Calling it quits!

Originally Posted by 38andlifetogo

Net worth about 20m and net worth 15m about the same. Both can travel business class, buy branded bags, eats about anything anywhere. 10m I think will need some trade offs. Main problem is that primary house expensive at about 4-5m. Even with some leverage, 10m guy only has about 8m or so to invest. At 4%, that is 320k to spend per annum. I used 4% as I assume bond, property rented and some equities type of portfolio.

The house you live in doesn't have to be a problem. Say you bought the house for $2m, putting down $600K, borrowing $1.4m and it is now worth $5m. Talk to your banker about raising your LTV to 50%. Say, you've paid the loan down to $1m, your current LTV is 20%. Raising LTV to the relatively safe level of 50%, you can borrow $1.5m at 80bp and put it into 6% return instruments, giving you around $75K of net return. QED. As the house you live in rises in value, you can borrow more.

Originally Posted by Unregistered

The house you live in doesn't have to be a problem. Say you bought the house for $2m, putting down $600K, borrowing $1.4m and it is now worth $5m. Talk to your banker about raising your LTV to 50%. Say, you've paid the loan down to $1m, your current LTV is 20%. Raising LTV to the relatively safe level of 50%, you can borrow $1.5m at 80bp and put it into 6% return instruments, giving you around $75K of net return. QED. As the house you live in rises in value, you can borrow more.

0.8% is for 1 week usd loan from pb. If interest rates rise, the arbitrage makes much less sense. And we know int rates has gone to 3% before. Also 6% return on asset consistently is quite tough without high risk. Pb managed balanced portfolios past 3 years yielding 2-4% annualized only leh.. How u do 6% safely?

My overall leverage for everything is only 35% to be safe. 50% is too high. I don't need to maximize my returns by taking undue risks. I think most people with 8 digit networth will feel the same.

Originally Posted by 38andlifetogo

0.8% is for 1 week usd loan from pb. If interest rates rise, the arbitrage makes much less sense. And we know int rates has gone to 3% before. Also 6% return on asset consistently is quite tough without high risk. Pb managed balanced portfolios past 3 years yielding 2-4% annualized only leh.. How u do 6% safely?

My overall leverage for everything is only 35% to be safe. 50% is too high. I don't need to maximize my returns by taking undue risks. I think most people with 8 digit networth will feel the same.

Interest rates rise mainly due to inflation, usually from a recovering economy. If short term rates rise, rates of return on longer dated instruments will rise in tandem, though unevenly. When short term rates rose to 3%, long-term rates rose to 9%+. Sometimes, in unusualy economic circumstances, you have a flat or inverted yield curve, but it doesn't last long.

Right now, short term rates have been relatively steady, while long-term rates have risen sharply, causing the carry trade to be the most profitable it has been in years. At 38 years old, you are managing your portfolio like you are 70 years old! Getting 2-4% return for the past few years, you should change your bankers. Maybe when you signed the forms, you ticked that you were an unsophisticated investor, hence they don't show any high yield instruments to you as they believe you can't understand them. Rules are strict since the minibond problems.

Overall leverage of 35% isn't that bad a strategy, but property can be leveraged much further because it isn't usually a very volatile asset class. Even the MAS allows property owners to leverage 60-80%. At 50%, that is pretty safe. It's hard to imagine Singapore property more than halving in value, such that you have a margin call.

Originally Posted by Unregistered

Right now, short term rates have been relatively steady, while long-term rates have risen sharply, causing the carry trade to be the most profitable it has been in years. At 38 years old, you are managing your portfolio like you are 70 years old! Getting 2-4% return for the past few years, you should change your bankers. Maybe when you signed the forms, you ticked that you were an unsophisticated investor, hence they don't show any high yield instruments to you as they believe you can't understand them. Rules are strict since the minibond problems.

Overall leverage of 35% isn't that bad a strategy, but property can be leveraged much further because it isn't usually a very volatile asset class. Even the MAS allows property owners to leverage 60-80%. At 50%, that is pretty safe. It's hard to imagine Singapore property more than halving in value, such that you have a margin call.

Hmmm.. By carry trade, u mean I borrow in sgd or usd to fund longer duration bonds and earn on higher yield and leverage . Eg. I borrow 400k and pay 100k to buy say 10 year usd bond yielding 6%? Interest rate is say 1%. But if in 2015, interest rates go up to 2%, my bond is now worth about 93 assuming duration of about 7. So we have lost on paper 1+ year coupon and am looking at 2 year return of about 5% and still got to minus interest of 2%. How is this a good trade? In fact, I am doing the reverse and owning low duration using leverage. Waiting for rates to rise before increasing duration of portfolio. Of course it is a bond ladder of about 40 bonds. Btw, this year most bond portfolios are slightly down or flat.

I have been in markets and trading and investing since 18 years old. Risk profile is aggressive as I do options on my equity positions and structured notes when appropriate. I use overseas pb and local pb. The 2-4% is referring to their balanced discretionary portfolios over last 3 years. It is rather low I agree but due to this year bond not moving and in 2011 equity markets not strong.

To clarify on the returns, I refer to 4-5% annualized on net investible assets. This refers to bonds, equities, alternatives, cash (most hnwi i know hold 20% cash!). The last item is a major drag. So eg this year, one does 6% returns on 40% equity, 1% on 40% bonds and 0 on cash, return is 2.4%. So with some leverage it goes to 3.5% at best. My 6% equity is fair as em are down, sg is up 3%, only us is up a lot, bond suck this year, cash is zero.

If u know a pb who can give me 6% on this basis, I will happily switch! Let me know.

No, carry trade can mean many things, currency, interest rates etc. For the past 3 years, I've been borrowing sub 1% to fund yield stocks, preference shares etc. Both in SGD and USD. You can even get 5% yield out of U.S. stocks like Verizon and AT&T. Capital gains overall are over 100% and I'm also drowning in a sea of dividends. The cash yield based on my purchase price over the past 3 years or so is probably around 8-9%. I will gradually move the higher beta equities over to long bonds when the yields are higher. I haven't done it yet because yields are still rising. I'm also generally a long term passive investor so if my holdings of high quality equities or bonds crash, I'm not going to panic. The large part of my equity portfolio is already free as the dividends have covered my purchase cost. I've been through several cycles. Good non bank companies will recover and I can always hold the bonds to maturity.

As for dealing with your bankers, the better you know them, the straighter they are about the products they are selling you. I've bought structured products from them selectively. Some of the currency arb ones have been good even though I know the bankers made a lot of money off them. I also stag IPOs using massive leverage. On the most recent IPO, I pressured the bank to bid for $30m of an IPO on my behalf. I was pretty confident it would go up because of massive demand. My allocation of about $150K of the IPO or 0.5% was completely expected given that it was massively subscribed. The stock went up 10% on the first day and I sold it earning $15K. I've done this more times than I can count. But I don't do every IPO. I do my research. Now, it is remotely possible that I will one day end up with $30m of a dud that falls in price, but I don't think so. I watch these deals closely and will pull out. The more simple bond mathematics you know, the less money you will make. haha.

You clearly run in a different HNI crowd than me. Everyone I know has made a ton of money in the last few years, easily surpassing the 4-5% you target. If you can't make money in such a buoyant market over the past 3 years, it doesn't bode well for the next few years! As for cash, I keep about $1m around. Keeping 20% would be nuts. The rest is invested. I don't see any need to keep that much cash when the banks will lend me large amounts should I ever need it.

Originally Posted by Unregistered

As for dealing with your bankers, the better you know them, the straighter they are about the products they are selling you. I've bought structured products from them selectively. Some of the currency arb ones have been good even though I know the bankers made a lot of money off them. I also stag IPOs using massive leverage. On the most recent IPO, I pressured the bank to bid for $30m of an IPO on my behalf. I was pretty confident it would go up because of massive demand. My allocation of about $150K of the IPO or 0.5% was completely expected given that it was massively subscribed. The stock went up 10% on the first day and I sold it earning $15K. I've done this more times than I can count. But I don't do every IPO. I do my research. Now, it is remotely possible that I will one day end up with $30m of a dud that falls in price, but I don't think so. I watch these deals closely and will pull out. The more simple bond mathematics you know, the less money you will make. haha.

You clearly run in a different HNI crowd than me. Everyone I know has made a ton of money in the last few years, easily surpassing the 4-5% you target. If you can't make money in such a buoyant market over the past 3 years, it doesn't bode well for the next few years! As for cash, I keep about $1m around. Keeping 20% would be nuts. The rest is invested. I don't see any need to keep that much cash when the banks will lend me large amounts should I ever need it.

Well I guess it is risk profile. The returns u describe only works if one put the bulk of portfolio into us equities last 3 years or into property. My usd equity, local property side also has done very well. Most other spaces have done badly. China and other emerging markets last years are down or flat. That includes sg. Bond market did great in 2011 and 2012. This ytd is down or flat. Gold and commodities too down. So how to have >5% overall returns unless one exclusively timed the us equities or property market? I suspect your risk profile/investment philosophy and hence portfolio volatility is much different than mine. You also practice high level of asset timing. I have seen enough to know that it is whatever works for the individual. I know myself and I will not be able to execute your strategy well. But good for you! Stick to what works best. When I gave my sharing, I assumed most rich people will think more like me. Your approach probably does not fit most rich people for use in their entire portfolio. Usually more risk adverse since we most risk on the business side.

Point on cash, I also used to think should have low cash positon like 5%. But when I asked my much richer friends (all entrepreneurs closer or at 9 digit net worth rich not banking and finance rich), they all hold much more cash and property than what portfolio allocation theory advocates. Read over 50% in cash and property where cash can be 10-30%..

Having written so much, the point I am making for this thread is that there is a lot more to life than trying to earn much more money beyond 15-20m. Each dollar really gives much less marginal utility at least to me. So if your investments can make enough income to cover annual expenses by 1.5 and more times whatever your level of expense, you really need to ask if you want to keep maximizing and what risks you want to take and time you want to spend on investments. My goal is to beat inflation by 2-3%, have less stress while at it. Stress not from portfolio mgmt but stress from always wanting to win the next guy in terms of net worth.

Originally Posted by 38andlifetogo

... the point I am making for this thread is that there is a lot more to life than trying to earn much more money beyond 15-20m. Each dollar really gives much less marginal utility at least to me. So if your investments can make enough income to cover annual expenses by 1.5 and more times whatever your level of expense, you really need to ask if you want to keep maximizing and what risks you want to take and time you want to spend on investments. My goal is to beat inflation by 2-3%, have less stress while at it. Stress not from portfolio mgmt but stress from always wanting to win the next guy in terms of net worth.

Good point.

I think you hit the nail on the head, but perhaps not in the way you think you did. You mentioned "you and your entrepreneur friends". That's the difference. You struck it rich through a business and perhaps are afraid that it is a one trick pony so you are very concerned about preserving your wealth.

Whizzard (I think) and I are professionals, not entrepreneurs. I've been through several cycles and have managed both people and finance in large global firms. The people I mix with are professionals including a lot of bankers. As I mentioned before, I'm a very passive investor. How do you think dividends have paid off the purchase price of the large part of my equities portfolio? I move a small part of my total portfolio around with my view of the world economy, but the bulk is held forever. Or in the case of bonds until maturity or preference shares, when the bank redeems because it doesn't qualify for regulatory capital anymore.

I know entrepreneurs too. Some can be reckless with their business strategies but so conservative with their investments. Others are part of syndicates which move small illiquid stocks (like their own companies) around. If you hang out long enough with your entrepreneur friends, they will let you into their secrets. It's all quasi illegal from my perspective. haha.

From your posts, it sounds like you are reading too many investment texts. Just relax and observe the markets over time. With age comes wisdom.

Originally Posted by 38andlifetogo

Having written so much, the point I am making for this thread is that there is a lot more to life than trying to earn much more money beyond 15-20m. Each dollar really gives much less marginal utility at least to me. So if your investments can make enough income to cover annual expenses by 1.5 and more times whatever your level of expense, you really need to ask if you want to keep maximizing and what risks you want to take and time you want to spend on investments. My goal is to beat inflation by 2-3%, have less stress while at it. Stress not from portfolio mgmt but stress from always wanting to win the next guy in terms of net worth.

I don't know about you, but I don't have a GCB yet. Also, I wouldn't mind having a condo in Aspen or St. Mortiz for winter. Always though about having a Sentosa bungalow where I could park the car in front and the yacht in the back. hahahahahaha

[whizzard]

Originally Posted by Unregistered

Right now, short term rates have been relatively steady, while long-term rates have risen sharply, causing the carry trade to be the most profitable it has been in years. Getting 2-4% return for the past few years, you should change your bankers.

Overall leverage of 35% isn't that bad a strategy, but property can be leveraged much further because it isn't usually a very volatile asset class. Even the MAS allows property owners to leverage 60-80%. At 50%, that is pretty safe. It's hard to imagine Singapore property more than halving in value, such that you have a margin call.

I have been mulling over a potential portfolio of perps, mainly investment grade rated banks which are callable over the next 2+ years i.e. the duration is short if they are called. I must qualify that I have not examined their individual bond structure hence the details has yet to be worked out.

Issuer Instrument Yield to Call Duration
A. Perp. 5.32%. 2.08 yrs
B. Bond due 2036 4.35%. 2.72 yrs
C. Perp. 5.63%. 3.28 yrs
D. Perp. 4.51%. 3.37 yrs

Weighted average yield = 4.9525%

Weighted average duration= 2.8625 years

Assuming 50% financing at 1%, int cost = $5,000 pa

Portfolio yield = $49,525 pa

Net portfolio yield = $ 44,525 pa

Capital invested = $500,000

Return on Capital invested = 8.905% pa

Strategy = hold till maturity with 50% leverage

Risks = borrowing costs shooting up but I think it would be unlikely to cross 4% during the duration of the proposed portfolio. I also don't think medium term interest rates would move so much such that the bond/perp prices would crash to trigger a margin call within the remaining duration.

What do you think? Would you invest in it (assuming bond structure is acceptable i.e. the issuer will exercise the call when it comes due).