Moominvalley Monthly Report March 2015

The Australian Dollar resumed its fall from 78.09 US cents to 76.24 US cents. World stock markets fell. The MSCI World Index fell 1.49%, the S&P 500 1.58%, and the ASX200 only 0.06%. In Australian Dollar terms we gained 0.50% and in US Dollar terms lost 1.88%. So we underperformed both the international markets but outperformed the Australian market. Actually because some stocks went ex-dividend this month but pay the dividend next month we did a bit better than this and outperformed all markets. But I can't be bothered to do the fussy accounting needed to account for dividends not yet paid.

Commodities and hedge funds were the best performing asset classes in our portfolio with Platinum Capital the best individual fund and Winton Global Alpha Fund second in dollar terms. Medibank Private was the worst individual performer losing $1690 in total.

However net worth rose $5k to $1.277 million not counting housing equity and fell $US20k to $US0.973 million. Including housing equity net worth rose $6k to $1.473 million ($US1.123 million). The monthly accounts (in AUD) follow:


Current non-investment income (salary etc.) was $13.6k and retirement contributions were $3.2k.  Total investment returns were $6.4k. Spending on the current account remained very elevated at $13.9k, which house painting and moving among other expenditures. Taking out the cost of moving (but not painting) and some business expenses that should be refunded it was a bit lower at $11.8k. The $2189 spending in the housing account is mortgage interest, while the $3,179 is our mortgage payments - so we paid back net $990 of our loan.

How Much Could We Save by Renting Our House out for a Year?

Bigchrisb commented on my recent post that we could save money by renting our new house out rather than going to live in it immediately. This is because the stamp duty paid to buy new properties is in this territory immediately tax deductible for investors. In Australia no costs of owner occupiers are tax deductible. So, I've calculated roughly what I think the financial gain from renting our house out for a year would be and come up with $18k:

The main deductions are the stamp duty, mortgage interest and depreciation. The first two we are going to pay ourselves anyway and so aren't actually additional costs while the latter is probably not a real cost, or we are going to suffer it anyway. Next there are property management fees, which might help in getting a tenant fast etc. and the difference between land tax on investors and rates on owner occupiers. There are real extra costs.

Assuming we could rent the house for one year at $650 a week we would earn $33800 in rent. So, the net income is -$34k and the tax saved at 40% is $13.5k. On the other hand we make $33.8k we would otherwise not have, but pay $25.8k in rent on our existing apartment that we would not have to pay if we lived in the new house as well as $3.7k in extra actual costs. So the net financial gain is $17.8k.

Let me know if you think I got something major wrong.

So, if we don't do this, economists would say that our revealed preference shows that the utility of living in our new house a year earlier and avoiding dealing with the hassles of being a landlord are worth at least $17.8k to us. For me, $17.8k is about 1.2% of net worth and so it's not enough to make a difference. It's not a lot more than our after tax salaries for one month. I asked Snork Maiden how big the number would have to be before she would be willing to do it and she said $50k. I know that if it was $100k I probably would do it :)

Housing Equity and Other Savings

I've updated my "savings components" chart to include housing equity. You can see the payment from current savings (blue) to the downpayment on the house (red). Also notable is that retirement profits (green) are approaching retirement contributions (pink). Non-retirement savings have performed much worse and profits (brown line) are nowhere near the money saved from salary etc (blue line). However, they are at least above the pre-GFC peak now.

Moominvalley Monthly Report: February 2015

The Australian Dollar was finally stable this month rising half a cent to 78.09 US cents. World stock markets rose strongly. The MSCI World Index rose 5.61%, the S&P 500 5.75%, and the ASX200 6.89%. In Australian Dollar terms we gained 4.92% and in US Dollar terms gained 5.57%. So we underperformed both the Australian and international markets but the latter only slightly. Still in absolute dollar terms this month had the highest investment income on record at $65k ($US57k), 55% more than any previous month.

All asset classes in our portfolio apart from hedge funds and private equity gained with small cap Australian stocks being the best performer (7.59%). Colonial First State Geared Share Fund gained the most dollars ($37.7k) followed by the Unisuper ($6.5k) and PSSAP ($3.9k) superannuation funds. I can't be bothered to work out rates of return for individual funds :)

However net worth fell $48k to $1.272 million not counting housing equity and fell $US31k to $US0.994 million. This was a result of the $111k second installment of our house downpayment. Including housing equity net worth rose to $1.468 million ($US1.147 million). The monthly accounts (in AUD) follow:




Current non-investment income (salary etc.) was $14.3k and retirement contributions were $3.3k.  Total investment returns of $108k also include the value of the gain in our house's value. As our house was valued at $785k and we only paid $740k I have credited a total gain of $45k, most of it occurring this month.

Spending on the current account was $11.9k, which include $2.8k in settlement costs and spending on our trip to New Zealand. We also paid car registration this month, which is an $1100 cost... The $693 spending in the housing account is additional costs, which the lender added to our mortgage loan. We have so far made two mortgage payments of $1589 each and so the total transfer to housing was $114k... So far there have been no interest payments on the mortgage. They would come under housing spending when we do make them. The house is currently being painted and we are booking the mover, arranging insurance etc.

Guardianship

My mother suffers from dementia. Up till recently my brother had power of attorney to make financial decisions for her, but financial providers now wanted him to have guardianship. So he is now the official guardian but the guardianship office where he and my mother live says that her investment portfolio is too risky. They want us to not have more than 20% in equities, get rid of all alternative investments and have the rest in cash and AAA bonds. It is not as if my brother and I decided on the current allocation. It's not a lot different to how it was when my mother could make her own decisions. The problem is that cash earns almost nothing anywhere and short term bonds less than inflation. Long-term bonds have the risk that their value will fall when one day central banks raise interest rates again.

We have tried to resist this and the guardianship office people met with my brother and his lawyer but the only concession they made was to give us a year to sort it out. In the meantime we also discovered (I read about this in an article in the New York Times) that the inheritance tax free threshold in the US for foreign estates was only $60k. That means that around 40% of the money in the US based separately managed accounts in my mother's name would be taxed away after she died - the accounts had minimal if any profit - so it would be taxing savings rather than earnings. So, we closed those accounts avoiding US inheritance tax and reducing the equity share of the portfolio to about 20%. Anyway, this is a warning to get good arrangements in place while you are still capable of making your own decisions rather than having a court imposed solution.

I need to think also about how to avoid US inheritance tax. I only have about $60k of direct US investments in stocks and mutual funds. But I also have another $70k in a 403b retirement account (TIAA-CREF). So, if I suddenly died there would be about $30k in inheritance tax that Snork Maiden would have to pay (no spouse allowance for foreigners...).  There are various options including trying to roll my 403b into an Australian super fund now or setting up an Australian self-managed super fund (SMSF) and transferring the US individual investments into it. My thinking is that this would then be like having units in an Australia based managed fund. Would need to get proper advice on that first. Of course, it's not worth setting up an SMSF for just USD 60k in investments - that would be just one of the holdings of the SMSF. So, watch out if you have individual stocks in the US and aren't a US citizen.

GMOM vs. GTAA

A few months ago Cambria Investment Management stopped advising the GTAA ETF and launched their own in house GMOM ETF to implement their their global tactical asset allocation strategy. How well has the new ETF performed? So far, so good:

 

GMOM has risen by about 2% since being launched and GTAA has fallen by about 1%. GTAA had had a fairly disappointing performance up till then. I was an investor in GTAA and switched to GMOM (I have 1000 shares). So, that was a good move so far.

ASX at Post-GFC High

Broke out of the trading range of the last year and a half. I had been thinking to rebalance away from large cap Australian stocks at the beginning of the week as US indices were looking like they could be topping out. But various evidence including the behaviour of the DAX index in Germany - which had recently broken out - made me eventually not do it.

Moominvalley Monthly Report: January 2015

The Australian Dollar fell by another 4.1 US cents this month to 77.61 US cents. The MSCI World Index fell 1.54% and the S&P 500 3.00%, but the ASX200 rose 3.28%. In Australian Dollar terms we gained 2.99% and in US Dollar terms lost 2.18%. So we underperformed both the Australian and international markets. All asset classes in our portfolio apart from small cap Australian stocks gained with commodities being the best performer. Colonial First State Geared Share Fund gained the most dollars ($14.5k) followed by the PSSAP ($5.6k) and Unisuper ($2.8k) superannuation funds and then the Winton Global Alpha fund ($2k). I can't be bothered to work out rates of return for individual funds :)

But net worth fell $A13k to $1.321 million not counting housing equity and fell $US65k to $US1.025 million. Including housing equity net worth rose to $A1.360 million but still fell in US Dollars to $1.055 million. The monthly accounts (in AUD) follow:


This month's accounts get more complex as we introduce the changes in housing equity and their implications for current and retirement accounts. And this is the much simplified approach. I decided to give up on a full economic accounting.

Current non-investment income (salary etc.) was $16.5k and retirement contributions were $3.2k.  Investment returns were $A42k in total.

Spending was at a record high of $32.5k because we paid $A27.8k in stamp duty tax to the government, which I decided to count as consumption spending. Income tax us treated as negative income in my accounting system but GST is an expenditure. So, logically stamp duty should be too.  Without that we only spent $A4.7k, which is low.

Then there was a $A37k transfer to the housing acccounting representing our 5% deposit with the seller's agent. This means we dissaved $53k from current non-investment income but made $37k in housing saving for a net dissaving (including retirement accounts) of $A13k. Next month will have the second and much larger transfer to housing of the 15% second installment in the downpayment of $A111k.

I just went to do a final inspection on the house. Settlement should be tomorrow.

Continuing to Recover from the Financial Crisis

This month profits on non-retirement accounts finally exceed the previous peak in June 2007 (in AUD terms at least). Of course, adjusted for inflation that is still a big loss, hence the title of this post. In retirement accounts the pre-crisis peak was $A108k in August 2007. This was exceeded for the first time in February 2013 and we now stand at over a quarter million dollars in cumulative profit this month. The retirement account numbers are post-tax. Cumulative profits on non-retirement accounts are only just over $A80k.

This is What Buying a House Looks LIke

Each time we tried to buy a house at auction we moved the necessary deposit money into our checking account from this account. The three attempts should be pretty clear on the chart - one in early 2013 and two in late 2014. Then finally we are actually buying a house, but not at auction. You can see the initial 10% deposit money coming out of the account (though the seller actually agreed to 5%) and then the rest of the 20% downpayment and the stamp duty tax - we have to pay a 3.7% tax to the state government to buy a house... The latter really slows people down from buying and selling houses and encourages people to extend, improve, or knock down and rebuild their existing house.

Signed Mortgage

Today we signed all the mortgage documentation at the bank to borrow $A592k....

Paid Deposit

I delivered the 5% deposit check for the house to the lawyer this morning and she expects the deal will be locked in today or Monday. Then we sign the mortgage loan documents at the bank and the countdown to "settlement" starts. I had been planning to do a proper economic accounting for the house, but it is getting very complicated and I think I might take a really simple option instead. This would treat principal payments like today's deposit and the capital component of mortgage payments as saving and everything else as just consumption spending. And I won't try to compute a rate of return for this asset. Any gain in value above the amount saved into the asset will be a gain in net worth but won't be included in reports on our investment performance.

Super Funds Make 7.5% in 2014

Says this article in the Australian. We made 12.5% on our retirement accounts this year in Australian Dollar terms. Overall return on all assets was 9.2% against a 4.01% gain in the ASX 200. Diversification away from Australian shares helped this year. OTOH the MSCI gained 4.71% in USD terms, while we lost 0.11% in USD terms overall.

Moomin Valley Annual Report 2014

The accounts for this annual report follow the same format as those in my monthly reports. Here are the accounts in Australian Dollars:

I've also added the change from last year. Salary and similar non-investment income was up 9% and spending was up 45% but investment income, saving, and, therefore, change in net worth are all down on last year. Because the US Dollar rose very strongly this year, the picture is worse in USD terms:

Investment income was negative because foreign exchange losses totalled $US93k, while core investment income was $87k.

Spending was by far at a record level. I don't expect this to be a permanent high level in the future, but definitely the trend is up.

2014 Outcome and 2015 Forecast

Last year I forecast that net worth would optimistically reach $A1.4 million and pessimistically hit $A1 million by the end of 2014. The US Dollar range was $US1.19 million to $US0.75 million. The result for this year turned out at $A1.33 million (USD 1.09 million). The Australian stockmarket didn't perform that well, the Australian Dollar fell to 81 US Cents and we spent a record amount. Therefore, the result was below the most optimistic projection.

So, now is time to forecast for 2015. Buying a house complicates things  even more. The optimistic projection is $A1.65 million or USD 1.33 million assuming the Australian Dollar only declines to 80 US Cents. The most pessimistic scenario is that the Australian Dollar falls to 70 US Cents, the stock market falls by 20%, and the value of our house falls to $A700k. In that case, we would have $A1.15 million or USD 800k.

Moominvalley Monthly Report: December 2014

The Australian Dollar fell by another 3.5 US cents this month 81.71 US cents. The MSCI World Index fell 1.89% and the S&P 500 0.25%, but the ASX200 rose 0.51%. In Australian Dollar terms we gained 2.63% and in US Dollar terms lost 1.67%. So this was a rare month where we outperformed both the Australian and international markets. All asset classes in our portfolio apart from hedge funds gained with private equity doing best. Medibank Private was again a good performer.

As a result, net worth rose $A44k to $1.330 million (new high) and fell $US9k to $US1.087 million. The monthly accounts (in AUD) follow:


Current non-investment income (salary etc.) was very high at $27.5k as were retirement contributions at $4.9k. This was a three paycheck month. Also we got some big medical and work-related reimbursements. Spending was extremely high at $19.5k due to medical related expenses. Still, that means that we still managed to save $8.0k from current non-investment income.

I'll do an annual report next.