Thursday 31 January 2013

January 2013 Review

2013 has started well, with my net worth increasing by 1.7% in January.

My investment portfolio had a great month, growing by close to 4%.  All ETFs performed very well, with January being the strongest month for the portfolio to date.  There were no major new investments in the month (apart from a small monthly purchase of the HK index tracker).  Gold was broadly flat, despite some volatility during the month.

Likewise, my pension funds had their best month on record, with solid increases in unit values (over 5%) as equities continued to rally.

My property was occupied, with one minor maintenance cost making a small dent in the monthly rent received.

Cash balances fell with the payment of the majority of my 2012/13 income tax bill, (offset by a corresponding fall in my tax liability). That being said, i did need to bring forward some of the remaining tax accrual, and when combined with late Christmas costs with another unplanned expense, the net result was a lower than average savings rate for the month.

Overall, a good start to the new year.

Monday 28 January 2013

Unexpected mail

I received a couple of unexpected but welcome letters this month.  Two of my savings account providers contacted me to let me know they would be raising the interest rates on some of my accounts. Its the first time (certainly post 2008) i can remember being contacted in such a way with the offer of an improvement in the rates on existing accounts, with no strings attached or new purchases required. The two institutions are unconnected.

Given the lack of central bank / market moves, i can only imagine these are motivated by local competitive forces.  I believe one is related to a product re-launch, the other appears to be more of a short term goodwill gesture.

This was a timely surprise following my recent post Falling rates, i wonder if they read my blog! Coincidentally i had been planning to move funds away from both accounts to better offers, so i'm assuming their marketing teams are monitoring competitor rates as closely as me and recognised the threat of losing funds.

Wednesday 23 January 2013

Sitting on the sidelines

Although i'm trying not to time the market, i'm currently suffering from a bit of inertia following the recent market rally.  Things that looked cheap a couple of months back now look a bit more fairly valued, which has narrowed the range of investment options i find attractive.

Bond yields are falling, even those with more questionable credit quality. There is also a real risk of capital loss unless tenors are kept short (which reduces yields further).

Equity valuations are broadly at a level i'd consider to be par, or fair value. Certainly nothing is jumping out to me as being dramatically undervalued at a country / regional level.

Looking at the mix of my ETF portfolio, i have reasonable emerging markets, UK & European exposure, and to a lesser extent Hong Kong. Where i think i'm lacking is exposure to North America, small caps, and broader Asian markets (incl China).  Industry wise, the high dividend nature of  my portfolio tends to favour financials, utilities and property. I could probably do with some more consumer based names and possibly industrial or infrastructure.

I think i'll see how the next couple of weeks play out in terms of broader economic sentiment. If we are just taking a pause, its probably a good thing given the past couple of months and i'll just continue with my asset accumulation plans.  If we see a pull back, its even better from a long term investment perspective.


Wednesday 16 January 2013

Forecasting

Something i probably devote as much time to as the basic managing & recording of my monthly finances is forecasting & planning, and i find this has a variety of uses.

Whilst this is inherently more judgmental and speculative than the actual reporting of past events, it allows me to project what my financial position is likely to be in the coming months or years.

Looking a few months ahead (for example the months of 2013) is particularly useful in managing the timing of cashflows, such as one off income/expenses or investments. It also helps the goal setting process & performance evaluation, in determining a baseline ie. estimating my financial position at the end of the year if nothing significant or out of the ordinary occurs in the coming months.  Looking further into the future can help to plan for major life events or expenses, or even potential retirement scenarios.

Whilst it is generally easier to forecast a short distance ahead, i believe the key to this process is determining appropriate assumptions upon which to base the projections.  Short term (for example within 1 year) assumptions are generally straightforward as income streams may have greater certainty, and expenses are either likely to be recurring or predetermined such as holidays.  Long term assumptions should ideally take into account the impact of inflation (certainly on expenses, and hopefully on income!) and investment returns.

Generally i like to keep my assumptions as simple as possible.  Given the inherent uncertainties in looking ahead, i see little value in over-engineering the process and losing sight of the key messages and purpose. For 2013 i've projected income & expenses to be broadly similar to 2012, with conservative investment returns.

My long term forecasting assumptions are very simplistic, really to keep my workings as simple as possible. For example, rather than trying to inflate both my income & expenses, i leave them both flat, effectively assuming wage inflation would offset expense inflation.  As my income generally exceeds expenses, i believe this generates a fairly conservative result, and is also easier to interpret (everything can be read in today's prices).  I often consider attempting to inflate these up and probably will do in the future, but for now i'm quite happy running a simple model. This is also because my primary focus for now is in managing cashflows and investments over the next year or so.

I'd be interested to hear if anyone takes similar or different approaches to forecasting, and what assumptions are used.

Saturday 12 January 2013

2013 objectives

After a successful 2012 i have a few things i'd like to achieve in 2013:

Financial goals:

1) Reduce cash balances towards my medium term target of 20% of total assets.
This will be challenging as i'm expecting a couple of lump sums of cash to come through in the first half of the year and my ability to invest will to some extent depend on the markets and any other investment opportunities that arise.  Whilst my investment focus for the past couple of months has been primarily on high yielding ETFs, i may also consider alternatives including property.  I don't expect to reach 20% in 2013 (barring any unforeseen investing opportunities), but i would like to continue to move towards this target.

2) Maintain investment discipline.
In the past i've had a tendency to make impulsive, short term investment decisions.  My investment discipline improved a lot in 2012 with each new addition forming part of an intentional long term strategy. I would like to maintain this into 2013, with focus on value & risk management (including geographical, asset class & industry diversification).

3) Achieve a high savings rate.
Whilst 2012 was exceptional in this regard, a quick forecast of 2013 suggests a 60% savings rate may be achievable again.  At a minimum this should stay above 50%.  I will also continue to build on my expense analysis as recent months have shown that i have been spending less than forecast.  As i believe the forecast amount is already sufficiently disciplined i will ring-fence any further 'under-spending' against this forecast as a fund that can be used on a more discretionary basis for unplanned luxuries.

Non-financial goals:

1) Improve fitness.
I have a gym membership but my attendance dropped considerably towards the end of 2012. In 2013 i would like to reverse this trend and target a minimum of 3 visits a week.  Along with exercise i need to improve my diet, in particular targeting less unhealthy takeaways and less chocolate.
As the logging of my investment decisions has proved successful in enforcing discipline, i might try the same trick with my fitness & devise some suitable metrics to monitor.

2) Improve work/life balance.
My workload increased in the second half of 2012 and this looks set to continue into 2013. Whilst i can't easily reduce working hours, i would like to stop work spilling into my life outside of work.  In particular, i'd like to reduce the amount i think about work when outside of work, and this can be done by distracting myself with hobbies, interests & a social life!

Good luck to you all in your goals for 2013!

Friday 11 January 2013

2800.HK purchased

Although i'm feeling quite hesitant about investing after the recent rally, i've decided to set up a scheduled monthly purchase of the HK Index Tracker ETF.  The amount each month is very small, and the aim is really to keep accumulating equities without worrying too much about market timing.

By investing a fixed amount each month i'm fairly indifferent to market volatility. If there's a pull back or sustained fall i'll get more shares for my money and i'll have plenty of cash on the sidelines to take advantage of a buying opportunity. I also won't feel like i've completely missed out if there is a prolonged increase from here.

Whilst i generally take the opinions of bloomberg/cnbc guests with a pinch of salt, there seems to be more unanimity growing for a market pull back in the near future.  We'll see how that goes, and in the meantime i'll be planning my next purchases.


Thursday 10 January 2013

Tax Bill

Today i had the pleasure of paying 75% of my annual income tax bill.

The Hong Kong tax system is refreshingly simple, with a straightforward annual tax return & 2 lump sum payments a year.

Whilst it is always painful parting with the cash, it does remind me that it could have been a lot worse if i was living & working elsewhere!


Tuesday 8 January 2013

2012 Full Year review

2012 turned out to be a great year for my finances, with my net worth increasing by around 41%

The biggest single driver was a good increase in employment income. Given my expenses did not materially change, my savings rate ((gross income - expenses) / gross income) for the year was 66%.  I found this number a bit surprising and whilst a high number is desirable, i'll give some thought as to whether i should add a target range to my financial objectives, rather than just making this as high as possible. I think there's a danger that the combination of my natural frugality (if that's a word!) and a greater focus on personal finances may unnecessarily constrain lifestyle choices.  I may consider options such as treats/rewards for reaching financial targets, or accruing some money each month that can be spent more freely. Whilst this is the first year i've really been monitoring income & expenses in sufficient detail to calculate this, i don't think my savings rate will have been much higher than 50% in the past.

Apart from employment income, all of my asset classes saw gains in 2012.

My property was occupied all year, apart from a few days between a change in tenants. A few minor maintenance issues arose, but the associated costs were low.  The rental yield for the year after factoring in all associated income & expenses was a little over 4%.  I also periodically compare similar local property valuations and update the asset value using the most conservative end of the scale. On this basis, the value also increased by around 6% in the year (although looking back i think the opening value was a bit low).

I've discussed my pension performance in an earlier post, but just to refresh with the year end position, the unit values increased by around 14% in 2012, following a strong end to the year. The number of units held also increased through the year with ongoing contributions.

My new investment portfolio (started in October) also performed well as markets rallied into the end of the year.  It was up roughly 4% (about 2% in Nov & 2% in Dec) when comparing income & capital gains against purchase costs.  Within the portfolio, all the ETFs were well up, in particular the UK & Eurozone high dividend ETFs which were the most recent two additions to the portfolio. My holdings of gold partly (but not materially) offset some of these gains, ending the year around 3.5% below its average purchase price.  My approach of buy, hold & accumulate still stands, although following the recent market strength i may grow the portfolio at a steadier pace (ie dollar cost averaging in) rather than piling in as quickly as i did in the past couple of months.

My asset allocation has started to change, with the investment portfolio going from zero to 6% of total assets. When combined with my pension funds (fairly stable at 15% of total assets), i estimate my overall equities exposure to be around 18% of total assets.  My combined invested assets (investment portfolio, rental property & pensions) came to 71%, leaving 29% in cash & near cash.  This is short of my medium term goal of an 80/20 ratio but is moving in the right direction.

I'll post some specific 2013 goals once i've given it some more thought.

I'd also like to take this opportunity to wish you all a happy & prosperous 2013!