Madame X: International Stock Funds

On to Madame X's international stock funds and a hopefully interesting lesson in passive vs. active management:



(something seems to be seriously wrong with Yahoo's index return figures for the last few years).

ETINX and FSIIX are both international (developed countries) index funds and as you can see almost exactly replicate each other. Madame X has both of these because they are in different accounts. The Fidelity one is just slightly better than the E-Trade version until this last year when it has slightly underperformed. On the other hand FDIVX, an actively managed fund has positive alpha (market-risk adjusted return) and better performance than either of the index funds despite its much higher expense ratio and much larger size. Low expense ratios are not the be all and end all of fund selection. This fund was in the upper quartile of its category in the last 5 years but has drifted downward in performance in the last few years. I wouldn't sell it, but it wouldn't be on my buy list either.

VEIEX is an emerging markets index fund. Its alpha and beta are measured relative to the developed country international index - its performance relative to emerging market funds is not as fantastic, but still respectable - in the last year it was in the top 20%. It's probably not a bad fund for exposure to emerging markets.

None of these international funds could be responsible for the possibly negative performance of Madame X's portfolio.

Target Portfolio

This is the target portfolio I hope to get to by next month or so by continuing to switch funds and invest:



I classify our portfolio three ways:

• By conventional asset class - stocks, bonds etc.

• By function - passive alpha, beta, trading etc.

• By currency exposure.

It's by no means a final portfolio - that will always be evolving - in particular, I want to bring down the amount of borrowing from 29% and the amount of cash from 9%. Borrowing is high currently because I believe we are near the bottom of a stock market cycle. The margin rates I am paying are too high for keeping these loans in the long-term IMO. We'll always need some cash used in trading and some in liquidity, but the liquidity category can probably be halved from 7% in the long term. Prerequisites are increasing the credit limit on our Australian credit card and rationalizing Snork Maiden's U.S. accounts.

On currency allocation, I'd like to get to around 50% of the portfolio being exposed to the Australian Dollar and then rebalance from there. The US Dollar/other currency balance is fine. We've come a long way in the last year.

Though only 81% of assets are allocated to stocks, portfolio beta is estimated at 1.16 as a substantial chunk of that allocation will be in a levered fund. I'm planning to maintain around a 10% allocation to bonds in the meantime. Australian bonds in particular might be a good bet in the near future if interest rates come down here as eventually they'll have to. Otherwise, there is a 26% allocation to alternative investments, via a variety of funds and listed stocks. The main planned change is the addition of the Man Eclipse 3 fund which will take the hedge fund exposure to 15%. I don't have particular goals for the subcategories here, it really depends on the opportunities I see. The remainder of the "passive alpha" category includes financial stocks (Total stocks at 81% = beta - bond allocation + financial stocks + "industrial" stocks).

Adding to TFS Market Neutral Fund

I'm adding $5000 from the inheritance money I received to my investment in the TFS Market Neutral Fund. It's performed very nicely recently unlike last August in the quant fund meltdown. This has increased my confidence in the fund. I'll now have 2.5% of net worth in the fund. It will take the "hedge fund" category of my "passive alpha" investments up to 13% of net worth. The remaining $3000 or so will go towards helping pay my U.S. taxes and in the future will probably be transferred to one of my US trading accounts. I don't want to add any more money to them until I reach my annual goal of breakeven on the money invested in them. My Mom also added £1000 as a wedding present. I'll keep that in my HSBC savings account for special purchases. A food mixer is on the buy list to help Snork Maiden make bread.

February 2008 Report

All figures are in US Dollars (USD) unless otherwise stated. Performance this month was more mixed than in recent months - net worth rose in US Dollar terms but fell in Australian Dollar terms due to the strong rise in the Australian Dollar this month. Investment performance was also positive in USD terms but not in AUD terms. Spending was high due to the wedding and "honeyweek" which took place this month.

Income and Expenditure



Expenditure was $7,271 - core expenditure was $4,067, which is higher than in recent months. This included $334 of implicit car expenses - depreciation and interest.

Non-investment earnings ($11,664) were dominated by the inheritance we received this month.

Non-retirement accounts lost $2,507 with the rise in the Australian Dollar offsetting $6,545 of what would otherwise have been a loss of $9,053. Retirement accounts gained $5,214 but would have lost $1,183 without the change in exchange rates. The differential between these accounts is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed $782 in realised gains.

Net Worth Performance
Net worth rose by $US7,419 to $US445,174 and in Australian Dollars fell $A12,976 to $A475,156. Non-retirement accounts were at $US226k (a gain of $1,400 or 0.6%). Retirement accounts were at $US219k. So we made progress on our first and third annual goals as net worth increased and non-retirement net worth increased by more than the MSCI index rose for the month (0.3%).

Investment Performance

Investment return in US Dollars was 0.62% vs. a 0.33% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.25% loss in the S&P 500 total return index. Returns in Australian Dollars and currency neutral terms were -3.65% and -2.34% respectively. Both the MSCI and our portfolio outperformed the the S&P 500 this month due to the fall in the US Dollar. So far this year we have lost 2.07%, while the MSCI and S&P 500 have lost 7.86% and 9.05%, respectively.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. This month trades resulted in modest gains or losses. The strength of the resource sector led to a nice gain in the Colonial First State Global Resources Fund. Completion of the takeover of Symbion by Primary Healthcare also produced a decent gain. Major losses were again dominated by the woes of the Australian listed fund sector. In particular the near collapse of Credit Corp (CCP.AX) hit the Clime fund (CAM.AX) hard due to its concentrated position in this company. Clime sold out its position in the middle of the month, but it seems that its other positions which had also been soaring high did not do well in the first couple of months of the year. Concentrated portfolio positions are dangerous when you are not an insider in the company and even then they are risky. I exacerbated things by doubling my position in Clime before it hit bottom. Seems I was as overtrusting in Clime's management as they were in Credit Corp's.

Progress on Trading Goals

Realised gains for the month were $782. This is the first positive month since June 2007! But the gains were entirely in securities trading as I didn't trade futures at all this month. I've only had two losing months in securities trading since last June (October and January). Anyway, it's nice to finally see a positive month in realised gains.

My three US trading accounts lost $1332 (or -2.33% which is better than the S&P 500 at -3.25%) and there is now $8047 to go till I reach breakeven across those three accounts, which is one of my annual goals. My Interactive Brokers account lost 0.77%.

So, I made progress on annual goal 5 (making money from trading) and slipped back on goal 4 (achieving breakeven in my US accounts).

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.52. Using a regression on the last 36 months of returns gives a beta of 0.76 to the MSCI or 0.61 to the SPX. Alphas are 0.9% and 5.7% respectively. A more sophisticated time series method yields a beta of 0.75 and alpha of 10.0% for the MSCI index. Therefore, we are doing well on our second annual goal (positive alpha).

Allocation was 35% in "passive alpha", 69% in "beta", 2% allocated to trading, 2% to industrial stocks, 5% to liquidity, 9% to other assets (including our car which is equal to 2.9% of net worth and otherwise mainly receivables) and we were borrowing 22%. Our currency exposures were roughly 58% Australian Dollar, 30% US Dollar, and 12% Other. We reduced exposure to industrial stocks this month and increased further our exposure to private equity and supposed "passive alpha" stock funds.

Summary
We made progress on four out of the five annual goals this month.

Portfolio Construction

Currently our portfolio is allocated like this:



I've explained these different categories previously. Basically "beta" contains mutual funds that are likely to be highly correlated with either the stock or bond market, while "passive alpha" contains funds that are expected to have a lower correlation with general stock market movements and financial stocks whose underlying business is not directly investing in the stock market index. Hopefully, these "passive alpha" investments will generate alpha - a risk adjusted excess return. I call these passive alpha because this is an attempt to earn alpha by investing with other managers rather than through my own trading efforts. Industrial stocks are individual non-financial companies, trading is cash and any very short-term trading instruments, liquidity is cash not dedicated to trading (mostly in Snork Maiden's accounts), asset loans is our rental deposit and car primarily, and borrowing includes margin loans, credit cards etc.

At the moment about 25 percentage points of the portfolio is in stocks within the "beta" category and 43 percentage points are in bonds. When we reach what looks like a bottom in the stock market to me, I plan to switch out of all the bond-heavy funds into stock beta investments. We'll do this by investing in CREF's Global Equities Fund (instead of their Bond Market Fund) and investing in Colonial First State's Geared Share Fund (rather than their Conservative Fund). We'll also shift some of our holdings of the Conservative Fund into CFS's Future Leaders, Developing Companies, and Imputation Funds.

For those who've questioned my judgment that the market is close to a bottom, I'm not planning on buying US stocks in a big way. I will also add individual US stocks in a small way as I did around the 22 January bottom. On the buying list are: IBKR, XLF, BWLD, SSRX, RICK, GOOG, PBD and maybe SHLD, AAPL, and NCT.

I plan on maintaining this same rough allocation between passive alpha and beta, but the beta funds will include a large chunk of a leveraged fund - the Geared Share Fund (geared = leveraged in Australian lingo). In the longer term I plan on having a portfolio beta of about one with a big chunk of passive alpha investments. The goal would be to achieve 10% returns from the stockmarket beta in the long-term and hopefully 10% or so of alpha for a 20% total return. If you use leverage, you can be fully exposed to the stockmarket while also trying other strategies. A simple version of this is the increasingly popular 130/30 funds. A much more sophisticated approach is followed by Bridgewater Associates. What I am attempting is somewhere in between.

January 2008 Report

All figures are in US Dollars (USD) unless otherwise stated. This month again saw falls in net worth due to negative investment performance, though our performance was not as bad as the market.

Income and Expenditure



Expenditure was $3,970 - exceptional expenses included expenses on the upcoming wedding - core expenditure was $3,323. This included $231 of implicit car expenses - depreciation and interest. Our core expenditure has been remarkably consistent over the last three months.

Non-investment earnings ($3,598) mainly consisted of Snork Maiden's salary. Her previous employer finally stopped paying her. Snork Maiden's retirement contributions from her employer were $872 - there were three contributions this month for some reason (but only two salary payments!).

Non-retirement accounts lost $11,713 with the rise in the Australian Dollar offsetting $3,739 of what would otherwise have been a loss of $15,452. Retirement accounts lost $405 but would have lost $2,938 without the change in exchange rates. This difference is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed $577 in my Roth IRA account and $82 to the non-retirement result.

Net Worth Performance
Net worth fell by $US10,905 to $US437,702 and in Australian Dollars fell $A23,167 to $A488,125. Non-retirement accounts were at $US225k. Retirement accounts were at $US213k. So we made negative progress on our first and third annual goals.

Investment Performance

Investment return in US Dollars was -2.70% vs. a 8.17% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 6.00% loss in the S&P 500 total return index. Non-retirement accounts lost 4.94%. Returns in Australian Dollars terms were -4.64% and -6.98% respectively. In currency neutral terms the portfolio lost 4.10%.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. This month most of the most negative numbers are unlisted and listed Australian funds, while most of the best gains are from short-term trades or new positions.

Progress on Trading Goals

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.58. Using a regression on the last 36 months of returns gives a beta of 0.75 to the MSCI or 0.65 to the SPX. Alphas are 0.52% and 4.65% respectively. A more sophisticated time series method yields a beta of 0.65 and alpha of 10.1% for the MSCI index. There is less difference in the estimate of beta this month between the different methods. This maybe suggests that the Australian Dollar was less correlated with the stock market this month.

Allocation was 34% in "passive alpha", 68% in "beta", 2% allocated to trading, 8% to industrial stocks, 5% to liquidity, 3% to other assets (including our car which is equal to 2.9% of net worth) and we were borrowing 20%. Our currency exposures were roughly 59% Australian Dollar, 31% US Dollar, and 10% Other (mainly global equity funds).

Summary
At the end of the first month of the year we are on track to achieve two out of our five goals (2: Positive Alpha and 4: Gain in Ameritrade/IB Accounts).

Boulder Total Return Fund

Is today's purchase. I used up the spare cash in my Roth IRA. I had been trying to trade that cash but the amount is small and it's a hassle. I classify this stock as a stock in the passive alpha category. The yield on this closed end fund is way higher than stated on Yahoo. Six times higher. At least that's what the fund says. 30% of the fund's net assets are in invested in Berkshire Hathaway. The fund also has quite a lot of financials, which may stage a bounceback here. I'll report in more detail on my other recent purchases soon.

Wednesday in the US was a crazy day in the markets. Despite the big fall in Apple Computer (and also a mysterious fall in NDS) we ended the trading day significantly up. Probably around breakeven for trading this month so far. The model is long for the next few days. Up till the FOMC meeting. Selling before the FOMC is looking like a good tactic at the moment.

Leucadia National

I bought some shares in Leucadia National, which has long been on my watchlist. Essentially it is a listed private equity firm. They should find some good opportunities in current market and economic conditions. I'm classifying this as a "passive alpha" investment in the asset class "private equity".

Annual Report: Asset Allocation

The table shows our asset allocation at the account and security level at the end of 2007 (before my recent flurry of trades). The split by currency is not perfect - for example the CFS Conservative Fund has foreign (to Australia) investments while Platinum Capital is partially hedged into Australian Dollars. "Passive Alpha" investments obviously have plenty of correlation with the market (I call them "passive alpha" to distinguish them from my own active trading). I include in this category all financial stocks and funds whose performance would be expected to contain significant sources of return which aren't pure stockmarket beta. This includes a fund of hedge funds (EBI), hedgefund like funds (Hussman, TFS, Platinum Capital), real estate funds (Challenger, TIAA, Newcastle), and private equity (Allco). The Clime fund (CAM.AX) is a long-only closed end fund but deliberately does not track market benchmarks and is very focused. My rationale for counting a stock like Interactive Brokers (IBKR) as alpha is that the majority of their income comes from market-making. If this isn't a source of alpha in the financial markets, I don't know what is. There are also fund management companies (Clime and EBB), a bank (HCBK), and insurance companies (Berkshire and Safety). Beta investments are more traditional mutual funds, which can be pure stock plays or diversified or even bonds, which have less stock market beta. We only had one trading position at the end of 2007 - Beazer (a homebuilder) put options. It was doing OK. I only have two non-financial stocks listed under "industrial stocks" - Symbion and FTS. I don't believe that I have an edge in picking individual stocks so I don't do much of it. But investing in a bank stock, for example, is a way of indirectly getting exposure to a financial asset class (loans) that is hard to invest in otherwise. All the other categories of accounts either support our lifestyle or investing (margin loans). By using margin loans we are 98% invested in long-term investments as well as having 6% allocated to trading, while having liquidity for everyday life.

The table doesn't split things down by retirement and non-retirement accounts. 47% of the total is in retirement accounts.

In retrospect, I have been too conservative in my beta investments in the last couple of years, though now it is beginning to pay off to some degree. On the other hand, my passive alpha investments, which had been doing well, took a distinct turn for the worse from the August "quant crisis" onwards. I plan to get more aggressive in my beta investments once there are some clearer signs of a bottom in the stockmarket. I'll also be adding new passive alpha investments and aiming over time to reduce the percentage allocation to Australian Dollars.

December 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a fall in net worth in US Dollar terms partly due to the fall in the Australian Dollar and partly to poor investment performance due to the continuing decline in global stock markets this month. Both these trends were milder than last month. Net worth also decreased in Australian Dollars terms. Trading results were bad and I stopped active trading to focus on improving my trading performance using simulated trading.

Income and Expenditure



Expenditure was $3,547 - there were no exceptional expenses. There were $315 of implicit car expenses - depreciation and interest - so actual cash expenditure was $3,212.

Non-investment earnings ($5,924) included another refund of work-related expenses from Snork Maiden's employer. She also again got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions from her employer were $559.

Non-retirement accounts lost $6,052 with $1,414 of the loss resulting from the fall in the Australian Dollar. Retirement accounts lost $1,731 but would have lost only $405 if exchange rates had remained constant. This gain is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed around half the loss in the non-retirement accounts, but actually came out slightly positive in my Roth IRA.

Net Worth Performance
Net worth fell by $US4,759 to $US448,556 and in Australian Dollars fell $A1,161 to $A511,233. Non-retirement accounts were at $US237k. Retirement accounts were at $US211k.

Investment Performance



Investment return in US Dollars was -1.72% vs. a 1.08% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 0.69% loss in the S&P 500 total return index. Non-retirement accounts lost 2.51%. Returns in Australian Dollars terms were -0.88% and -1.70% respectively. In currency neutral terms the portfolio lost 1.11%,. Summing up the year, we gained 18.35% (USD) vs the MSCI with 12.18% and the SPX with 5.5%. Our non-retirement accounts are up 21.68%. Australian Dollar returns were competitive with the SPX. In currency neutral terms we gain 9.8% for the year.



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading resulted in some of the biggest losses - QQQQ/NQ and ES. Otherwise, no clear story emerges this month except that EBB.AX and EBI.AX continue to perform poorly.

Progress on Trading Goal

I lost $2,003 in trading . The loss is 6.92% of trading capital. The NDX was down 0.2% for the month. For the year, trading generated $9,749 or a gain of 35% vs. an NDX gain of 18.4%. So in the end I beat the market, but with a lot more risk and volatility.

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.47. Using a regression on the last 36 months of returns gives a beta of 0.81 to the MSCI or 0.60 to the SPX. Alphas are 0.55% and 6.44% respectively. A more sophisticated time series method yields a beta of 0.97 and alpha of 7.6% for the MSCI index. The extra beta generated by these methods is due to the correlation between equity returns and the Australian Dollar in recent times as a result of the "carry trade".

Allocation was 29% in "passive alpha", 66% in "beta", 6% allocated to trading, 3% to industrial stocks, 7% to liquidity, 3% to other assets (including our car which is equal to 2.8% of net worth) and we were borrowing 14%. Our currency exposures were roughly 60% Australian Dollar, 30% US Dollar, and 10% Other (mainly global equity funds).

November 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a fall in net worth in US Dollar terms partly due to the fall in the Australian Dollar and partly to poor investment performance due to the decline in global stock markets this month. Net worth also decreased in Australian Dollars terms. Trading results were negative but I managed a significant turn around in the last few days of the month.

Income and Expenditure



I've introduced a breakdown of investment and trading income for the first time in this month's report. The two sum to "core investment income" which together with "forex" sums to "investment income". I've used different size fonts to try to express this relationship. Not sure that it works :) I've also broken out "core expenditure" which excludes work-related and moving-related expenses.

Expenditure was $6,680 but this includes a large work-related expense for Snork Maiden (which resulted in us effectively buying two thousand or so Australian Dollars (expense in US Dollars, reimbursement in Aussie) and port-handling charges in Sydney for both of us. Core expenditure was well under control at $3,280. This included $A59.07 of implicit interest costs of owning a car.

Non-investment earnings ($7,119) included the refund of the work-related expenses from Snork Maiden's employer. She also again got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions were $1180.

Non-retirement accounts lost $19,364 with $8,315 of the loss resulting from the fall in the Australian Dollar. Retirement accounts lost $6,917 but would have gained only $249 if exchange rates had remained constant. This gain is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. In AUD terms non-retirement accounts lost and retirement accounts gained for the month.

Net Worth Performance
Net worth fell by $US24,563 to $US453,326 and in Australian Dollars fell $A3,171 to $A512,406. Non-retirement accounts were at $US241k. Retirement accounts were at $US212k.

Investment Performance
Investment return in US Dollars was -5.50% vs. a 4.38% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 4.18% loss in the S&P 500 total return index. Non-retirement accounts lost 7.46%. Returns in Australian Dollars terms were -0.96% and -3.01% respectively. In currency neutral terms the portfolio lost 2.26%, which is relatively good compared to the performance of the indices. YTD we're up 20.4% (USD) vs the MSCI with 13.4% and the SPX with 6.4%. Our non-retirement accounts are up 24.8%.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. My Australian funds all did horribly with Platinum Capital being the worst of all. I also suffered net losses trading SPI (Australian Share Price Index) and ES (S&P 500) futures but gained in NASDAQ trading. PSS(AP) is Snork Maiden's superannuation fund, where we are starting off with a loss...

Progress on Trading Goal

I lost $1,035 in trading following losses of $1,123 in September and $681 in October. The losing streak is depressing even though relative to net worth the numbers are small. The loss is 3.97% of trading capital vs a 6.69% loss in the NDX. My IB account lost exactly 6.69% for the month, though I gained 7.8% or $1,310 in the last week in this account. As far as my goal of achieving breakeven in my 3 US trading accounts, I have currently invested a net amount of $60k and the accounts are currently worth $54,230. At the end of 2006 the value stood at $41,042 so I have made progress even if it is slower than I would have liked.

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.42. Recent performance shows, though, that actual beta of my USD denominated returns is a lot higher than this. My time series estimate using the Kalman filter estimates beta to the S&P 500 at 0.90 and to the MSCI at 1.00. The reason for this is that the Australian Dollar is becoming increasingly correlated with global stock market returns due to the carry trade where traders borrow in low interest currencies like the Yen and buy high yielding currencies like the AUD and stocks. When their "aversion to risk" increases they sell both Aussie Dollars and stocks and buy Yen and US bonds.

Allocation was 29% in "passive alpha", 67% in "beta", 6% allocated to trading, 4% to industrial stocks, 6% to liquidity, 3% to other assets (including our car which is equal to 2.8% of net worth) and we were borrowing 15%. The biggest losses this month were in the funds that I have designated as "passive alpha". Those funds really contain a lot of beta of course too. I include all hedge-fund like and alternative investments under the "passive alpha" label and all long-only equity mutual funds under "beta". Our currency exposures were roughly 60% Australian Dollar, 30% US Dollar, and 10% Other (mainly global equity funds).

October 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a record gain in net worth in US Dollar terms, mainly due to the continuing rise in the Australian Dollar. Net worth also increased in Australian Dollars terms. Underlying investment performance was also strong - strong enough to result in investment gains in Australian Dollar terms despite the drag exerted by the appreciating currency. Trading results were negative but getting better.

Income and Expenditure



Expenditure was $5,940. We paid a year's car insurance and also depreciated the car immediately by $A1250. Dividing the insurance by twelve and using a typical month's implicit car costs (depreciation plus interest) we would have spent $US3,944. This calculation is useful for forecasting future expenses.

Non-investment earnings ($13,280) included a refund of relocation expenses from Snork Maiden's employer. She also got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions ($784) also started kicking in (in theory - we only got the application forms for her superannuation today!).

Non-retirement accounts gained $15,951 with $8317 coming from the continuing rise in the Australian Dollar. Retirement accounts gained $7,964 but would have gained only $948 if exchange rates had remained constant. In AUD terms non-retirement accounts gained and retirement accounts lost for the month.

Net Worth Performance
Net worth rose by $US31,322 to $US490,433 and in Australian Dollars rose $A10,517 to $A529,111. Non-retirement accounts were at $US271k. Retirement accounts were at $US219k.

Investment Performance
Investment return in US Dollars was 5.21% vs. a 3.92% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.59% gain in the S&P 500 total return index. Non-retirement accounts gained 6.41%. Returns in Australian Dollars terms were 0.49% and 1.67% respectively. YTD we're up 27.3% (USD) vs the MSCI with 18.6% and the SPX with 11.0%. Our non-retirement accounts are up 34.3%.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. The Google and Amazon trades were two of the negative contributors. Symbion also fell in the wake of ongoing shenanigans orchestrated by Primary Health, which is attempting to block the merger with Healthscope. Nice gains were seen in listed and unlisted funds and some individual stocks (e.g. Rick's Cabaret). Index trading only saw small gains.

Progress on Trading Goal

See the trading report.

Asset Allocation
At the end of the month the portfolio had an estimated beta of 0.51. Allocation was 31% in "passive alpha", 65% in "beta", 4% allocated to trading, 6% to industrial stocks, 5% to liquidity, 4% to other assets (including our car which is equal to 2.93% of net worth) and we were borrowing 15%. Our Australian Dollar exposure rose to 62% partly due to the rise in the Aussie.

September 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw very positive investment performance in USD terms, due to the sharp rise in the Australian Dollar (AUD). Underlying performance was also positive. Trading results were negative - I only traded during the beginning of the month before our move. Spending, not surprisingly, was at record levels. Net worth rose in USD terms but fell in AUD terms

Income and Expenditure



Expenditure was $11,812. My previous highest monthly expenditure was $10,174 in August 2002 when I moved from Australia to the US. We can attribute $9,582 to move related expenditure. We also paid $A744 ($US659) in rent for part of the month. Taking out the move-related spending and adjusting the rent to a full month's rent we would have spent $US3,263. For comparison this is roughly double my individual expenditure last month after removing moving-related expenditures and the cost of the laptop I bought that month. So spending is actually very much under control at this point. Snork Maiden earned a total of $2,336 from her previous job, her moving sale etc.

Non-retirement accounts gained $16,520 but would have gained only $1,943 if it were not for the sharp rise in the Australian Dollar. Retirement accounts gained $13,273 but would have gained only $1,474 if exchange rates had remained constant. These gains are both at record levels. In AUD terms both account types lost money for the month.

Net Worth Performance
Net worth rose by $US20,008 to $US458,963 and in Australian Dollars fell $A20,020 to $A518,309. Non-retirement accounts were at $US249k. Retirement accounts were at $US210k.

Investment Performance
Investment return in US Dollars was 6.79% vs. a 5.40% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.74% gain in the S&P 500 index. Non-retirement accounts gained 6.83%. Returns in Australian Dollars terms were -1.74% and -1.68% respectively. YTD I'm up 20.9% (USD) vs the MSCI with 14.1% and the SPX with 9.3%. My non-retirement accounts are up 26.0%.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency losses appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Mutual funds made nice positive contributions as did a few US individual stocks. Australian listed funds and stock indices generally lost money.

Progress on Trading Goal

US based trading lost $1083 or 5.9% of trading capital. The model and the market both gained but I don't have the exact figures at the moment. My Ameritrade and Interactive Brokers accounts were at $55,873, down $100 on the month, against the goal of $64k. So negative performance on my goals in this area.

Asset Allocation
At the end of the month the portfolio had a beta of 0.54. Allocation was 35% in "passive alpha", 65% in "beta", 4% allocated to trading, 6% to industrial stocks, 8% to liquidity, and we were borrowing 18%. Our Australian Dollar exposure rose to 61% partly due to the rise in the Aussie. The move reduced "liquidity". We will reassess this level of liquidity when things have settled down some more from the move to Australia.

August 2007 Report

All figures are in US Dollars unless otherwise stated. This month again saw negative investment performance in USD terms, though this was due to the sharp fall in the Australian Dollar and underlying performance was positive. Trading results were positive but volatile and spending was very high. At the end of the month I merged my finances with Snork Maiden for purposes of reporting net worth etc. The income and expenditure figures for this month are mine alone, but the final net worth figure is our joint figure. Net worth fell in US Dollar terms and rose in Australian Dollar terms post-merger. Both figures fell on a pre-merger basis.

Income and Expenditure



Expenditure was $7,959. More than half the figure was moving expenses and more than a quarter the cost of my new computer. Other expenses totalled only $1625. Yes, there is a retirement contribution ($901) there though I am no longer employed.

Non-retirement accounts lost $11,332 but would have lost only $2214 if it were not for the sharp decline in the Australian Dollar. Retirement accounts lost $4151 but would have gained $2693 if exchange rates had remained constant. Net worth declined by $23k on a pre-merger basis. At one point in the month it was down around $50k.

Net Worth Performance
Net worth fell by $US5755 to $US439,155 and in Australian Dollars gained $A20817 to $A538,576. Non-retirement accounts were at $US242k. Retirement accounts were close to $US197k.

Investment Performance
Investment return in US Dollars was -3.75% vs. a 0.23% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.29% gain in the S&P 500 index. Non-retirement accounts lost 5.13%. Returns in Australian Dollars terms were 1.36% and -0.02% respectively. YTD I'm up 12.9% vs the MSCI with 8.3% and the SPX with 5.1%. My non-retirement accounts are up 17.4%. So I'm not too concerned about this month's performance, especially as we gained in Australian Dollars!

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency losses appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. The biggest positive contribution came from the CFS Conservative Fund which has a 30/70 equity/fixed income mix. Interactive Brokers began to rebound this month. Voltality (of the right sort) should help the stock. The investment in Hudson City Bankcorp also began to pay off as it is seen as a solid bank in a shaky environment. Something similar could be said about Berkshire Hathaway. Trades in IYR, Lehman, Toll Brothers, Beazer, and the S&P 500 made nice contributions. All three of my earnings plays (AAPL, GOOG, DELL) did not work out and neither did NDX trading this month. The quant fund meltdown resulted in a huge loss in the hedge fund of funds management company Everest, Brown and Babcock and to a lesser degree in their fund of funds EBI.AX. The latter is very undervalued at the moment.

Progress on Trading Goal.

Asset Allocation
At the end of the month the portfolio had a beta of 0.50. Allocation was 35% in "passive alpha", 63% in "beta", 4% allocated to trading, 5% to industrial stocks, 10% to liquidity, and we were borrowing 17%. My Australian Dollar exposure fell to 59% partly due to the fall in the Aussie and partly due to the merger which brought in $US17k in US Dollars. The merger also increased "liquidity". We will keep this very high level of cash through the move to Australia. We'll spend quite a lot more in the process and then reallocate our cash when things have settled down in October.

July 2007 Report

This is my net worth and investment performance report for July. All figures are in US Dollars unless otherwise stated. This month saw the first negative investment performance in 10 months (in USD terms), bad trading results, and a small decline in net worth.

Income and Expenditure



Expenditure was $2,113 - this month there were no moving expenses. Current non-investment income mainly consisted of a refund from the IRS. I'm no longer receiving a salary or making retirement contributions. Non-retirement accounts lost $1797 but would have lost $3923 if it were not for the continued lift from the Australian Dollar. Retirement accounts gained $288. I've introduced a new entry this month: "retirement tax credits". As I've explained, I measure all investment performance on a pre-tax basis including my Australian supperannuation account. Unlike US retirement accounts the returns on Australian retirement accounts are taxed at source but at a concessional rate. In order to compute the actual gain in my superannuation account after tax to get the change in net worth I need to take out the tax paid. This month the account lost in Australian Dollar terms so the tax adjustment is negative.

Net Worth Performance
Net worth fell by $US356 to $US444,932 and in Australian Dollars lost $A6615 to $A517,784. Non-retirement accounts were at $US244k. Retirement accounts were close to $US201k.

Investment Performance
Investment return in US Dollars was -0.34% vs. a 1.50% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.17% loss in the S&P 500 index. Non-retirement accounts lost 0.73%. Returns in Australian Dollars terms were -1.48% and -1.91% respectively.



The S&P 500 is barely beating a savings account so far this year.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. I can't see any patterns at all in these results - the best gains and worst losses both came from futures trading.

Progress on Trading Goal.

Asset Allocation
At the end of the month the portfolio had a beta of 0.59. Allocation was 34% in "passive alpha", 64% in "beta", 6% allocated to trading, 6% to industrial stocks, 6% to liquidity, and I was borrowing 16%. My Australian Dollar exposure was steady at 62% from 69.5% in January.

June Report

I finally have the data together in almost final form to be able to present to you my net worth and investment performance report for June. All figures are in US Dollars unless otherwise stated. This month saw stronger performance than last month, net worth again increased, and investment returns remained positive for the ninth month running.

Income and Expenditure



Expenditure was $3,622 which included a plane ticket to Australia. Current non-investment income consisted of $561 in reimbursements. I was paid two months salary in May already. 403b contributions totaled $3,021 due to delayed deposit of last month's doubled contributions. I stopped contributing to my Roth pending the move to Australia. Non-retirement investment returns were strong at $9698 but more than half of that came from the continuing increase in the Australian Dollar. Retirement investment returns came in at $3299, almost entirely due to the change in the exchange rate.

Net Worth Performance
Net worth rose by $US12,166 to $US445,261 and in Australian Dollars gained $A866 to $A524,391. Non-retirement accounts reached almost $US245k. Retirement accounts rose to $US200k.

Investment Performance
Investment return in US Dollars was 3.00% vs. a 0.26% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.52% loss in the S&P 500 total return index. Non-retirement accounts gained 4.06%. Returns in Australian Dollars terms were 0.35% and 1.36% respectively.



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Stock index trading (NQ/QQQQ and ES/SPY) produced nice results this month while long-term investments lost the most with the weakness in the market.

Progress on Trading Goal
Trading in my US accounts netted $2,691 - a 10.7% return on trading capital. The model gained 4.1% while the NDX rose 0.3%. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts have reached $55,233 with $61.5k contributed - so I still need to gain just over $6k. Since the beginning of the year the trading capital gained 82%, the NDX has gained 10% and the theoretical model gained 41%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.49. Allocation was 34% in "passive alpha", 63% in "beta", 5% allocated to trading, 6% to industrial stocks, 6% to liquidity, and I was borrowing 14%. I've brought my Australian Dollar exposure down to 62.2% from 69.5% in January. The goal is to eventually reach 50%.

May Report

All figures are in US Dollars unless otherwise stated. This month saw weaker performance especially when compared to the market, but net worth still increased and investment returns remained positive for the eighth month running.

Income and Expenditure



Expenditure was $2,154 while take home pay of $5,248 reflects receiving two months pay this month - we don't get paid in June - and my income tax payments which I treat as negative income. 403b contributions totaled $1,792 and Roth contributions $333.33 as usual. Non-retirement investment returns were more moderate than in recent months ($3,530). Retirement investment returns were also weaker ($804). The Australian Dollar fell a little deducting $2,120 from returns measured in U.S. Dollars.

Net Worth Performance
Net worth rose by $US9,220 to $US433,011 and in Australian Dollars gained $A14,471 to $A523,530. Non-retirement accounts reached $US239k. Retirement accounts rose slightly to $US194k.

Investment Performance
Investment return in US Dollars was 1.02% vs. a 3.07% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.49% gain in the S&P 500 index. Non-retirement accounts gained 1.52%. Returns in Australian Dollars terms were 1.68% and 2.18% respectively. The markets were again very strong this month but my U.S. Dollar returns are still beating the indices year-to-date:



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading worked out well in the end despite some setbacks along the way. Stock index trading (NQ/QQQQ and ES/SPY) produced nice results this month while very bad trades in Salesforce.com and Interactive Brokers lost the most.

Progress on Trading Goal
Trading in my US accounts netted $1,567 a 5.6% return on trading capital. The model lost 0.9% while the NDX rose 3.2%. This is the first time the model has had a losing month in more than a year and a half. In the light of that, my positive performance is rather surprising as up till now I have tended to lose in months when the model has even a weak positive performance. Seems my trading is improving at least in the stock index trading area. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts have reached $53,758 with $63k contributed - so I still need to gain just over $9k. Since the beginning of the year the trading capital gained 64%, the NDX has gained 9.7% and the theoretical model gained 35.3%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.48. Allocation was 30% in "passive alpha", 66% in "beta", 6% allocated to trading, 5% to industrial stocks, 4% to liquidity, and I was borrowing 11%. I've brought my Australian Dollar exposure down to 64.5% from 69.5% in January. The goal is to eventually reach 50%.

Passive Investing and Entrepreneurship

Many personal finance bloggers and personal finance gurus are in favor of passive investing. Invest your money in the market portfolio rather than trying to beat the market through selecting investments and trading. The logic behind this advice is that the sum of all "alpha" - risk-adjusted above market returns - is zero - unlike in Lake Wobegon, not everyone can be above average. The assumption is that the the above market returns are either distributed randomly or are flowing to the Goldman Sachs and Warren Buffetts etc. of this world. It is true that the majority of mutual funds have negative alpha. So why not minimize costs and invest in the market portfolio at the lowest possible?

In thinking about trading as a business an idea came to me.

Many of the same people who are opposed to trading and are in favor of passive investing also strongly favor entrepreneurship and starting your own business. But on average all businesses make the average rate of return on capital. Some are very successful and some fail. Why does it make sense to invest in your own business if it doesn't make sense to be selective in investing in other businesses through the stock market?

April 2007 Report

All figures are in US Dollars unless otherwise stated. This month saw very strong performance, which has been the case for the last several months.

Income and Expenditure



Expenditure was $3525 - more than take home pay ($3,299) due to spending on my brother's upcoming visit to the US. 403b contributions totaled $1,792 and Roth contributions $333.33 as usual. Non-retirement investment returns were again very strong this month ($10,363). Retirement investment returns were also nicely positive ($5,615). The rise in the Australian Dollar again contributed significantly to returns.

Net Worth Performance
Net worth rose by $US17544 to $US423,791 and in Australian Dollars gained $A7451 to $A509,058. The Australian Dollar again rose this month resulting in a relatively large gap between performance in the two currencies. Non-retirement accounts reached $US232,779. Retirement accounts also saw nice gains to $US191,012.

Investment Performance
Investment return in US Dollars was 3.93% vs. a 4.48% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 4.33% gain in the S&P 500 index. Non-retirement accounts gained 4.65%. Returns in Australian Dollars terms were 1.11% and 1.87%. The markets were extremely strong this month. My U.S. Dollar returns beat the indices year-to-date and over the last 12 months:



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading worked out well in the end despite some setbacks along the way. Trades around the Google and Apple earnings reports made good contributions. I again had a positive result for QQQQ/NQ trading ($527). The biggest gain was from a balanced mutual fund - the CFS Conservative Fund. Symbion began to run up in anticipation of the May 1st merger bid. Everest Brown and Babcock suffered a loss this month as the fund of funds sold off in response to the rights issue.

Progress on Trading Goal
Trading in my US accounts netted $3,248 a 10.8% return on trading capital. The model gained 6.4% while the NDX rose 5.4%. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts in total gained a net $3,249 and I have now achieved $12,297 of the annual goal of about $19,000. Since the beginning of the year the trading capital gained 56.1%, the NDX has gained 6.3% and the theoretical model gained 36.5%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.04. 41% of the portfolio was in stocks, 42% in bonds, 13% in cash, and loans totalled -9%. The remainder was in hedge fund type and real estate investments, futures value etc. Looking at asset allocation the way I prefer, 25% was in "passive alpha", 66% in "beta", 8% allocated to trading, 7% to industrial stocks, 3% to liquidity, and I was borrowing 9%.

IPO

I have an opportunity to participate in an IPO, in this case the IPO of Interactive Brokers - one of my US stockbrokers. When I lived in Australia I participated in several IPOs some of which were very profitable and some of which were disastrous. I've learnt how to tell them apart upfront. My guess on this one, even before reading the prospectus is that it would be intermediate between the two extremes. Only 5% of the company is being IPOed. Owners don't do that if they expect the value to fall. They will sell the whole company then (see HIH). On the other hand they are going to use a Dutch auction to set the price and they are opening it to all the account-holders of the company. This encourages a full valuation of the company as it is an efficient auction mechanism. The indicative pricing ($23-27) gives a P/E of around 20. I haven't participated in a US IPO before. Maybe I'll do it just for fun. I'm thinking of bidding for 100 @ $27 and 100 @ $36. If the issue prices from $27-36 I'd end up with 100 shares and below $27 200 shares. What do you think?

P.S. 9:54PM

Another IPO - Platinum Asset Management - these guys are the manager of Platinum Capital (PMC.AX) , which is one of my passive alpha investments. They are selling 20% of the company valuing it at $A2.8 billion. They have $A22 billion under management. I can't participate in the IPO as I'm not resident in Australia. But this one is going onto my watchlist.