Portfillio size? Whats normal for a personal self managed porfillio?

[ENP]

$300 per fortnight.

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

[Corporate]

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]

$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]

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]

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” .

Cheers
Te Whetu

[ENP]

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]

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]

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]

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]

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.