Currency wars, Risk taking and Satisfaction

Risk taking

            With interest rates still low – some government bonds offer negative interest rates – the Eurozone crisis stabilizing and the US economy healthier, investors are emboldened.

              A huge amount of liquidity has been sitting in cash or negative yield bonds out of fear. As that recedes, a wall of money is flowing into financial assets. Debt markets are very accommodating and there is a lot of capital sloshing around.

             Some of the governments are more desperate than others – in the UK there has been serious discussions on imposing negative interest rates as a stimulus measure.  This will further undermine the savers efforts to earn meaningful money to preserve the capital against inflation.

              Spread between yields for highly-rated and lower-rated companies bond is far narrower than it is used to be. Investors are chasing returns, sometimes at all cost. It is not unheard off that emerging markets institutes rated at BBB- successfully selling bonds at 3.6 per cent in USD. This makes bonds rather risky and pricy investment.

              Investors are putting money in the assets they would not do otherwise for the premium they are getting – stock market at the current returns. Markets are almost at all-time high, while the returns are very low.   There is a risk of not only erasing value of the money, but erode the returns as well.

Rate of Return (ROI) on Real Life Investments

In 2012 I have acquired some investments and would like to review their effectiveness. The way I calculate rate of return is quite simple:

-         For the shares /equities with dividends paid:  (price at the end of the year – price at the beginning of the year + dividends paid)/ price at the beginning of the year.

-         For the mutual funds or shares with the dividends reinvested: (price at the end of the year – price at the beginning of the year)/ price at the beginning of the year.

I used my current investments as real life example of rate of return on the investments:

	Vanguard Energy ETF - VDE	Gazprom OAO (GAZ:FRA)	Company shares
Number of holdings	300	3000	248 to 260
30th December 2011	30,243 (@100.81)	32,130 (@10.71)	9005 (@36.31)
28th  December 2012	30,057 (@100.19)	27,690(@9.23)	8736 (@33.6)
Dividends	537* (1.99 per share)	1219** (@ 0.45)	12 shares or 388**
Dividends %	1.78	4.4	4.4
Overall return $	351	-3,221	-269
Overall return %	1.1%	-10%	-3%

*10% taxes paid.

** projected dividends, 10% taxes paid.

February 2013 update ($229,800 +$3,060 or +1%)

It has to be highlighted that the change is for the last 2 months, rather than one.

The portfolio changes:

↑ Accumulate additional $7,000 as part of my annual savings plan ($42,000 a year or $3,500 a month)

↑ Vanguard Energy ETF stocks are up $2,100

↑ Vanguard Energy ETF 2012 dividends were $ 537 or $1.99 per share.  By default bank charged 10% income tax on the dividends, otherwise I would get $597.

↑ Emerging market mutual funds are up combined $450

↓ Precisions metals lost $1,210

↓ Company & Gazprom shares down combined $930 in spite of Q4 dividends reinvestment. Gazprom yet to pay dividends for 2012. Projected $0.23 per share - $4.34 or almost 5%.

↓ GBP (£) lost to USD ($) almost 6% of its value. For me it presented a $4,700 loss.

Diversification

One of the key strategies for successful financial independence is to keep right portfolio allocation and diversification.

What I have decided is my annual investment targets to be invested in mutual funds. This will provide less growth but less risk as well. Should I manage to accumulate any additional money for the investment, I can put them in individual equities, if I want to.

This is last two years and three scenario for this year (Do nothing and stay in cash, do partial investment or invest everything):

Key Performance Indicators (KPIs) for Financial Independence

From A to B and  how.

A - Knowing where you are (current net worth)

B - Where you want to be  (amount of money you need to achieve financial independence).

How – Family budgeting vs. Income –Savings and where to invest.

These are the financial independence basics. One would still need to have key performance indicators. For my plan and portfolio I want to choose following:

-         Absolute total return on invested cash. Expressed in dollars and percentage.

In 2012  the result was $5,4 K and 3%.

-         Relative total return (measured against S&P 500)

3% vs. 14% (S&P 500).

-         Inflation adjusted return.

       2012 inflation was 3%, hence adjusted return was 0%.

-         Cash accumulated to be invested (annual figure expressed in 2010 money).

$ 51 K vs. $ 40K planned.

-         Assets & currency allocation.

To be developed. Moving in the right direction.

-         Personal expectation.

After getting acquainted with inflation, I lowered my expectation of early retirement /financial independence.  However this is still a very important indicator.

Suppose market performed well, but you did not manage to accumulate as much money as planned – you still on target. Sometimes market was bearish or certain assets underperformed, but accumulated cash compensated for it.  You need to have your own understanding and aspirations.

Rate of Return (ROI) on Investment - Real Estate Apartments

I have  been recently contacted by a reader asking for a help to analyze results of investing into 2 condominiums (apartments).

Here is the input data (story):

Apartment #1  (Apt. #1) - initial investment $ 56 K back in 2005 and additional amount of money in 2010 - $170 K.

Apartment #2 (Apt. #2) - investment $ 170 K in 2010.

The questions are:

 - Whether the investment in the real estate worth it and what is rate of return (ROI)? 

 - What to do next - sell them or keep as rental properties?

Rate of Return (ROI) vs. Inflation

I set my goal back in 2010 that I would need $2 million to become a financially independent person. This means that I have enough capital to generate income which should cover my expenses.

I looked at the role of the inflation on my portfolio. Since the 2010 Cumulative inflation over 3 years is 9%.  In practical terms  it converts $100 in 2010 worth less than $92 today.  If current inflation rate will stay the same by 2040 the same $100 would worth only $48.

I reported that my portfolio worth $226,800 but in 2010 money it is $209,000. This underlines importance why  rate of return on your investments should be at least 2-3% above inflation rate.