the recent market correction. The accounts that are currently accumulating were little affected by market fluctuations. They are also much more diversified.

How Much Money Should You Give as a Present if You are Invited to a Wedding?

If you ever wondered how much money to give as a gift at a wedding, there is an "app" for that if the wedding happens to be in Israel. Unfortunately the link is in Hebrew (I can read it...). I wonder if there are similar sites for other countries?

Snork Maiden said that in China RMB 1000-2000 would be expected, which sounds like a lot of money to me as RMB 2000 could be a month's wages for a factory worker or even a new graduate.

Moominvalley August 2011 Report

Six losing months in a row now... The accounts for the month look like this in USD terms:



Non-investment income was very high as was spending. This was a triple pay month - we get paid every two weeks as is the norm in Australia and every few months there is a month with three payments. Also my pay rose as I took on my new position.

But in USD terms we lost 7.25% this month against an MSCI World Index loss of 7.26%. We're now down 9.31% for the year in USD terms while the MSCI has lost 4.19% for the year so far. The Australian Dollar fell back a little to USD 1.07 and so Australian Dollar returns were "only" -4.67%.

Expenditure was very high at $9,743. But a third of this was another long haul plane ticket I bought which I should be reimbursed for (I still need to be reimbursed for my trip to India). Core expenditure was still high. There was about $1000 of medical and dental expenses. We'll get reimbursed about $200 for those.

As a result net worth fell USD 27k to USD 520k and fell AUD 11k to AUD 487k. Due to buying shares asset allocation was pretty much unchanged for the month as stocks fell.

Was There a Lost Decade?

An interesting article in the NY Times about whether investors should have had a lost decade - losing money over the last ten years or for the first decade of the 21st Century. The author argues that if you were properly diversified then you wouldn't have lost money. So I decided to check it out based on the data I have collected. I have been keeping accounts and returns on investment in a spreadsheet since 1996, so I have several years of data shown in the graph above. As at the end of last year the S&P 500 had a very meagre positive return over the previous decade. It's a little better now because it is coming off a lower base in 2001 in the tech crash. After inflation you would have lost money investing in the index. The MSCI World Index though had a return of 3.07% and would have about broken even after inflation. I was a little ahead with 4.31%. Right now I'm at 4.57%, MSCI at 3.77% and the S&P500 at 1.52%. So the author's point about diversification holds up. Back in the depths of the GFC all three were losing money. If you had a lot of relatively safe bonds you might have been above water. Not if you had a lot of Australian Dollars which fell dramatically in value in the crisis. So it depends what period you pick exactly, what result you get.

Are Tech Stocks Cheap?

Most large cap tech stocks now have fairly low price earnings ratios and some are even paying big dividends:



Historically, tech stocks paid very low or no dividends and utilities great big fat ones. From Tickersense.

Buying Shares

I've actually been buying shares recently. Adding $A5,000 to the CFS Geared Share Fund (large cap Australian shares with in built borrowing and today I bought 5000 shares of Qantas (QAN.AX). That was a departure from my recent investment plan. The only other stocks of individual companies I hold are Legend International (LGDI.OB) and Bekaert (BEKB.BR) and neither has been doing well lately. Still, if analyst forecasts are even slightly right, Qantas is very cheap and it is trading a lot below book value. The two moves are about a 2.5% investment of net worth. Of course, we have automatic investments of more than $A5,000 happening every month anyway. $A1,000 in each of mine and Snork Maiden's CFS managed fund (mutual fund) accounts and retirement contributions - about $A2,000 for me and $A1,400 for her. These are in diversified but equity biased funds.

I also just bought a ticket to the US today. On Qantas.

Superannuation and Life and Disablement Insurance

I finally got my job contract and have signed and returned it, so now I have a permanent job. As I discussed, I decided to make no additional contributions to superannuation (retirement) beyond the 17% my employer is contributing. Additional contributions have to come from after tax income as the employer contribution already almost hits the annual $A25k ($US26k) ceiling on pre-tax contributions. As I won't be paying any capital gains tax for a while and franking credits help reduce my tax bill it seems to make sense to invest outside super for the moment. There will be plenty of opportunity to invest extra in super nearer retirement (assuming the laws don't change). The cap on after-tax contributions is $A150k per year and at the moment for over 50s there is a $A50k cap on pre-tax contributions. I'm 46. So from age 50 to 65 I could in theory put $A3 million into super! I don't think I need to make extra contributions now.

I think we will instead increase Snork Maiden's superannuation contributions to the maximum pre-tax level. Currently her employer pays 15.4% on top of her salary. We contribute $A225 every two weeks from pre-tax salary. We could double that to $A450 and stay within the $A25k cap.

I did opt for the maximum life and disability insurance that is allowed by my superannuation provider without providing health information. This would be a lump sum payout of $A255k currently. That declines to $A231k next year and so forth. It makes sense that the number goes down as there are less years of salary to replace and savings will increase at the same time. The premium is $A218 a year for that amount. I'm not a big fan of paying premiums to insurance companies given the insurance company failures I've seen. But this amount made Snork Maiden feel more comfortable.

Hedge Fund Performance in the Recent Market Correction

The Dow Jones Credit Suisse Core Hedge Fund Index is a hedge fund index that is updated daily. This allows real time tracking of hedge fund performance vs. other asset classes:



Hedge funds declined much less than stocks in the recent correction. Particularly noteworthy have been the gains in managed futures.

Moominvalley July 2011 Report

Another month has flown by... I'm getting tired of losing money. In Australian Dollar terms the last 5 months have all had negative returns on investment. That's a long-run of negative returns. The accounts for the month look like this in USD terms:



Our trip to Asia didn't end up costing us very much at all. My flight and first week hotel was paid as I was on business. I also got an $A1,100 expenses payment up front with no need to prove any expenses and then I got another $US500 for a presentation I gave the next week. So this more than paid for our expenses in Seoul ($A800 hotel bill etc.). Snork Maiden's parents gave her a RMB15k gift, though she was expected to pay for some family meals etc. But that is about what her flight cost. As a result, income was high and so was expenditure. Total expenditure also included a ticket to India. Core expenditure, which excludes this amount which I expect to get refunded was still high but not above the normal range.

In USD terms we lost 2.86% this month against an MSCI World Index loss of 1.60%. We're now down 1.92% for the year in USD terms while the MSCI though has gained 3.32% for the year so far. Due to the continuing rise in the Australian Dollar (hitting a post-float high above USD1.10), AUD performance looks much worse - a 5.23% loss this month and a 9.10% loss YTD.

As a result net worth fell USD 6k to USD 547k and fell AUD 18k to AUD 498k, down below half a million dollars again.

HSBC Sells Upstate NY Branches to First Niagara

HSBC lost a lot of money from it's venture into North America. Now they are withdrawing and have sold their upstate New York branches to First Niagara Bank. I have a checking account with HSBC at an upstate NY branch as well as a credit card account and an online savings account. Apparently, all these accounts, including the online only account, will transfer to First Niagara:

"9. I have an Online Savings/Advance Account, and also accounts at a branch which is included in this transaction. Will my Online Savings/Advance Account transfer with my other accounts?

Upon completion of the sale, if you have a branch relationship, all accounts associated with your branch relationship (including Online Savings/Advance) will be automatically transferred."

Snork Maiden has an online only account with HSBC and so apparently her account will stay with HSBC. The full FAQ is here.

Moom's Taxes 2010-2011

I can't submit my tax return yet as I don't have details of the tax treatment of a couple of distributions I received. But I did all the other calculations now to get this out of the way. In the following table I make some assumptions about the distributions:



Click here for the 2009-10 data. For those of you outside Australia, the Australian tax year runs from 1 July to 30 June. There are no state income taxes and no joint taxation of married couples. All numbers are in Australian Dollars (1 AUD = 1.10 USD).

I was only employed in Australia for 6 months of the year, hence the relatively low salary, which is after 10% voluntary super (retirement) contributions. Gross interest and Australian dividends are pretty self explanatory. Dividends are just direct payments from companies. Dividends and other Australian income not including capital gains paid out by a managed (mutual) fund is include in the Income Distribution from Trusts. I had a net capital loss, but you can't deduct any of that against general income (unlike the US), so zero is entered here. Foreign source income is a lot bigger than last year because I worked in Sweden for a month. It's also the reason why I have such a large foreign tax credit as I was charged 25% flat tax on my earnings there. Total income comes in 28% higher than in the previous year.

The work related travel expense is due to not being fully refunded for flying to CCL. Australian dividend deductions are mostly margin interest. Taxable income was up 32%.

Gross tax is the tax due on taxable income if no credits were allowed. The low income tax offset is a credit available if your income is under $67,500 and is maximal at $1,500 if your income is below $30,000. Franking credits are credits on Australian dividends for corporation tax paid by the companies. This is Australia's way of reducing the double taxation of corporate profits. As noted above, I paid a lot of foreign tax, mostly to Sweden this year. As a result I should only owe $6,624 to the Australian government, which is an 11.82% tax rate. As $12,266 was withheld, I should get a $5,642 refund. Withholding was very high because it is based on me earning my salary for 12 months rather than just 6.

High End Japanese Restaurant

When I posted a picture of Yoyo looking at Sushi I said that was a high end Japanese restaurant too. This place was on the 39th floor of a building in a Seoul satellite city with a great view. You had to take your shoes off outside the private dining room and then get up into the room. In the middle was a table over a sunken well. So you were sitting on the floor Japanese-style but actually your feet were in the well and so you were actually sitting at a table Western-style simultaneously. There were endless courses.



In the picture there is sashimi (on balls of shredded radish) on the right and sushi in the plate. The mug has hot sake with fugu fins in it. My host said that his grandfather liked to drink this. It was interesting and not bad at all. There was also beer.

Bibimbap at the National Museum

Bibimbap can be served in a sizzling bowl which you are supposed to add soup and hot sauce to complete the preparation. But, then, sometimes it isn't, like this example at the National Museum:

River of Alcohol

A bar with a river of alcohol! The traditional Korean drink makoli to be precise:




This was in the Sinchon neighborhood. You can drink as much as you like for W4,000 each (just under $4). You can also order food. The main menu was in Korean and Japanese, but there was also a Chinese menu. No English menu. Again, recommended by our Hong Kong guide. So, the dishes cover holes in the table. You lift the dish and ladle out some drink into your cups. It is about as strong as cider or a strong beer. It is the first stage in the production of rice based liquor before distillation.

Sovereign Credit Ratings

With all the talk about the U.S. credit rating possibly being lowered to AA from AAA due to the debt ceiling debate debacle, I was wondering what the credit ratings of other countries were as a point of comparison. Wikipedia, helpfully has a list. According to Standard and Poors, other AA countries include:

Belgium
Bermuda
China
Japan
Kuwait
New Zealand
Qatar
Saudi Arabia
Slovenia
Spain
Taiwan

Not such a bad club to be in. Some are countries with un-democratic governments but low debt like China and others democracies with very high debt levels like Japan. Apart from the U.S., the AAA club currently includes:

Australia
Austria
Canada
Denmark
Finland
France
Germany
Guernsey
Hong Kong
Isle of Man
Liechtenstein
Luxembourg
Netherlands
Norway
Singapore
Sweden
Switzerland
UK

These are democracies with reasonable debt levels and good track records or tax havens. Yes, Hong Kong is a tax haven. I don't think that Singapore counts as a tax haven and isn't a democracy really (despite having elections) but it does seem to have very good and reliable financial regulation.

Neighborhood Restaurant

We found lots of attractions and places to eat in Seoul by following a guidebook that Snork Maiden bought at Hong Kong airport. First she had to translate from Cantonese to Mandarin and then to Korean though some things were actually labelled in Korean. This was very helpful. By the end of the trip I could read all the Korean consonants. One of the places recommended was just round the corner from our hotel and we ended up eating there twice. We would never have tried some place like that without the guidebook. The basic menu consisted of 20+ dishes (and rice and soup) for W7,000 (about $6) per person. This is what it looks like (with an additional dish in the middle):



As here, you can order "additional dishes" in addition to the basics. The restaurant is in a traditional house with a tiled roof. The host brings the menu on a giant wooden spoon:



There is actually a menu in English, surprisingly enough. We actually asked for one in Chinese first. Here is a Korean pancake (W10,000):



The dish we were least enthusiastic about were these leaves (I think it is perilla):

Snork Maiden's Taxes 2010-2011

Time for the annual report on Snork Maiden's taxes. For some reason, these are some of my most popular posts. For comparison here is last year's report. I can't actually submit her return until I do my taxes which won't be for a while (I need to gather a lot of tax statements from investments first). This is because they are now requiring full details of a spouse's income in order to avoid paying the Medicare surcharge. This is an extra 1% tax on total taxable income for household's earning more than $A146,000 a year who don't have private health insurance. Our income for the 2010-2011 tax year was about $A120,000 but we need to prove that.



Compared to last year salary (after superannuation (retirement) contributions rose by 3.3%. Distributions of Australian income from managed (mutual) funds almost doubled but foreign income fell a little. She had about double the amount of unrefunded work expenses. As a result, taxable income was up 3.0%.

The amount of tax due in last year's post is wrong. In fact, tax due rose by 2.7%. This year's tax refund should be $A633 compared to an actual refund of $A203 last year. The estimated tax rate is slightly down at 22.11% of taxable income. There are no state income taxes in Australia so this federal tax is the total income tax.

End of an Era

Soros to return all outside money to investors. I didn't realise that it was down to just $1 billion in outside money. The Alchemy of Finance was one of the books that got me interested in trading. In the end that didn't turn out to be a very productive thing for me to try to do, but it was fascinating.

Chun Restaurant

At this place, in the Sinchon neighborhood, the staff cook your food in a big pan built into your table. It is supposedly chicken, but was mostly cabbage. Before:



and after:

Namdaemun

Namdaemun (Nan da men in modern Mandarin Chinese - South Great Gate) is a market area in the centre of Seoul. We had lunch one day in a restaurant there after going camera shopping. This is what it looked like:



The main dishes are a spicy tofu stew and cold buckwheat noodles. After serving the noodles a woman came and cut them with a big pair of scissors. We didn't think much of the sushi. In centre from left - soup, kimchi, tofu, radish. Also in the picture rice and bean-sprouts. You always get served a bunch of small dishes for free in Korean restaurants but I found they were a bit more substantial in Korea than in other countries. Close up of the noodles:



Also typical of restaurants in Korea is that there is a lot of chopsticks and spoons on the table which you select as many as you need:

Temple Food

We went to a restaurant in the Insadong neighborhood that claimed to serve "temple food". This meant that the food was vegetarian and made of locally available ingredients and featured some things that Buddhist monks might have traditionally eaten. Lunch was a fixed menu for W22k per person (about $20) with a large number of small dishes. As my friends commented, this was pretty lavish for monks. The first set of courses looked like this:



At top left and bottom right are crunchy cracker, at top right pancake, and at bottom left tofu-like. In the middle was very salty peppercorns. The next round looked like this:



Top right is tempura vegetables (mushrooms and capsicum) and in the wicker basket mostly greens/herbs of various slightly different varieties surrounded by kimchi, tofu, and other dishes, soup etc. There was also rice (not in the picture). The dessert course featured some sweet stuff and crispy puffy things that seem to be popular in Korea:

Yoyo Tackles Korean Food

Yoyo takes on a Korean melon:

Yes, they are really small. Snork Maiden thought that the skin was edible. I wasn't so sure. Yoyo wasn't much happier with this box of sushi:

Each piece was individually wrapped in plastic. It wasn't that good. On the other hand I went to a high end Japanese restaurant. I haven't got the pictures from that yet. Yoyo looks happier with this almond liquor and salted almonds:

The liquor was really sweet. We didn't finish it.

Yoyo en Route

Traditional pictures of food coming up soon.

No you can't actually take a train to Pyeongyang from this station. 50m down the tracks there are stop signs:



Though until 2007 there were trains to the industrial area just across the border.

Tax Changes as Part of Climate Package

The government announced its climate policy package today. It's expected to get through parliament. The carbon price will apply to only the biggest 500 companies by emissions but they'll pass on the costs to a large extent to consumers. There are also tax cuts as part of the package including tripling the tax free threshold to over $18k a year. If we multiply that increase by the 16.5% lower tax bracket that is a tax cut of $2,000 per year. But media reports are saying the cut is much smaller than that - $600 for people earning $20k p.a. and zero for people earning more than $80k per year. So apparently there are some other changes which haven't been discussed. I guess the low income tax offset will be abolished and that might explain the $600 number. But something else must increase to remove the benefits from higher income households.

HFRX Index Performance June 2011

The HFRX hedge fund index lost another 1.59% in June and is down for the year by 2.12%. By comparison, the MSCI World stock index was down by 1.54% in June but is up 4.99% for the year. All strategies but equity market neutral lost money in June. The latter is also the best performing strategy YTD.

India

It looks like I'll be going there soon too. Two new countries this year then. It's going to be an even crazier year, travelwise.

P.S. Next year I'll be going to New Zealand. I've never been there as you can't really go there on the way to somewhere else (well maybe some Pacific islands). It really is the end of the world :)

End of the Financial Year

The Australian financial year ends on June 30. Investment results for June are always delayed due to this. But here are the preliminary accounts for June in USD terms:



This was a crazy month in terms of income and expenditure. Income was inflated by travel refunds (for the trip to Cloud Cuckoo Land and one to Sydney (Snork Maiden went on business and I went along for fun and we drove there and back) and an advance for travel expenses (a per diem rate of $A275 per day!). Maybe I should count these things as income but the latter two really are. We didn't spend $A587 in getting to Sydney and back and I'm not going to spend $A1,100 on my trip. And I did somewhat enjoy myself on the CCL trip.

This month seemed to be a non-stop shopping trip. Snork Maiden was buying presents for people when she visits China. I bought a new watch, got my glasses fixed (more than 400 dollars), bought a new drive of sorts for my computer, had some largish medical and dental bills, went to Ikea in Sydney etc.

In USD terms we lost 1.64% this month on a preliminary basis. We lost money investing for the fourth month in a row in Australian Dollar terms. It's a slow decline but pretty depressing all the same. We're now down 4% for the year in AUD terms and up 0.66% in USD terms. The MSCI though has gained 4.99% for the year so far. The Australian stock market has been underperforming on a global basis.

As a result net worth fell $A755 despite all the income coming in and rose by USD 2,961.

Couldn't Buy GTAA for my Mom

I blogged that we wanted to buy shares in the Cambria GTAA ETF for my Mom among other investments we were making in the portfolio. But the bank (one of the biggest global banks) which has custody of the portfolio (they don't manage it really, we (my brother and I) do so that's why I put it this way) said that they couldn't buy the shares because a US Partnership was involved in this stock and the "security settings" blocked them from buying these shares for non-residents. I was able personally to buy shares in GTAA through Interactive Brokers. So this is weird. I contacted the GTAA portfolio manager and he thinks it's weird too and passed the info on to the relevant people. After the changes we did make - we were allowed to buy shares in the China Fund on the NYSE - the portfolio looks like this:



The rate of return for June was -1.11% overall, whereas the MSCI World Index lost 1.54%. You can see that we managed to reinvest some of the Sterling cash but not even the majority of it. We got rid of most of the USD cash and about half the Euros. We need to retain some cash to possibly pay taxes including on the capital gains on the bond funds we sold. The reinvestment in bonds is in a convertible bond fund rather than straight bonds. Otherwise we invested in a real estate fund and tried to increase holdings in non-US stocks and alternative investments. The long-run picture of asset allocation looks like this:



The breakdown is much cruder and we don't have observations for every month. The main thing to notice is the increase over time in the allocation to equities and the reduction in cash. We are now at 31% equities, which is close to where we want to be I think. The real estate share has mostly increased due to the increase in the value of my Mom's apartment. The portfolio is now more similar to the allocation in endowment portfolios. It is particularly close to the Australian Future Fund allocation and the Harvard allocation. The main difference with Harvard is that they have 13% in private equity and this portfolio has zero in that class. Instead, the portfolio has 27% in fixed income vs. Harvard's 13% in that category. There is also more in cash and less in "real assets" in my Mom's portfolio. This makes sense for a "small" investor. Small relative to Harvard though big relative to most personal finance bloggers :)

Non-concessional Superannuation Contributions

Does it make sense to make non-concessional superannuation contributions? These are after tax contributions to a retirement account in Australia. In other words, the money is taxed at your marginal rate and then put into a retirement account and locked up until you are least 60 (if you are born in 1964 or later as I am). The advantage is that the tax rates on earnings are lower than in non-retirement accounts for high income earners. Instead of a 38.5% marginal tax on regular income (interest, unfranked dividends, and short-term capital gains) there is a 15% rate and the long-term capital gains rate is 10% instead of 19.25%. Of course, for so called "franked dividends" the effective tax rate is 8.5% outside of super and 0% in super. So, do the lower tax rates make it worth locking up the money for 14 years at least (in my case)? I'm expecting to pay zero capital gains tax for a while given accumulated losses and after interest and expense deductions I don't pay any tax on dividends anyway. So, I think the answer is no in my case, for the moment. My employer will be putting almost the maximum pre-tax contribution allowed into my super anyway.

When I get nearer retirement age I expect to stuff the maximum allowed non-concessional contributions into my super account for a few years. This is because there is zero tax on earnings once the super account is paying out distributions.

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.