Investment Advice/ Risk assessment

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Topic Author
ANZACINHK
Posts: 3
Joined: Wed Jun 05, 2019 11:22 pm

Investment Advice/ Risk assessment

Post by ANZACINHK » Wed Jun 05, 2019 11:58 pm

Hi

I am wanting an investment/ risk checkup of my current investments and a rain-check of what I should be considering moving forward.

Keeping in mind I am Hong Kong based and not a US citizen (so no capital gains tax, tax on dividends, etc...) I have converted all $ to USD for ease of the readers

34 m Main income earning $250,000, around $220,000 Net after tax

My primary investments are NZ real estate (all in NZ capital which continues to increase by roughly 7% a year):
- 5 x home and income rental properties
- Current market value = $3,300,000
- Current mortgages = $2,150,000
- Interest rate 3.89%
- Net income after all expenses and taxes = $80,000 (put towards principle)

Secondary investments
- $130,000 in - iShares Core MSCI World UCITS ETF (traded in Amsterdam, Irish domiciled fund so I don't get caught up in the US death taxes thresh-hold)
- $100,000 shares in high risk startup (12.5k put in, current value based on last valuation)
- $200,000 invested in another high risk startup (cash flow positive and growing)
- $160,000 in Cash

My plan is to push the bulk of my savings moving forward 100% into iShares Core MSCI World UCITS ETF

I never plan to sell my properties, so I believe my largest risk at the moment is the interest rate risk on my properties. And by my calculation interest rates would need to move up above 8% before it needed any top-up anything into the properties.

I know this forum favors low cost index funds over property investments but with a net migration of migrants into NZ of 60,000 people (for a little country of 5 odd million) property in NZ has in the past been a very safe bet, if I was to liquidate the properties there would be about 300,000 in profit tax to pay (there is no capital gains, but if you sell a property within 5 years you have to pay tax at the level of your income, in my case it would be a trust tax as that is the entity I have them parked)

However I am sure there are risks I haven't considered so I am open to being convinced by more experienced guys than me, as I feel most my investment experience has been in this low interest rate environment.

Appreciate the advice in advance.

Thanks
Nigel

Valuethinker
Posts: 38381
Joined: Fri May 11, 2007 11:07 am

Re: Investment Advice/ Risk assessment

Post by Valuethinker » Thu Jun 06, 2019 7:35 am

ANZACINHK wrote:
Wed Jun 05, 2019 11:58 pm
Hi

I am wanting an investment/ risk checkup of my current investments and a rain-check of what I should be considering moving forward.

Keeping in mind I am Hong Kong based and not a US citizen (so no capital gains tax, tax on dividends, etc...) I have converted all $ to USD for ease of the readers

34 m Main income earning $250,000, around $220,000 Net after tax

My primary investments are NZ real estate (all in NZ capital which continues to increase by roughly 7% a year):
- 5 x home and income rental properties
- Current market value = $3,300,000
- Current mortgages = $2,150,000
- Interest rate 3.89%
- Net income after all expenses and taxes = $80,000 (put towards principle)

Secondary investments
- $130,000 in - iShares Core MSCI World UCITS ETF (traded in Amsterdam, Irish domiciled fund so I don't get caught up in the US death taxes thresh-hold)
- $100,000 shares in high risk startup (12.5k put in, current value based on last valuation)
- $200,000 invested in another high risk startup (cash flow positive and growing)
- $160,000 in Cash

My plan is to push the bulk of my savings moving forward 100% into iShares Core MSCI World UCITS ETF

I never plan to sell my properties, so I believe my largest risk at the moment is the interest rate risk on my properties. And by my calculation interest rates would need to move up above 8% before it needed any top-up anything into the properties.

I know this forum favors low cost index funds over property investments but with a net migration of migrants into NZ of 60,000 people (for a little country of 5 odd million) property in NZ has in the past been a very safe bet, if I was to liquidate the properties there would be about 300,000 in profit tax to pay (there is no capital gains, but if you sell a property within 5 years you have to pay tax at the level of your income, in my case it would be a trust tax as that is the entity I have them parked)

However I am sure there are risks I haven't considered so I am open to being convinced by more experienced guys than me, as I feel most my investment experience has been in this low interest rate environment.

Appreciate the advice in advance.

Thanks
Nigel
Risks on property:

- rise in interest rates - can you hedge by fixing your mortgage for the longer term? Long term mortgage rates are at the lowest levels in most countries they have ever been (almost)

- fall in rents accompanying recession. I happen to believe NZ is in the middle of the same property bubble that has infected Vancouver, Sydney, Melbourne, Brisbane, Toronto. There are all population/ immigration arguments for those cities but fundamentally rising property prices has led to more mortgage borrowing thus driving up property prices thus leading to more mortgage debt etc. At some point, those bubbles will deflate - and could do so quite explosively (I know a lot less about Auckland than I do about the other cities named - it's the Canadian situation that I am closest to)

London btw, which has had 4-5% real property rises p.a. since 1994, is in the midst of its first prolonged slump since 2008-9 (which was a pretty short drop tbh). I would say down 10-15% from the pre Brexit vote (June 2016) peak. Toronto is also suffering and I gather Vancouver too, despite good immigration and a robust US economy.

- rent control and other govt action risks

- exchange rate risk - fall in NZD lowers global purchasing power. However it probably also serves to increase the price of housing assets (they look cheaper to a global investor)

Other points:

- value the high tech startup equity at book cost unless you have a realisation event. If you do use "last round valuation" remember that escalator can break - value at at least a 40% discount to LRV

- your portfolio is heavily tilted towards personal assets - houses, startups. That's fine, but startup investing is high risk

In terms of diversification I would suggest what you need is a mix of equities and very safe assets:

- equities a global equity index fund is fine

- safe assets are a tradeoff against repayment of mortgage debt. But setting that aside, you need to hold either global government bond fund, investment grade, or US Treasury bond fund, investment grade. I would suggest 40% of your portfolio should be fixed income.

My thinking here is that there is correlation between a downturn in world stock markets, a downturn in the world economy (especially China) and NZ property prices. *All* of those could go down together. If it was really bad, then you could wind up being trashed on all fronts.

You also have a decent liquidity need for personal emergencies (loss of job, repair of houses, share issue (possibly at a price to dilute existing shareholders) by one of your startups).

So of that $290k cash + equity index fund, I would be something like :

- 30k cash in insured bank accounts or deposits
- 120k in safe government bonds (as above, probably hedged into USD)
- 140k global equity index fund

If you have too much cash you might be tempted to chuck it into more startups. That's fine, but you really are going back to the racetrack and betting on new horses - it might not work for you. You are, in effect, using your leverage against your housing to increase your investment in illiquid assets (venture capital).

So I'd keep cash down to ready expenses, knowing in a worse case you can tap your bond funds.

You have to consider a world where your properties just cover their costs (at best) and your equity is shrunk or underwater. And where your startups have lower or zero value. I faced such a world in 2003 and it wasn't fun (I lost my job, too, after 9-11). And many people I knew were in that situation in early 2009.

andrew99999
Posts: 449
Joined: Fri Jul 13, 2018 8:14 pm

Re: Investment Advice/ Risk assessment

Post by andrew99999 » Thu Jun 06, 2019 8:33 am

Valuethinker wrote:
Thu Jun 06, 2019 7:35 am
- fall in rents accompanying recession. I happen to believe NZ is in the middle of the same property bubble that has infected Vancouver, Sydney, Melbourne, Brisbane, Toronto.
Small point, Brisbane was not included with Sydney and Melbourne.
Many expected the boom a few years after Sydney as everyone gets priced out of Sydney and then Melbourne as normally happens, and I believe it did occur a little in the more sought after areas around the inner city, but throughout most of the city it just never really came. It started to finally move a little in 2017 but I believe the enforced (previously just recommended) tighter lending restrictions stopped it doing anything other than possibly moving up in a very slow creep.
With the rate cut of a few days ago and I've read the govt is considering removing some of the lending restrictions, it may start moving again, but as of yet, I believe there was no real boom in Brisbane like Sydney and Melbourne and the prices can't at all be considered insane like Sydney/Melbourne prices, and people in Sydney/Melbourne see Brisbane as ridiculously cheap with houses only a little over half the price.

Valuethinker
Posts: 38381
Joined: Fri May 11, 2007 11:07 am

Re: Investment Advice/ Risk assessment

Post by Valuethinker » Thu Jun 06, 2019 9:45 am

andrew99999 wrote:
Thu Jun 06, 2019 8:33 am
Valuethinker wrote:
Thu Jun 06, 2019 7:35 am
- fall in rents accompanying recession. I happen to believe NZ is in the middle of the same property bubble that has infected Vancouver, Sydney, Melbourne, Brisbane, Toronto.
Small point, Brisbane was not included with Sydney and Melbourne.
Many expected the boom a few years after Sydney as everyone gets priced out of Sydney and then Melbourne as normally happens, and I believe it did occur a little in the more sought after areas around the inner city, but throughout most of the city it just never really came. It started to finally move a little in 2017 but I believe the enforced (previously just recommended) tighter lending restrictions stopped it doing anything other than possibly moving up in a very slow creep.
With the rate cut of a few days ago and I've read the govt is considering removing some of the lending restrictions, it may start moving again, but as of yet, I believe there was no real boom in Brisbane like Sydney and Melbourne and the prices can't at all be considered insane like Sydney/Melbourne prices, and people in Sydney/Melbourne see Brisbane as ridiculously cheap with houses only a little over half the price.
Urrkkk ... thank you.

I have no idea why I wrote that. I didn't even think it was true. Brain fade.

Some places the boom is justified by the fundamentals. SF Bay comes to mind. The local industry is booming and so are housing prices. Calgary or Perth when resource prices were booming.

Vancouver et al it just seemed to take leave of its senses. 5 to 10 years ago maybe.

I have a friend in Sydney. Who considers me a party bore on this. I keep telling him that bubbles don't have a "cause " that deflates them. They just deflate and after the fact we point to a "cause". Ex post rationalization

QuantOfAsia
Posts: 38
Joined: Sun Apr 14, 2019 7:57 pm
Location: Hong Kong

Re: Investment Advice/ Risk assessment

Post by QuantOfAsia » Thu Jun 06, 2019 7:00 pm

ANZACINHK wrote:
Wed Jun 05, 2019 11:58 pm
Hi

I am wanting an investment/ risk checkup of my current investments and a rain-check of what I should be considering moving forward.

Keeping in mind I am Hong Kong based and not a US citizen (so no capital gains tax, tax on dividends, etc...) I have converted all $ to USD for ease of the readers

34 m Main income earning $250,000, around $220,000 Net after tax

My primary investments are NZ real estate (all in NZ capital which continues to increase by roughly 7% a year):
- 5 x home and income rental properties
- Current market value = $3,300,000
- Current mortgages = $2,150,000
- Interest rate 3.89%
- Net income after all expenses and taxes = $80,000 (put towards principle)

Secondary investments
- $130,000 in - iShares Core MSCI World UCITS ETF (traded in Amsterdam, Irish domiciled fund so I don't get caught up in the US death taxes thresh-hold)
- $100,000 shares in high risk startup (12.5k put in, current value based on last valuation)
- $200,000 invested in another high risk startup (cash flow positive and growing)
- $160,000 in Cash

My plan is to push the bulk of my savings moving forward 100% into iShares Core MSCI World UCITS ETF

I never plan to sell my properties, so I believe my largest risk at the moment is the interest rate risk on my properties. And by my calculation interest rates would need to move up above 8% before it needed any top-up anything into the properties.

I know this forum favors low cost index funds over property investments but with a net migration of migrants into NZ of 60,000 people (for a little country of 5 odd million) property in NZ has in the past been a very safe bet, if I was to liquidate the properties there would be about 300,000 in profit tax to pay (there is no capital gains, but if you sell a property within 5 years you have to pay tax at the level of your income, in my case it would be a trust tax as that is the entity I have them parked)

However I am sure there are risks I haven't considered so I am open to being convinced by more experienced guys than me, as I feel most my investment experience has been in this low interest rate environment.

Appreciate the advice in advance.

Thanks
Nigel
Good idea to diversify away from property and startups, both of which seem to be doing very well for you, and will probably remain a good though illiquid cornerstone of your portfolio.

iShares Core MSCI World UCITS is a good choice for a "one stop global stock" solution, which as you mention is tax-efficient for non-Americans, and Vanguard and State street also have competing ones. The next steps might be to look at whether you might want to add a bond ETF, like the "iShares Core Global Aggregate Bond UCITS ETF (USD Hedged Accumulating)", and perhaps branch out into different stock ETFs as well. After these "core two", I tend to look next at factors the like "iShares Edge" funds, for example the "iShares Edge MSCI World Value Factor UCITS ETF" - for a slightly higher expense ratio, these buy higher yielding stocks I expect to do better long-term. I also prefer to tilt towards Emerging markets, so look at several funds for that as well.

I am also based in Hong Kong, and also keep very little in HKD, as I find better investment options and yields in USD and other currencies, though occasionally find good HK-listed single stock opportunities as well. HK-listed ETFs unfortunately are more expensive and less global than your UCITS options.

Hope that helps.

Valuethinker
Posts: 38381
Joined: Fri May 11, 2007 11:07 am

Re: Investment Advice/ Risk assessment

Post by Valuethinker » Fri Jun 07, 2019 2:33 am

QuantOfAsia wrote:
Thu Jun 06, 2019 7:00 pm
ANZACINHK wrote:
Wed Jun 05, 2019 11:58 pm
Hi

I am wanting an investment/ risk checkup of my current investments and a rain-check of what I should be considering moving forward.

Keeping in mind I am Hong Kong based and not a US citizen (so no capital gains tax, tax on dividends, etc...) I have converted all $ to USD for ease of the readers

34 m Main income earning $250,000, around $220,000 Net after tax

My primary investments are NZ real estate (all in NZ capital which continues to increase by roughly 7% a year):
- 5 x home and income rental properties
- Current market value = $3,300,000
- Current mortgages = $2,150,000
- Interest rate 3.89%
- Net income after all expenses and taxes = $80,000 (put towards principle)

Secondary investments
- $130,000 in - iShares Core MSCI World UCITS ETF (traded in Amsterdam, Irish domiciled fund so I don't get caught up in the US death taxes thresh-hold)
- $100,000 shares in high risk startup (12.5k put in, current value based on last valuation)
- $200,000 invested in another high risk startup (cash flow positive and growing)
- $160,000 in Cash

My plan is to push the bulk of my savings moving forward 100% into iShares Core MSCI World UCITS ETF

I never plan to sell my properties, so I believe my largest risk at the moment is the interest rate risk on my properties. And by my calculation interest rates would need to move up above 8% before it needed any top-up anything into the properties.

I know this forum favors low cost index funds over property investments but with a net migration of migrants into NZ of 60,000 people (for a little country of 5 odd million) property in NZ has in the past been a very safe bet, if I was to liquidate the properties there would be about 300,000 in profit tax to pay (there is no capital gains, but if you sell a property within 5 years you have to pay tax at the level of your income, in my case it would be a trust tax as that is the entity I have them parked)

However I am sure there are risks I haven't considered so I am open to being convinced by more experienced guys than me, as I feel most my investment experience has been in this low interest rate environment.

Appreciate the advice in advance.

Thanks
Nigel
Good idea to diversify away from property and startups, both of which seem to be doing very well for you, and will probably remain a good though illiquid cornerstone of your portfolio.

iShares Core MSCI World UCITS is a good choice for a "one stop global stock" solution, which as you mention is tax-efficient for non-Americans, and Vanguard and State street also have competing ones. The next steps might be to look at whether you might want to add a bond ETF, like the "iShares Core Global Aggregate Bond UCITS ETF (USD Hedged Accumulating)", and perhaps branch out into different stock ETFs as well. After these "core two", I tend to look next at factors the like "iShares Edge" funds, for example the "iShares Edge MSCI World Value Factor UCITS ETF" - for a slightly higher expense ratio, these buy higher yielding stocks I expect to do better long-term. I also prefer to tilt towards Emerging markets, so look at several funds for that as well.

I am also based in Hong Kong, and also keep very little in HKD, as I find better investment options and yields in USD and other currencies, though occasionally find good HK-listed single stock opportunities as well. HK-listed ETFs unfortunately are more expensive and less global than your UCITS options.

Hope that helps.
Financial markets are putting very strong pressure on the Renimbi to devalue. The trade war does not help

Although HKD is pegged to USD that makes me worry re HK. And HK has a deposits to GDP ratio which is very high. As someone knowledgable once said to me: it looks like an Asian Swit!erland Great Britain or Iceland before the 2008 Crisis.

I think one wants to be diversified away from Homg Kong and HKD, on risk control grounds.

Topic Author
ANZACINHK
Posts: 3
Joined: Wed Jun 05, 2019 11:22 pm

Re: Investment Advice/ Risk assessment

Post by ANZACINHK » Fri Jun 07, 2019 10:59 pm

Thanks All

Interesting stuff here, i'll go through and answer some things:

- In NZ the longest fixing of mortgage rates is 5 years, and the premium on this is a little over 1%. I currently do 1 year fixed rotating rates, and change my mortgage provider every 3 years for a 20k cash incentive, which really means I move them back and forward between 2 banks and they pay me to do it. I have considered fixing it for long, but the agility in the 1 year cycle has mean I have pulled and been given a change to renegotiate every year for well below rates.

- Looking at more fixed assets is actually something I haven considered yet, i've always looked at it like i am investing for the long term so go 100% equities, but the risk reduction of having capital available during a downturn to cover the leverage ont he properties is probably well worth it. The iShares Core Global Aggregate Bond UCITS ETF looks good, thank you, I was struggling to find an irish domiciled bond fund I liked!

Thanks for taking the time to look through!

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