Rising Local House Prices

The graph shows the percentage premium over the original sales price (when the development was originally marketed) of freestanding houses sold in our development since we bought. Ours is the first datapoint. The most recent sale at auction yesterday establishes a new record premium. The regression model I fitted to the data predicts a price for our house that almost exactly matches my recent upgrade of the value. I use two regressors – the original sale price and the date of the new sale. Premia are higher on the houses that originally had lower sales prices i.e. the smaller houses.

Long Term Investing Trends

The Australian Dollar tends to be high relative to the American Dollar during economic booms and low during economic crises. The recent low point in 2015-16 is related to a fall in commodity prices and slowdown in the World economy, especially in China. I think China probably slowed down by much more than the government admitted. During 2015 US stock markets went sideways or declined. The Australian market started 2015 optimistically but then had a steep fall:

There is now a lot of talk of renewed growth in the World Economy. On the other hand, US interest rates are rising as the Federal Reserve tries to reduce its balance sheet and with the Fed not buying US government bonds, but the US Treasury trying to issue even more after Trump's tax cut, the Treasury will need to offer higher interest rates, which makes government bonds an unattractive investment as rising yields implying falling prices for existing bonds. That is likely to both have negative effects on growth in the short run and make Australian Dollars less attractive in terms of interest yields. So, I'm a bit skeptical about the Australian Dollar rising strongly from here.

The US stock market is also very highly valued based on corporate earnings over the previous 10 years (Shiller's measure of stock market valuation, CAPE):

Historically, that has meant negative returns in the US market going forward. On the other hand, it is possible that something has changed and the risk premium for stocks has declined so that the stock market won't return to PE's as low as in past bear markets. It's unlikely that inflation would get as high as it did in the 1970s, which both raised the required rate of return and compressed growth profit. CAPE in Australia was 18.4 at the end of January, which is much more reasonable.

The best indicator of an oncoming recession is the yield curve. If short-run interest rates are higher than long-run interest rates, usually a recession follows. There is no sign of that at the moment in the US:

January 2018 Report

We gained for the eighth straight month in a row as US stock markets went parabolic, the Australian Dollar rose, and one of our private equity investments made a big gain.

Here are our monthly accounts (in AUD):

"Current other income" consisted entirely of salaries (after tax) this month and was $17.8k. It's higher than usual because I finally got my tax refund from last year of $2.6k. Spending (not counting our mortgage) was a little on the high side at $7.8k. After deducting the mortgage payment of $4.1k (which includes implicit interest saving due to our offset account - the actual mortgage payment was about $874 less than this), we saved $6.1k on the current account and added $2.2k in housing equity. Retirement contributions were $2.9k. Net saving was, therefore, $11.1k across the board.

The Australian Dollar rose from USD 0.7813 to USD 0.8077. The ASX 200 lost 0.45%, the MSCI World Index gained 5.66%, and the S&P 500 5.73%. All these are total returns including dividends. We gained 1.11% in Australian Dollar terms and 4.53% in US Dollar terms. So, we outperformed the Australian market and underperformed international markets.

The best performer in dollar terms was IPE.AX, which is a listed private equity fund of funds, gaining $8.7k. One of their funds made a deal to sell Threatmetrix to the former Reed Elsevier group, now known as RELX. The stock, which had been languishing at around 9.9 AU cents rose to 12 cents. Management estimates that if all goes well the net value of the stock has risen to 14 cents. I have bought some more shares at 11.5 cents since the deal was announced. Is this what Ron Brierley knew when he bought into IPE? I am at around 470,000 shares and hoping to buy more as the position is only 3% of net worth :) Early in the month I sold out of Platinum Capital (PMC.AX) at prices of $2.09-$2.15 and then recently when the price fell I bought back in at $1.96-2.00. I also reopened a position in Oceania Capital Partners (OCP.AX), another private equity investment. So far, my latest trade is down. Yes, it was the worst performing investment this month, down $2.7k.

The second best performer this month was Winton Global Alpha Fund, a managed futures fund, which gained $2.8k. I'm planning to increase my holdings in it too as a hedge against equity downside. Currently, the position is $110k after investing an extra $10k. Yeah, that's only 5% of net worth. Despite the craziness of the stock market rise in the US, there isn't a strong case for a big correction. The yield curve isn't yet near inverting, the world economy seems to be doing well, and Oscar Carboni is bullish for the year :)

Private equity was the best performing asset class, up 9.6%. All asset classes gained. Australian large cap stocks gained the least at 0.1%.

House prices rose here 8.4% for the year. Given this strong rise, I have raised the value of our house adjusting the September and December 2017 accounts. The carrying value is now $840k.

As a result of all this, net worth rose AUD 30k to $2.158 million or rose USD 81k to USD 1.743 million.

Projection for 2018

My fair weather forecast for 2018 is a net worth gain of about AUD 250k to reach about AUD 2.3 million. It is based on expected salaries and retirement contributions, an increase in spending of 6% and an 8% rate of return on investments.

ASX200 Alpha and Beta

Another new chart:

This is based on regressing my returns in excess of the RBA cash rate on the ASX200 returns in excess of the cash rate using 36 months of data. Clearly there is a negative correlation between alpha and beta. In recent years beta is less than one and alpha greater than one. Alpha was very negative during the financial crisis and there are some wild swings before that. The tech crash also had hugely negative alpha. Looks like I outperform in bull markets and underperform in bear markets but that it isn't all just due to too much leverage.

Annual Report 2017: Graphs

So here is how the last year looks on a graph in the context of everything since 1996:

The blue line is the sum of the other three lines. Medium term balance is liquid assets, the green line is retirement accounts. Both of these and housing equity increased. Markets performed well this year and we saved more.

This graph provides a slightly different view, breaking things down according to savings and profits. I don't break down housing equity into the two components as it's not worth it yet...

Though we are making savings outside of retirement accounts and housing equity - the blue line is rising - the slope is shallower than before we bought a house and had a baby but steeper than last year. So, a lot of this year's increase came from profits. In the long run we have done much better with retirement than with current accounts in terms of profits. Half of our retirement accounts are now made up of profits and half from contributions.

The next graph shows actual monthly non-retirement savings since 1996 and a 12 month moving average:

I have truncated the axis at -$15k - we dissaved $53k in January and $118k in February 2015 as we bought the house. After the big transfer of savings to buy the house, savings recovered, but to a lower level than in recent years. In the past year they have edged back up again to an average of $5k per month, though they are very volatile.

Housing Saving

A new chart - monthly housing saving:

It's mostly mortgage principal payments. Initially, we made our downpayment in two payments over two months. I've truncated the scale at $10,000 - saving in January 2015 was $37k and in February 2015 $115k. The main interesting thing on the graph is the upward trend over time. This reflects the increasing money in our offset account and the resulting lower interest payments. As a result, the part of our mortgage payments that's reducing the principal increases over time. The periodic spikes are the three mortgage payment months - we make a mortgage payment every two weeks. The red line is a 12 month moving average.

Annual Accounts 2017

This is our annual account - the sum of each of the monthly accounts I've posted - in Australian Dollars (one Aussie Dollar is currently 78 US cents - see accounts in USD at the end of this post). First a reminder about how these accounts are laid out: Current account is all non-retirement accounts and housing account income and spending. Then the other two are fairly self-explanatory. But housing spending only includes mortgage interest. Property taxes etc. are included in the current account. There is not a lot of logic to this except the "transfer to housing" is measured using the transfer from our checking account to our mortgage account. Current other income is reported after tax, while investment income is reported pre-tax. Net tax on investment income then gets subtracted from current income as our annual tax refund or extra payment gets included there. Retirement investment income gets reported pre-tax too while retirement contributions are after tax. For retirement accounts, "tax credits" is the imputed tax on investment earnings which is used to compute pre-tax earnings from the actual received amounts. For non-retirement accounts, "tax credits" are actual franking credits received on Australian dividends and the tax withheld on foreign investment income. Both of these are included in the pre-tax earning but are not actually received month to month as cash.... Finally, "core expenditure" for housing is the actual mortgage interest we paid. "expenditure" adds back how much interest we saved by keeping money in our offset account. We include that saved interest in the current account as the earnings of that pile of cash. That virtual earning needs to be spent somewhere to balance the accounts... It is also included in the "transfer to housing". Our actual mortgage payments were less than the number reported by the $8k in saved interest. For current accounts "core expenditure" takes out business expenses that will be refunded by our employers and some one-off expenditures. This year, I think there are none of those one-off expenditures. Oh, "saving" is the difference between "other income" net of transfers to other columns and spending in that column, while "change in net worth" also includes the investment income.

We earned $201k after tax in salary, business related refunds, medical payment refunds, tax refunds etc. We earned (pre-tax including unrealised capital gains) $107k on non-retirement account investments. Both of those numbers were up strongly from last year as Moominmama went back to work and investment markets performed very strongly in the first year of the Trump Administration. Total current after tax income was $308k. Including mortgage interest we spent $101 up 7.5% from last year.

$7.6k of the current investment income was tax credits, which actually was down on last year. Finally, we transferred $50k in mortgage payments (and virtual saved interest) to the housing account. The change in current net worth, was therefore $160k. Looking at just saving from non-investment income, we saved $60k. Both these numbers were up strongly from last year.

The retirement account is a bit simpler. We made $47k in after tax contributions and the value rose by an estimated additional $126k in pre tax returns. $15k was the estimated tax on that and so the increase in net worth was $158k. Taxes are just estimated because all we get to see is the after tax returns. I do this exercise to make retirement and non-retirement returns comparable.

Finally, the housing account. We spent $14k on mortgage interest. We would have paid $23k in mortgage interest if we didn't have an offset account. I estimate our house is worth $2k more than I did last year based on recent sales in our neighbourhood. After counting the transfer of $50k into the housing account housing equity increased $31k of which $27k was due to paying off principal on our mortgage.

In total net worth increased by $350k, $135k of which was saving from non-investment sources. Comparing 2017's accounts with the 2016's, we saved 34% more and net worth increased by 61% more. Total after tax income was almost half a million dollars, up 52% on last year. It is hard to get my head around that number and reconcile it with our fairly modest lifestyle. Of course, most of it was earned in retirement and non-retirement investment accounts and it includes a lot of notional unrealized capital gains. In 2008 we had a net loss of $150k...

Here are the same accounts expressed in US Dollars:

Because of exchange rate movements "non-core" investment earnings don't translate from one set of accounts to the other at a regular exchange rate. The "core investment earnings" takes out that exchange rate movement.

December 2017 Report

The optimistic annual projection was AUD 2 million. We exceeded this, reaching AUD 2.064 million at the end of this month. I'll do an annual report soon.

Here are our monthly accounts (in AUD):

"Current other income" consisted entirely of salaries (after tax) this month and was $13.1k. Spending (not counting our mortgage) was moderat at $6.2k. After deducting the mortgage payment of $4.0k (which includes implicit interest saving due to our offset account - the actual mortgage payment was about $994 less than this), we saved $2.9k on the current account and added $2.2k in housing equity. Retirement contributions were $3.1k. Net saving was, therefore, $8.2k across the board.

The Australian Dollar rose from USD 0.7571 to USD 0.7813. The ASX 200 gained 1.81%, the MSCI World Index gained 1.65%, and the S&P 500 1.11%. All these are total returns including dividends. We gained 1.43% in Australian Dollar terms and 4.67% in US Dollar terms. So, we slightly underperformed the Australian market and strongly outperformed international markets because of the rise in the Australian Dollar against the US Dollar.

The best performer in dollar terms was the Colonial First State Geared Share Fund, gaining $9.2k followed by Colonial First State Developing Companies, which gained $4.5k. Generation Global Share FUnd was the worst performer losing $0.3k because of the fall in the US Dollar against the Australian Dollar. Australian Small Cap stocks was the best performing asset class in percentage terms, gaining 3.54% followed by Commodities at 2.89%. Private equity was the worst performing asset class, but it still gained 0.45%.

As a result of all this, net worth rose AUD 32k to $2.064 million or rose USD 74k to USD 1.613 million.

How Did We Get to AUD 2 Million?

This month we hit $A2 million net worth for the first time. We reached $A1 million in September 2013. How did net worth increase that much in 4 years? This graph should help explain:

The biggest contributor is profits on retirement accounts at $295k. Stock markets have been very strong. Retirement contributions added $182k. Housing equity contributed $249k. Current savings added $72k and profits on non-retirement accounts $219k. But, of course, we shifted $150k of current savings as a downpayment on our house. So really current savings were a larger contributor than retirement contributions. Of course, mortgage payments come out of our current income too.

A lot of the time it feels like that we aren't doing any saving now apartment from mortgage principal payments and retirement contributions. The blue line shows that actually we are.

November 2017 Report

Stock markets rose again this month and our net worth went over the AUD 2 million mark. I am wondering how sustainable that is going to turn out to be. We hit the AUD 1 million mark in September 2013. So it's only taken just over 4 years to add another million and double our net worth.

Here are our monthly accounts (in AUD):

"Current other income" was $21k. This was a three salary payments month and I also got a large reimbursement. Spending (not counting our mortgage) was high at $8.5k. After deducting the mortgage payment of $5.6k (which includes implicit interest saving due to our offset account - the actual mortgage payment was about $869 less than this - it was also a three mortgage payment month), we saved $7.1k on the current account and added $3.7k in housing equity. Retirement contributions were $4.7k. Net saving was, therefore, $15.6k across the board.

The Australian Dollar fell slightly from USD 0.7672 to USD 0.7571. The ASX 200 gained 1.64%, the MSCI World Index gained 1.98%, and the S&P 500 3.07%. All these are total returns including dividends. We gained 1.98% in Australian Dollar terms and 1.68% in US Dollar terms. So, we slightly outperformed the Australian market and slightly underperformed international markets. The best performer in dollar terms was the Colonial First State Geared Share Fund, gaining $5.9k followed by Unisuper, PSSAP, and Platinum Capital, which all gained around $4k. 3i (III.L) was the worst performer losing $0.8k. Hedge funds were the best performing asset class in percentage terms, gaining 2.43%. Private equity was the worst performing asset class, losing 0.47%.

As a result of all this, net worth rose AUD 48k to $2.034 million or rose USD 17k to USD 1.54 million.

October 2017 Report

The Australian stock market rose strongly for a change this month and the Australian Dollar fell a little. As a result, our net worth increased strongly and now is quite close to the AUD 2 million mark. Here are our monthly accounts (in AUD):

"Current other income" was $15k. We received almost $2k in childcare subsidy that the government pays us quarterly. Spending (not counting our mortgage or business expenses that should be refunded) was a little higher than last month moderate at $7.0k. After deducting the mortgage payment of $4.0k (which includes implicit interest saving due to our offset account - the actual mortgage payment was about $828 less than this), we saved $1.7k on the current account and added $2.1k in housing equity. But we should get a $2.3k refund of business expenses at some point, which will be credited as saving in a later month. Retirement contributions were $3.1k. Net saving was, therefore, $6.9k across the board.

The Australian Dollar fell slightly from USD 0.7839 to USD 0.7672. The ASX 200 gained 4.01%, the MSCI World Index gained 2.1%, and the S&P 500 2.33%. All these are total returns including dividends. We gained 4.19% in Australian Dollar terms and 1.97% in US Dollar terms. So, we slightly outperformed the Australian market and slightly underperformed international markets. The best performer in dollar terms was the Colonial First State Geared Share Fund, gaining $17.5k. Cadence (CDM.AX) was the worst performer losing $0.5k. Australian small cap stocks were the best performing asset class in percentage terms, gaining 4.68%. Hedge funds gained 4.46% and US stocks 4.42%. Private equity was the worst performing asset class, but still gained 2.21%!

As a result of all this, net worth rose AUD 72k to $1.985 million (new high) or rose USD 23k to USD 1.523 million (also a new high).

TFS Capital Closes Its Mutual Funds

I was surprised to hear that TFS Capital is closing its three mutual funds. I have about USD 14k invested in the TFS Market Neutral Fund. I think they will send me a check with the proceeds. Following Interactive Brokers transferring my account to their new Australian subsidiary, this will be another step in reducing my financial footprint in the US. I still have a couple of bank accounts and a 403b fund there. I'm not planning on closing the latter and will also try to hang onto the bank accounts.

September 2017 Report

It was another relatively quiet month financially. Here are our monthly accounts (in AUD):

"Current other income" was $14.7k. I got paid about $2.5k of backpay. Spending (not counting mortgage) was about the same as last month moderate at $6.8k. Rates (property tax) and the body corporate (condo) fee added more than $1k. After deducting the mortgage payment of $4.0k (which includes implicit interest saving due to our offset account - the actual mortgage payment was about $840 less than this), we saved $3.9k on the current account and added $2.1k in housing equity. Retirement contributions were $3.5k. Net saving was, therefore, $9.5k across the board.

The Australian Dollar fell slightly from USD 0.7922 to USD 0.7839. The ASX 200 lost 0.02%, the MSCI World Index gained 1.97%, and the S&P 500 2.08%. All these are total returns including dividends. We gained 0.97% in Australian Dollar terms and lost 0.09% in US Dollar terms. So, we outperformed the Australian market and underperformed international markets. The best performer in dollar terms was the various Platinum Funds, gaining $6.0k. IPE was the worst performer losing $2.0k. That was the result of a tick down of 0.5 cents in the share price to the bid rather than ask side of the spread. Hedge funds were the best performing asset class in percentage terms, gaining 3.55%. Private equity was the worst performing asset class, losing 4.11%. Commodities were also down, 1.58%. All other asset classes gained.

As a result of all this, net worth rose AUD 22k to $1.910 million (new high) or rose USD 2k to USD 1.498 million (also a new high).

Moominmama's Taxes 2016-17 Edition

I've filed Moominmama's tax return for this tax year. The tax year runs from 1st July to 30th June in Australia. The figures ignore employer and employee contributions to superannuation (retirement account) which amount to a lot of extra income. Everything is in Australian Dollars of course.

Her salary is down because she went on maternity leave and the average tax rate also falls as a result. Investment income is up though.

Here are the reports on Snork Maiden's taxes for all previous years:

2015-16
2014-15
2013-14
2012-13
2012-13
2011-12
2010-11
2009-10
2008-9
2007-8

Moominpapa's Taxes 2016-17 Edition

I have now completed my tax return. Looks like I should get a $2,870 refund. This huge increase in refund compared to last year is mainly due to the 16% increase in tax witholding by my employer relative to only an 11% increase in tax owed. My taxable income is up by 8%. But my tax is up 11%. This is because the increase in income is taxed at the maximum marginal rate, which is 49%. Gross cash income is before tax income ignoring franking and other tax credits and adding in net undiscounted capital gains (not deleting losses from previous years). It was up 16%.

I again checked what information the government knows about my tax affairs as revealed by the prefilled information on my tax return. They are still missing as much information as last year.  I filed Moominmama's return online for the second time, using the prefilled numbers plus deductions.

Previous years' reports:

2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-9
2007-8

Interactive Brokers Australia

Interactive Brokers have set up a subsidiary in Australia and are requiring all clients resident in Australia to move their account to the new broker. The only declared difference is that they won't hold cash in currencies apart from AUD and USD. A few years ago they told Australian clients that they couldn't borrow on margin any more. Maybe that was fixed in the meantime. In any case, the website indicates that you can borrow on margin. Formally, it doesn't change the obligation to pay US estate tax on US assets. These start at an estate of only USD60k for non-US citizens. But it would probably make it easier to avoid. I still have a US retirement account, which is a bit over the USD 60k limit and a US mutual fund worth USD 14k. I also have a bank account, but that isn't included in the estate tax liable assets. It seems though that the US-Australia estate tax treaty means that my estate wouldn't be required to pay US estate taxes.*

* This wasn't the case for my mother who lives in a country that doesn't have an estate tax treaty with the US.