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krusty
03-05-2011, 06:10 PM
and what size isn't worth the diesel so to speak? Is it normal to want a certain minimum value or share number - or am I just someone whom likes ducks to line up too much? What is a good/normal/economic value of the average trade?

percy
03-05-2011, 08:46 PM
I was told once there were very few people who had more than $50,000 worth of shares.If you look at trades you will see trades of a few hundred dollars to trades of hundreds of thousands dollars.One person with a portfolio of shares will manage it themselves even if it runs into millions,while another person will leave it to a broker to manage.I think most of us on sharetrader prefer to manage our own portfolio.I will often buy a small holding and add to it if I like the progress the company is making.

CJ
04-05-2011, 08:06 AM
Krusty - what exactly are you trying to ask?

No point getting a pro to manage a $10k portofolio. Above say $100k if you are happy doing it yourself and think you can beat a pro after fees why not. I would question at what size does a personal portfolio become a job.

Re average trade size. I am trying to get mine at about $10k. Smaller than that, brokerage is not as efficent. Above that and I dont have the diversification that I want due to the size of my portfolio.

I would be interested in hearing those with larger trade sizes, if they struggle to fill orders on the NZX or do you have to keep to the top companies. Ie. does your order move the market or are you able to take advantage of attractive prices when they turn up. ie. if you wanted $100k of Resturant brands or Ryman would you have to do that over time to avoid pushing up the market.

OldRider
04-05-2011, 08:40 AM
In my opinion trying to manage a portfolio under $20,000 would be an uneconomic waste of time. Worthwhile only if you enjoy it as a hobby, or are using it as a learning exercise to greater things. Life changes and over time my interest has waned until investing is now a tedious necessary discipline to preserve our assets and income, there are much more enjoyable things to do.

This was my advice to my children, until $20,000 of savings is reached split into four equal holdings
Listed NZ Property Company
List NZ Investment Co NZ shares
Listed ASX Investment Company ASX shares
Listed ASX Investment Company Foreign shares avoid unit trusts and advisors
Then add a further ASX Listed Investment Company in small to midcaps.
Then your own selections.

Lizard
04-05-2011, 08:57 AM
Worthwhile only if you enjoy it as a hobby, or are using it as a learning exercise to greater things.

I wouldn't underestimate the value of using a small portfolio as a learning exercise. I started with $6000 and 2 share picks, but I have started nieces & nephews with as little as $300 spread over 3 shares (they get to pick from shares I hold in my own name and I allocate them the benefit of a few - so it is really more of a CFD arrangement for them and carried out on trust). In my view, the earlier they can learn about the benefits of investment and compounding, the better - and getting 3.7% at Rabodirect on-line is not going to get them terribly motivated.

As to what is "normal", I think it would be clear if we did a poll that there isn't a "normal". Although the amount available to invest will affect investment style - along with all the other factors that I would loosely group under the categories of Age, Personality and Circumstances (I guess I should find a "B" synonym for "personality" and then would have the basis for a book on the topic. :D)

krusty
04-05-2011, 10:41 AM
My old broker use to offer and take me out to lunch at a flash place for free. Didn't know why. Do they run expense accounts or something? This personal portfolio is worth in excess of 100,000 - but not mega bucks - and returns f all in the pocket - about 6,000pa gross. My pc suggests the capital returns of between 294% down to -100%. I tend to 100% believe the negative result but tend to take the positive one with a grain of salt. I only find interest in the ones that produce results FPH, MFT, RYM, and BHP - some of the others have gone to hell in a hand basket.
Am I better off in seeking professional help again - but pay for their time in this new enlightened investing environment we live?
I have a pockc kiwisaver only because the 100% return from the government is not bad. The value of this one is half that of my partner, but she works full time, whereas I dont work and stick the minimum into the scheme - not bad for zero effort. I have a trust portfolio too.

Lizard
04-05-2011, 02:15 PM
Krusty,

You sound more of a reluctant investor than an enthusiastic one - perhaps sensibly trying to avoid over-paying for poor advice. Personally, I have found most wealth advisory/management services come at a cost that is not recovered by their returns and most investors seemingly would be better off in term deposit. Maybe others have had better experiences.

However, of late, the cost in time of DIY has started to get more difficult for me to manage, so I also grapple with whether to throw the lot at someone else to manage while I get on with other things. Have noticed that over the years the one part that has done okay where I haven't micro-managed is the UK investment trusts - I have TEM held here and Fidelity European Values, JP Morgan European Smaller Coys, Aberdeen Asian Small Caps on the LSE and all have done okay, though don't provide much income.

My mother has given up and moved back to term deposits as broker no longer willing to advise her without having the management fees - which for very conservative portfolio is not really justified. I remember complaining once that one popular investment manager had managed to only return about 4.5% pa on a portfolio of funds for my father over 12 years and was told it was because he'd chosen a conservative fund - but reality was that term deposits had been as high as 9.5% over the years he'd invested.

Halebop
04-05-2011, 05:43 PM
I can just manage to recall my first share purchases - but certainly not for the value of my portfolio. By my mid teens I'd built it to a useful figure thanks to the fairly crazy bull run in the mid 80's but the initial portfolio was a princely A$2,000 (As a 12 year old that felt like being a millionaire!). As others have suggested, portfolio size is not so much the issue as skill, desire and learning opportunities. For a small portfolio the key issues will be risk & volatility tolerance as you are more likely to be concentrated in fewer investments. I personally prefer a narrower range of investments and hands on management but getting the mix wrong will be more costly. On the flipside as "diversified" investors discovered during the GFC recently, a wide spread sometimes just means you lose a lot of money on a wide range of investments (and maybe even pay fees for the "benefit").

JemT
04-05-2011, 06:51 PM
I started off my portfolio in 2009, buying up cheapish blue chip stocks after the financial crisis. I was not brave enough to jump straight in after the shares fell (i.e. buying FBU at ~$5), but it was a good start to my portfolio buying up high yielding stocks that have since risen between 10 and 20%. I do not like to spend less than $3,500 at once as a $30 brokerage fee eats into your return a little, however this is as much a hobby and a learning exercise as it is an investment. As of today my portfolio has 6 companies (two ASX listed, one NZX listed Aus co. and three NZX companies). I think invested capital is around $22,000.

I think one of the main drawbacks about a small portfolio is that it is hard to gain exposure to international shares. The transaction costs of these are quite a bit higher (from memory it was 30 pounds to trade on the FTSE).

As long as you trade no less than $3,000 at a time, and enjoy monitoring shares, then managing your portfolio is a good option. If you cannot afford to buy in lots of $3,000, then perhaps look at joining together with someone. That way you can make one purchase (incurring a $30 fee), then do an off market transfer at no cost for half of the shares.

It is quite an enjoyable hobby, and especially if you are young it can be beneficial as you can take greater risks (any capital you lose you can always earn back later in life through working), and of course it does tend to get you some respect. I have found that most people don't have a clue about shares so it is a good feeling to be able to help them out.

RRR
04-05-2011, 08:38 PM
My purchases, nowadays, are between $3000-$5000 per transaction (buys that is) and I hardly sell (may be that is not a good thing from a trader point of view). My first purchase was worth 1K in 2008 - GMT for $1.39!. Portfolio has increased significantly since I first started and I count dividends $3500/year which is mostly reinvested where possible.
I will stay away from financial advisers/planners - I sought advice in 2009 from a financial adviser and the most frequent question was 'Do you know about UK investment trusts' and despite telling him that I am not interested in any managed funds or similar, he kept pushing me to invest in it. I said good bye to him the very next day by email.
My Mrs keep a watch nowadays of what I am doing and has instructed me not to invest in shares this year! She keeps reminding me about the PRC fiasco!

JemT
05-05-2011, 04:48 AM
Indeed, $3,000 is not a truly economic order value, but if you are buying shares because you enjoy doing so then it is a reasonable benchmark.

ENP
29-05-2011, 07:14 AM
If a main goal is to save up for a house in term deposits over the next 2-3 years, does it make sense to have a 3-6k share portfolio on the side also? More as a hobby?

Anyone else do this type of thing?

shasta
29-05-2011, 01:20 PM
If a main goal is to save up for a house in term deposits over the next 2-3 years, does it make sense to have a 3-6k share portfolio on the side also? More as a hobby?

Anyone else do this type of thing?

It comes down to your intentions & time frames, if you are wanting to save specificially towards a deposit for a house, you dont want any risk, or to lose any capital.

But the question is what will give u the best return v risk over that period.

Usually the returns from the markets do better than bank interests rate when inflation is factored in, but some years the returns are negative!

We are at the bottom of the economic cycle, & interest rates will rise as the NZ economy rises, so your options are:

1. Do nothing, let the interest accumulate in the bank a/c & add to it as required (into chq or call a/c)
2. Put the money into a bank term deposit short (locking in say 5% for 2 - 3 years might miss out on higher rates, but provides certainty & u know what u will have after "x" period)
3. Put the money into the NZX debt market, ie TEL, FBU, IFT bonds
4. Put the money into shares in the top ASX 100, ie blue chips, with dividends or reinvest shares
5. Put the money into high dividend yield stocks, outside the main ASX indexes
6. Put the money into the speculative end of the markets, where u may lose it, or double it.

Have a think about those options

ENP
29-05-2011, 05:54 PM
The bulk (90+ percent) of the funds will be kept in bank accounts and term deposits.

But what about 3-6k or funds into stocks? How is stock investing with 3k any different than spending 3k on gold clubs, a new bike or any other hobby?

shasta
29-05-2011, 05:59 PM
The bulk (90+ percent) of the funds will be kept in bank accounts and term deposits.

But what about 3-6k or funds into stocks? How is stock investing with 3k any different than spending 3k on gold clubs, a new bike or any other hobby?

Those other hobbies cost u money, & $3k isnt too much to lose, so you could go have some fun with it, or select 1 stock with a short term focus/chart based & try & turn it into $4k, or $5k etc

If u want to look at stocks with good charts etc, have a look at the ASX Breakout thread, some very good TA chartists lurk in there.

Plenty of fundamental investors like myself on here too, just depends what risk u are prepared to accept!

buns
29-05-2011, 06:12 PM
But what about 3-6k or funds into stocks? How is stock investing with 3k any different than spending 3k on gold clubs, a new bike or any other hobby?

I'm not to sure where you are going with this. Are you saying you want to do it as a hobby? If so why not just paper trade?

If it is a hobby thing I would go golf clubs any day over watching 1 company/stock wangle about.

buns
29-05-2011, 06:17 PM
Those other hobbies cost u money, & $3k isnt too much to lose, so you could go have some fun with it, or select 1 stock with a short term focus/chart based & try & turn it into $4k, or $5k etc



The intention is buying a house right? So whatever you do with this tiny bucket of cash isn't going to change to much for this house goal.

It's simply not worth stressing over.

The lessons/learnings from taking $3k to $5k is probably the more important thing, as these can be used again to mutiply much larger sums of cash. But again, that is not the intention behind this question right?

ENP
30-05-2011, 04:46 PM
The question is..

I enjoy reading about stocks, companies and the economy.

However, my main goal is to buy a home in 2-3 years time. I don't want to risk my capital but also want to learn and keep a pulse on stocks and investing.

Te Whetu
30-05-2011, 11:58 PM
I wouldn't want to paper trade for fun... seems boring. Paper trading is good for learning but it's hard to do just for fun.

I started investing in Jan 2004, my first investments were: $385 in FTB, $805 in MET and $490 in NPX. This was a total investment of just $1680 + $97.50 in brokerage spread over three stocks... i.e. I paid 5.8% in brokerage JUST to get into them. Looking back I wouldn't recommend investing so little but it certainly helped me get into investing, which I'm not sure if I'd have done otherwise. Since then I've developed and learned a lot, I now work in finance dealing with free cash flows and discount rates etc. and love it.

I do find it amusing that I had more diversification 7.5 years ago than I do now... sad almost.

Cheers

Te Whetu

*Once again, I DON'T recommend people invest c.$2k over three stocks + brokerage... :p

EDIT: Oh and ENP, if you don't want to risk capital and since you are going to need the capital soon, the best thing is likely to be paper trading to learn. As I said above, I don't personally find it that "fun" but it is the safest way to learn.

h2so4
31-05-2011, 01:39 PM
The bulk (90+ percent) of the funds will be kept in bank accounts and term deposits.

But what about 3-6k or funds into stocks? How is stock investing with 3k any different than spending 3k on gold clubs, a new bike or any other hobby?

I can't see a problem, it's only 3-6% of savings.

How much are you saving per month?

ENP
31-05-2011, 06:21 PM
$300 per fortnight.

I'm only 22 so don't have a big income. I have $23,000 savings. All at Rabodirect.

Corporate
31-05-2011, 06:30 PM
I'd flag the house idea and learn about investing/trading shares. All depends on what you want to do long term though I guess.

h2so4
01-06-2011, 04:49 PM
$300 per fortnight.

I'm only 22 so don't have a big income. I have $23,000 savings. All at Rabodirect.

Excellent.

Capital allocation is an important stategy in any investment portfolio. The reality is that simply saving and investing is not enough if you want growth.

I think you will be fine with a 3-6k share portfolio. Say you invest 3k in an industry leader that is selling for a discount, whatever happens to your investment your savings plus interest income will return you that capital back in less than 7 months. Very few 22 year olds can do that. I don't know any.

You are in an excellent position to start a share portfolio. Identify opportunities and sell out for better ones. Keep your brokerage per transaction under 1% and don't be sucked into taking high risk opportunities because you are young.That's just a cliche, High risk usually means high loses.

Good luck

RRR
02-06-2011, 08:13 PM
ENP - You can probably buy a home now (a small unit may be) worth 250K (10% deposit from you) - revolving credit is excellent if you are careful with your money. You mentioned owning a house is your aim 2-3 years from now - you can do it now if you want! Interest rates are favorable too, so why wait for 2-3 years when the interest rates are likely to be higher?

Te Whetu
02-06-2011, 09:30 PM
ENP - You can probably buy a home now (a small unit may be) worth 250K (10% deposit from you) - revolving credit is excellent if you are careful with your money. You mentioned owning a house is your aim 2-3 years from now - you can do it now if you want! Interest rates are favorable too, so why wait for 2-3 years when the interest rates are likely to be higher?

ENP, I'd be vary careful of anyone using the logic RRR is using here. People who use language like this when trying to convince you to invest in a particular *thing* often rely on the bigger fool theory to justify the investment.

RRR, saying "so why wait for 2-3 years when the interest rates are likely to be higher?" is fundamentally flawed reasoning. Purchasing now will not allow ENP to avoid the higher interest rates, he'll still have to suffer through them in three years anyway.

In addition, if you made that post after July I'd suspect you would likely be in breach of the Financial Advisers Act. (Does the Act cover advice given on forums? It should). EDIT: seems rules don't cover property...

Anyway lets look at the situation in a little more detail:

1) Assume ENP is renting at c.$150 per week (and this could be saved)
2) Assume $300 per fortnight could be directed towards the mortgage
3) ENP would have $300 per week to service the loan
4) Assume 25yr amortising loan
5) Assume interest rate of 7% (approx. 3 yr rate at Kiwibank).

Under these assumptions the maximum loan would be $184,000. Add to that current savings of $23,000 and you have a total maximum purchase price of $207,000 (including any legal fees etc). The variable rate at Kiwibank is lower at 5.65%, however as you say rates are likely going to go up so there is the risk of ENP being forced to move out if interest rates rise if he borrowed more. In addition it is not certain a bank would lend against in this situation at their advertised rate.

As a base case, lets look at EPN net worth in three years assuming no purchase of property:

1) Current Net Worth : $23,000
2) Savings per week : $150 (half of $300)
3) Annual after tax return on investments 5%
4) In this case his net worth in three years would be $51,800

First scenario I'll run is purchase with no growth in house prices over three years.

1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000
6) In this case his net worth in three years would be $30,000

Now I would argue that this is a highly likely scenario in the current environment. But to be fair and reasonable I’ll also show what will happen with -2%/3% price change in property per year.

Second scenario is purchase house with 3% p.a. growth in house prices over three years.

1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $224,000
6) In this case his net worth in three years would be $49,000

Third scenario is purchase house with 2% p.a. loss in house prices over three years, (reasonable chance as you will likely be buying a pour quality place which generally performs badly until the market starts to peek.

1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $193,100
6) In this case his net worth in three years would be $18,000... i.e. you’ve paid a mortgage and gone backwards.

Note that these do not show either the best OR worst outcomes, they are for illustrative purposes only. Also note that in three years interest rates could easily be higher than 7%, so when you refinance at that point you may be in a worse position.

Neither do they take into account the exact situation of ENP; a key factor will be where ENP lives as property prices can vary wildly between areas.

Also I have just now realised that I assumed ENP is male. Instead of going back and changing all references which are gender specific “I’m sorry ENP if you are female” :D.

Cheers
Te Whetu

ENP
03-06-2011, 06:48 AM
You have done well. I am male, and live/flat in Takapuna, North Shore, Auckland.

Main reason I want to wait 2-3 years is I'm wanting to purchase a house with my partner, double income, double deposit.

My Dad (who works at National Bank) did some numbers and said as long as we have 20% deposit, we can borrow up to $450k, that assumes a deposit of 90k which combined with my partner we should have in 2-3 years time including kiwisaver contributions to it.

buns
03-06-2011, 09:48 AM
I want to wait 2-3 years is I'm wanting to purchase a house with my partner, double income, double deposit.



Does she know who ENP is? Hope not, it sounds like you are forecasting something bigger than just a house here.

I've only skimmed over these posts. But have you really sat down and considered why you want a house over renting? A 450k loan instead of $400 a week rent payments?

Don't get trapped by the kiwi mindset that you have to own a home to be viewed as successful! It’s hard to do, but think about yourself in that home 6 months down the track, what will be materially different in your living from renting to owning? I think its the initial blood rush of the first home that sucks a lot in.

I've seen other posts from you, talking about financial freedom. If this is still the end goal, buying a house at your age probably is probably a tad iffy..

JBmurc
03-06-2011, 10:18 AM
Does she know who ENP is? Hope not, it sounds like you are forecasting something bigger than just a house here.

I've only skimmed over these posts. But have you really sat down and considered why you want a house over renting? A 450k loan instead of $400 a week rent payments?

Don't get trapped by the kiwi mindset that you have to own a home to be viewed as successful! It’s hard to do, but think about yourself in that home 6 months down the track, what will be materially different in your living from renting to owning? I think its the initial blood rush of the first home that sucks a lot in.

I've seen other posts from you, talking about financial freedom. If this is still the end goal, buying a house at your age probably is probably a tad iffy..

Yeah I agree most NZ'er have the mindset to get their own home as soon as possible and tick themselves upto the eyeballs thinking this will make them a safe good return compared to renting and investing elsewhere ,in my case I did the latter I never wanted to be stressed paying more than we would renting so decided I had made enough money(later down the track I got married) to have the house we really wanted so rented/flated for the last 12yrs till just recently when we built our own home that straight away has a G.V 100k above cost we still have debt on the property but costs as round $200pw less than if just straight out rented the house at current market rents.
Now I'm not saying don't invest in property if your investing to make a profit over a shorter term which if you good at it can make you some money towards your own home..
(we spec built 4 houses and owned many rentals in other areas over the last 12yrs while we rented where we wanted to live)

Te Whetu
03-06-2011, 11:45 AM
Don't get trapped by the kiwi mindset that you have to own a home to be viewed as successful! It’s hard to do, but think about yourself in that home 6 months down the track, what will be materially different in your living from renting to owning? I think its the initial blood rush of the first home that sucks a lot in.

It's honestly sad how ingrained this mindset is. I have both friends and family trying to tell me to by a house just because I can afford one. Seriously buying a house would be the worst financial decision I could personally make at this point in time. I will end up buying a house, but only for non-financial reasons; financially it just doesn't stack up.

Couple points around AA's comment.

1) You can get leverage for both property AND shares... as at 30 May 2011 the rate on a ASB margin lending is 6.20%. Depending on what you invest in you can have LVR's of up to 70%. Now I'm not recommending a leveraged share investment for everyone, depends on your circumstances. What I am saying is that leverage is available for both asset classes.

2) You can't look at at 10% return on property and say that is a 100% return when you are also putting additional amounts in to pay the mortgage. A 10% return on property vs. a 10% return on shares is not a valid comparison. I realise you said "not a example for shares vs property as its not complete", but just putting this up as a warning of WHY it's not a example of shares vs. property.

3) Despite what you say, inflation does not pay off a mortgage. Inflation is included in the interest rate the bank charges you. Only unexpected inflation which was not included in the bank interest rate will help pay off your mortgage. In addition this is a zero-sum game, so if inflation is below forecast then you end losing.

4) Inflation does not reduce savings, (as long as you have a return on your savings greater than inflation).

5) AA you said: "Don't under estimate how hard it is to extract money from the Share Market, it takes years of experience and trial and error." This is wrong. Buy an index(s): while you may not get above-market returns, past experience suggests you are highly likely to "extract money from the Share Market" over the medium to long term. Paper trade if you want to try out individual stock trading methods. Also yes, this may not be suitable to ENP if he wants to buy a house in three years, but I would suggest that a diversified portfolio between stock indexes and his current Rabobank would likely be reasonable.

6) AA you said: "now is a good time to buy near the low of the housing cycle". This should be read as: in AA's opinion it's a good time to buy and it is his belief that prices will soon start rising. Not certain if AA is right or wrong, but this is clearly just your opinion. My opinion is house prices are going to generally go sideways for a while (i.e. go down in real terms) with isolated pockets varying from this trend.

Leverage works both ways: It increases both gains and losses. It will also reduce gains when the gains are less than the interest cost. Leverage also increases risk, it does this for both shares and property (mortgagee sales do occur, and even more frequently people lose money on their property investment but just not enough for the banks foreclose).

ENP if you want to buy a house in a few years, and you have thought through the consequences, then I think you should do it. But just take with a grain of salt anyone pushing you too hard in either direction, especially if they want you to hurry your decision If you do buy a house then I would recommend not doing it for financial reasons, however if there are enough non-financial reasons on why you would like to buy a house, go for it!

Cheers
Te Whetu

BIRMANBOY
03-06-2011, 02:44 PM
I'm sure a lot of us would love to be in your position. At 22 with a lifetime of earning in front of you the BEST INVESTMENT you can make now is in yourself. By that I mean spend your time and cash improving either your education and or skill base. This will give you a better job opportunities and bigger income which will in turn lead to easier acquisition of both a stock portfolio and a house. Good luck.
$300 per fortnight.

I'm only 22 so don't have a big income. I have $23,000 savings. All at Rabodirect.

buns
03-06-2011, 04:13 PM
1) Current Net Worth : $23,000
2) Savings per week : $150 (half of $300)
3) Annual after tax return on investments 5%
4) In this case his net worth in three years would be $51,800

First scenario I'll run is purchase with no growth in house prices over three years.

1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000
6) In this case his net worth in three years would be $30,000

Now I would argue that this is a highly likely scenario in the current environment. But to be fair and reasonable I’ll also show what will happen with -2%/3% price change in property per year.

Second scenario is purchase house with 3% p.a. growth in house prices over three years.

1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $224,000
6) In this case his net worth in three years would be $49,000

Third scenario is purchase house with 2% p.a. loss in house prices over three years, (reasonable chance as you will likely be buying a pour quality place which generally performs badly until the market starts to peek.

1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $193,100
6) In this case his net worth in three years would be $18,000... i.e. you’ve paid a mortgage and gone backwards.

Cheers
Te Whetu

TW – great post. Exactly what I had in my head, but couldn’t be bothered posting it. However, a future cash flow/NPV expert like yourself could have rammed this (rent v buy) home even more

The $20k gain from investing at 5%, with 7.8k (300 a fortnight) reinvested each year will compound to $50k after 3 years, to $70k after 5 years and around $145k after 10 years. You could say you can compound the remaining savings after mortage over those years to a bigger number as well, however houses generally require reinvestment every now and then. This is a $$/time/Stress burden which could be avoided.

At the age of 22 your wages should grow by more than inflation in 10 years, with your wages your ability/skills will rise allowing you to average a higher return than 5% + adding in the lady mean your savings rate/income will rise substantially. When you factor this in, that 145k will double!

Couple this with the non financial un-certainty’s a 22 year old will have – big holidays (would be rent free), relationships, unforecasted events, job losses? Even what you want from a property/town even life in 5-10 years time..

The list goes on – but for me, there is no buying beats renting for a youngster in your position – The numbers speak for them selves, but even bigger than this is the potential effect of the unknowns.

Don’t mean to pi*ss on the camp fire, but think its important you step back and think about this kind of thing in depth.

ENP
03-06-2011, 05:35 PM
If we were to buy a 3/4 bedroom home then we would most definitely rent out the remaining bedrooms. On the North Shore it's relatively easy to rent a decent size room for $150 each, so taking that into account, it makes it about the same if we were to rent a double room in a flat anyway.

In time, the mortgage will decrease, rents will go up.

I have thought quite a bit about continuing to rent and value invest (Buffett style) into stocks in NZX/ASX but overall it just doesn't make sense to do so.

As previous posters have said, if I have 50k, a 15% odd return is 7.5k, however if I leaverage that 50k for a 20% down deposit and the house goes up, then what ever % capital gain the house gets will be multiplied by 5. So hence, house prices will only need to go up 3% as opposed to a 15% gain in stocks to get the same return.

Another quick question...

Who has done the opposite, used all their spare cash, continued to rent and invested in stocks

buns
03-06-2011, 06:33 PM
ENP

What is annoying here is you ask these general questions, wanting an answer in value terms, or what makes economic sense.

But the whole time you have your assumptions about things which are impossible for a third party to understand, plus place value on other things (non -financial) which we have no idea about.

I get the feeling you don't quite understand what some people have said, already have your mind made up and am just waiting and waiting for someone to say your idea is right - so you can go ahead..

You have got some top notch replies here, from some smart cookies who probably have limited time. But seems you have just chosen to ignore it, wasting their time.

Either that or you didn’t state your goals clear enough up front.

I don't mean to have a go at you. But, some of the stuff certain people say around here is bloody interesting. Those people will quickly lose interest when no one cares to listen or respects the time they put into posts.

ENP
03-06-2011, 08:33 PM
Buns,

I have re-read the entire thread and agree with you. You make pretty valid points about unforeseen things that may pop up over the next 5 or so years. Overseas travel, maybe moving town or across town to get new jobs, etc.

I guess deep down the reason why I would like a house is that its "the thing to do" and that it has a stigma attached that you are doing well for yourself and are all grown up. I really don't have an issue with renting as a whole but see home ownership as a solid start in life.

RRR
03-06-2011, 08:46 PM
450K home loan! Good luck. Council rates, insurance, interest cost, maintenance will be proportionately higher too. Enjoy the journey and there are several routes to Jerusalem. I will be very careful posting on this free to share forum for fear of being sued for free opinion/advice:ohmy:

ENP
03-06-2011, 09:08 PM
Then on the other hand, if I was to buy a house, it would be in a cheaper, less desirable suburb. Definitely not Takapuna, close to work, motorway, supermarket, beach and shops.

If I got a job somewhere else in Auckland, it would be a bigger hassle to get to. If I wanted to go on an OE, with renting I could just pack up and leave. My rent doesn't include the expense and hassle of rates bills, insurance, mortgage interest, repairs, etc.

I'm beginning to see your argument! :D

BIRMANBOY
03-06-2011, 09:08 PM
So what you seem to be saying ENP is that you are concerned with how people perceive you and wish to be recognised as someone with some mana and maturity. Eminently understandable..we all want to be respected. However the surest way of getting there is probably not going to be directed by the concept of doing something because "its the thing to do". Question is well "who's thing is it"..if it is "your" thing then fine, but if its someone elses "thing" then perhaps it should be re-examined. Other people on this thread have given really compelling reasons for doing or making decisions based on your situation. The smartest decisions are always made when you gather all the facts, plug in your personal information and make a decision for YOU. Doing something because "it the thing to do" is surely the direction of a follower. Doing the right thing for you is the sign of a leader. Up to you.
Buns,

I have re-read the entire thread and agree with you. You make pretty valid points about unforeseen things that may pop up over the next 5 or so years. Overseas travel, maybe moving town or across town to get new jobs, etc.

I guess deep down the reason why I would like a house is that its "the thing to do" and that it has a stigma attached that you are doing well for yourself and are all grown up. I really don't have an issue with renting as a whole but see home ownership as a solid start in life.

h2so4
04-06-2011, 07:51 AM
The smartest decisions are always made when you gather all the facts, plug in your personal information and make a decision for YOU. Doing something because "it the thing to do" is surely the direction of a follower. Doing the right thing for you is the sign of a leader. Up to you.

Hey that's not bad. You could never be wrong, you don't even need all the facts, just do it for YOU. Oh and the Misses of course.:)

Te Whetu
04-06-2011, 07:54 AM
As previous posters have said, if I have 50k, a 15% odd return is 7.5k, however if I leaverage that 50k for a 20% down deposit and the house goes up, then what ever % capital gain the house gets will be multiplied by 5. So hence, house prices will only need to go up 3% as opposed to a 15% gain in stocks to get the same return.

No. This is incorrect. If it only goes up 3% you will not get a 15% return on investment, you have failed to account for the cost of your mortgage.


Who has done the opposite, used all their spare cash, continued to rent and invested in stocks

I have, and I suspect others here have as well.

ENP
04-06-2011, 09:01 AM
ENP this may be another option for you consider, Buy a house but rent it, Manage it well, this would give you flexibility to live where ever you want via renting and still own property.


Don't you need a 30% deposit when a rental is your first house?

Banks seem more willing to give you a loan if it is your primary residence rather than a rental from my limited experience.

Te Whetu
04-06-2011, 10:06 AM
Actually neither of you are correct, ENP you have failed to account for the cost of your mortgage and Te Whetu you have failed to account for the gearing.

AA. Please re-read my post.

I know exactly how gearing works, you'll note I didn't state what the actual return was. The reason I didn't state the exact return is that it depends on the exact circumstances and I couldn't be bothered running further NPV examples.

The point I was making was: With leverage, assuming 3% increase in prices, ENP's return on investment may be negative and defiantly will be less than 15%.


House prices have exceeded growth of 15% pa many times through out history with interest rates well below 15%

The geometric mean of house price increases has not exceeded 15% pa over any sustained period of time since we left behind inflation >10%. Yes prices may spike in a year, and if they do you'll be lucky in that year. They may also have very good runs like we got pre-GFC, but 15% yoy growth is a pipe dream today.

Are you saying your forecast is for 15% yoy growth in house prices over the next three years?

If you want I'll happily put a high level forecast out there... 1% growth yoy in nominal terms over the next three years. Feel free to revise your estimate, but lets see who's closer? :p

Seriously.

Te Whetu

Te Whetu
04-06-2011, 10:54 AM
Hi Te Whetu, my reply was regarding your previous posts regarding your zero sum game comment, you were implying with the cost of the mortgage you would be no better off with the gearing , sorry I should have made that clearer.

My apologies if I was not clear. In any case let me clarify my comment.

Unexpected inflation above or below forecast is a zero-sum game. That is you gain when inflation is higher than forecasts and lose when it is below, however the probability weighted present value outcome of these two scenarios for all participants in the market should equal zero. Thus "zero-sum game".

I was not suggesting leveraged investing in property was a zero some game. At a simple level applying leverage to an investment is a linear relationship between risk and return. However in this case with the expected return on the asset arguably less than the cost of debt, it's not a very pretty linear relationship*.

Te Whetu


*Less return with more risk. Yes, the perfect investment!

ENP
04-06-2011, 12:26 PM
So the way I see it are:

1. Save in term deposits, buy in 2-3 years time.
2. Save in term deposits, delay purchase, maybe do an OE, etc and buy in 4-5+ years.
3. Save and invest into shares, buy in 2-3 years time.
4. Save and invest into shares, maybe do an OE, etc and buy in 4-5+ years.
5. Buy a cheaper 2-3 bedroom house in the $250-300k range instead.
6. Buy a rental elsewhere and continue to rent myself.
7. Pay off my entire student loan of $28k

Initially I was hell bent on #1. But now I've listened to all the comments here, I'm more inclined to sway towards #4 or #6

Te Whetu
04-06-2011, 12:42 PM
My question to you Te Whetu if holding property long term (30 years plus) is ones intention, and historically home ownership has been a extremely good investment due to leverage and inflation, both of which are still here.

(the leverage which is available is far far greater than what is available in shares unless you move into CFDs etc, im a share trader so i do know, try borrow $250,000 worth of shares with just $50,000)

wouldn't you rather buy after a fall in house prices, when you know from history house prices will increase over time, even if not straight away, its the build up cycle, the boom cycle will come, isn't this an opportunity to enter the market at a very good price level, knowing house prices will catch up to inflation at some point in the next property boom cycle. While your waiting for that,inflation is increasing your wages while your Debt stays the same.

I can easily find good quality companies with LVR's of 50-60%, and LVR's of up to 70% are available from ASB. No I can't borrow $250,000 on $50,000 (LVR circa 16.7%) like you suggest with property. In the end if 30 years is your time horizon then it actually gets fairly easy to model so maybe some other time I'll show the impact of that.

Also the argument that prices will eventually go up is weak. Yes, I agree they will at some point, but so will a diversified portfolio of bonds and shares. The question is will they go up by enough to justify the investment (i.e. for levered property that means will the asset returns after allowing for all cash flows be greater than the cost of your loan).

If I told you that there was a 100% chance of property AND rents going up by 2.5% per annum into perpetuity, would that make it worth investing? Well the answer is still a resounding maybe. It would depend on what rents were and what the costs associated with the property were (e.g. rates and maintenance). It would also depend on inflation (above or below that 2.5%) and the interest rates you're paying. Finally it would depend on the opportunity cost of investing in the property.

Oh! oh! oh! I've got a good example!!! :)

So you have a government bond which returns 3.5% after tax and is inflation adjusted! Would you borrow at 7.0% to invest in the bond? Of course! It's guaranteed to go up in value with inflation AND it provides a return. It helps pay itself off!!! All you have to do is top it up every so often. The best thing about it is that after 10-30 of contributing it will be worth more than it's initial value. That a great return! All you need to do is ignore all your top-up's. *

*please don't sue me... I'm joking. :p


I think you are focusing very short term at the detriment to your financial wealth long term.

By my very nature I take a longer term view than most of my peers. That's the beauty of the share market, unless you are a skilled trader you NEED to take a longer term view. I base my current investment decisions on what I feel will be true in 1-3 years, but still only invest if I can see myself being happy to be still holding the investment in 10+ years in case things don't go my way. I'm always happy for the market to correct once I'm in, but don't require it for the exactly because I take a longer view.

Will I be happy with my choices to forego home ownership for a while in 10+ years? Well that depends on what the housing and share markets do in the intervening time. However with all current knowledge, I give much higher probability chance to being happy with the decision than not.


Im sure we can agree to disagree here

Yep, agree to disagree.

Te Whetu

buns
05-06-2011, 12:14 PM
This has gone well away from ENP’s question.

AA – I think your assumptions completely degrades your whole argument.

Try doing your same calcs you are doing now with house prices rising 1% for 5 years, and 3.5% to terminal value. With interest rates at 6% for 3 years and 8.5% to terminal value. Add in some maintenance costs as well if you really want the spread sheet to go red.

Yes – these are assumptions, let’s not argue them as there is no correct answer.

I see no way you can make that calculation favour housing.

But remember, it doesn’t matter as ENP has a bunch of other things he values which cannot be put in the NPV.

Seriously – Someone in NZ needs to write a book on this, using exact figures, facts and meaningful assumptions easy to understand for the general 20 year old who is coming into some money. It would seriously hit home with a lot of kiwi's in ENP’s position, allowing them to weigh up a question like “Are my non-financial reasons for owning a home worth more than X$?”.

The government should also subside the thing (because it wouldn’t make money with the kiwi housing mind-set) as it would solve a heap of their problems all at once.

Te Whetu
05-06-2011, 10:47 PM
AA, the analysis you propose is good, but I would suggest the following:

1) Inflation was extremely high during periods over the last 30 years, no one expects a return to those levels of inflation so inflation should be isolated considered separately.

2) To do this find a historic time-series of both inflation and house price changes, adjust changes in house prices for inflation to get the real change in residential property over time.

3) Ad back inflation at between 1.5-3.5% (model with a couple values to get some sensitivities).

4) You then need to take the geometric mean (http://www.investopedia.com/terms/g/geometricmean.asp) of the rates over time.

5) When looking at interest rates should do the same thing, look at interest rates assuming we never had >10% inflation.

Now I don't know what rates of change you will find, I've never done this analysis. But I suggest that it will not be huge. The problem changes in capital value make up only one small part of the return of owning a house. As we all know, we also need to factor in items such as rent, and/or avoided rent, expenses etc.

Still it would certainly help inform this discussion.

...

Ok since it didn't look too hard I've done the above (at least for house prices). It's likely not perfect but as an indication and to help inform the conversation:

Inputs:
1) Data-series since 1962 (that's when the StatsNZ house price index (http://www.rbnz.govt.nz/keygraphs/housingdata.xls) I found goes back to).
2) Housing data is for detached houses only, I suspect units and apartments would have lower growth.
3) Inflation based on CPI (http://www.rbnz.govt.nz/statistics/econind/a3/ha3.xls).

Outputs:
4) Nominal annual ∆ in prices has been 8.6%
5) Real change in prices has been 2.1%
6) If we assume 2.5% inflation then this would imply a nominal growth rate in house prices of 4.7%

Which to be honest is not too bad, certainly higher than I thought it would be. NOTE: This is still past data, so while it may help give a reasonableness check, it does not guarantee future changes.

Personally I don't believe property prices can outstrip changes in peoples income indefinitely. I feel we will have a time of contraction and consolidation before the continued slow march continues. Even if that slow march does continue at some point, it doesn't mean buying now is a positive investment decision.

Cheers
Te Whetu

Sauce
06-06-2011, 08:45 AM
Personally I don't believe property prices can outstrip changes in peoples income indefinitely. I feel we will have a time of contraction and consolidation before the continued slow march continues. Even if that slow march does continue at some point, it doesn't mean buying now is a positive investment decision.


Hi Te Whetu

I am on holiday and have been enjoying this discussion from my iphone.

Anyway, enjoyed your posts and agree with your view entirely.

When talking residential property there are really two types and they are valued (by the market) very differently and people always seem to miss this point in general discussions..

So called 'sophisticared' property investors tend to prefer multi-income properties from large blocks of flats down to home and income type properties in good suburbs (say a four bedroom home with a granny flat or 1 bedroom flat attachd to it and rented separately). This allows them to get a higher 'yield'. i.e. more cashflow from the investment. These properties are valued (as they should be) by capitalising the cashflow they produce (although most investors get this part wrong but thats another discussion).

A standard 'home' in the 'burbs is valued by the market based upon factors such as the lifestyle benefits and features it provides as a family home, in a rough comparison to what else buyers can get for their money in the same area and previous sales etc.

Now if you are an investor buying a three flat city-fringe rental property in Auckland or Wellington, your long term capital gains are going to be influenced by two things: Rental inflation, and the prevailing cap rates required by other investors. The only time that land value or general family home price inflation even comes into it is if those values were to rise so high the property was worth more as a different use, i.e. a homebuyer converts it into a non-investment property for a family to use, or the land is worth more for some other use.

Now over the long term, rental inflation is a near certainty, particularly in the major centres, as population growth and finite land combine to put pressure on rents.

But cap rates are another story. Currently investors are still buying multi-income properties in Wellington on approximately 7.5% gross yields, which equates to probably less than 5% if people were honest about the real cost of maintenance averaged out over the life of the asset (which they are NOT honest with themselves about in nearly all cases in my experience). In my opinion this is still way to low to provide a return I would be happy with.

look at it this way - its financial equivilent of buying a stock on a PE of 20 that grows earnings at the rate of inner city rental inflation.

Of course it can and is argued that the certainty of the income is so great this low return is justified, and thats a fair argument. But people still need to be realistic that these are simply not very spectacular returns.

Te Whetu is right. Leverage is not a guarenteed way to make excess returns with property. In fact I know for a fact that leverage can and does destroy a lot of wealth in the property sector, and ironically people often do not even realise it..

The few truly 'sophisticated' property investors I have met keep their gearing at under 30% and reinvest their cashflows in new income streams, compounding their returns over long periods of time. They do NOT even care about so called 'capital gains' as they have no intention of selling, they are simply building a larger and larger stream of cashflow. The only time current cap rates are of interest is when they are purchasing. They prefer property because of the certainty of rental income, over the uncertainties of business income. But, for that certaintly, they accept lower returns and lower potential rates of compounding. Of course they still get very wealthy over long periods of time.

Buying on an average yield now, and hoping rents rise AND yields will drop, is simply trying to guess the impossible, and playing the 'bigger fool theory'. It is also stupid as it relies on actually selling to realise capital gains and having to time your exit.

The value of any cashflow producing asset is simply the present value of all the cash it will generate in the future, discounted for the time it takes to generate the cash. Investment property is no different. Hoping someone will pay more than you in a few years and disregarding this fact is a bad strategy on so many levels.

My personal view is that we are going through a large adjustment in the property market right now. Inflation will not include rents and land values but inflation of everything else is going to erode the value of peoples equity in their properties in the short term. Prices won't collapse due to structural factors such as no-oversupply in NZ (unlike the US). But wage and salary's are likely to catchup with home prices at some point.

However, that doesn't mean, if you are a savy investor who is focused on cashflow, that now is not the time to pick up some high yielding investment properties - if you are agressive and look for distressed sellers, you are certainly more likely to find some greedy and foolish overgeared speculator who capitulates and sells you a bargain (i.e. a high cash yield) in this market. I.e. the transfer of wealth from the impatient to the patient..

Generally speaking, property investors spend too much time reading books that teach really poor ideas about finance in general (as applied to real estate).

Come to think of it Terry Seripisos (or his banks) might be about to sell a few bargains... ;)

With regards (from Kalkan, Turkey)

Sauce

P.s. Sorry about bad grammer spelling, clarity etc, don't have time to tidy up this post.

Sauce
06-06-2011, 05:35 PM
Sorry I should also mention that my post was a general rant about the differences between property as an investment and property as a home. The reality is these things are very different in practice which was my long winded point.

The home you live in is simply not an investment at all, and it's naive to think it is. For a start you always need to live somewhere ? So that capital is dead money.

A second home might be considered an investment, but people are better to buy for income (and most, but not all, do).

I wasn't posting with regard to enp and his situation.

Cheers sauce

percy
06-06-2011, 08:32 PM
Just googled Kalkan.Looks a fantastic place.

Sauce
07-06-2011, 02:27 AM
Just googled Kalkan.Looks a fantastic place.

Hi Percy

Kalkan is simply amazing. Got to love the med if you like your sea turquoise and your food delicious.

Speaking of which, I must now go forth and fatten myself.. :)

Cheers

Sauce