Risk Assessment

[Steve Navra]

Hi All,

I alluded to this new topic in the previous thread. (Re-assessing Strategy)

The following seems clear:
• We are all on a path to financial freedom
• There are many different philosophies as to HOW to get there.
• Cashflow appears to be an important consideration
• Efficiency in utilizing assets seems necessary

The following questions might then need answering:
• SANF: what keeps you awake and why?
• LVR: what is a reasonable level? (Please justify)
• Buffer: How much is necessary?
• What is risk profile and in which risk category are you?
• How do you stress test your portfolio?

I invite Forum members to give a reasonably detailed response to some of the above questions and thereafter I will be happy to respond with my few cents worth.

Regards,

Steve

 

[Sim]

SANF: what keeps me awake at night is a loss of freedom - having to work to earn a certain income just to support our investments. I don't buy cashflow positive for the sake of it, I prefer growth, but want to have the overall portfolio pay for itself (which is why I like Steve's strategies).

LVR - real estate: in the short term, because we have high surplus income and are still building the foundations of our portfolio, I prefer to gear real estate to 90%. Essentially, I know I will run out of LMI capacity eventually, so I'm working hard to use it while I've got it. Once the insurers will no longer touch me, I'll work on an 80% LVR over the medium term, and once we're happy with the security of our portfolio, I think I'll let it drop to 60-70%.

LVR - shares: in the short term, I'm happy to go as high as 60% LVR (assuming a 70% maximum lend on the shares/funds in the portfolio). I've got enough liquidity and cashflow to handle sudden drops. Medium term, I'll aim for closer to 50% LVR here to give a bit more buffer.

Buffer: I prefer to have a cash buffer that will cover expenses (especially interest) for 6-12 months. Cash sitting in an offset account - not a LOC. If I get to the point where I need to rely on that money, I really don't want to be getting further into debt.

Risk: I actually put us in the low-medium risk category, although we have taken some risky options in our investments in recent years - mostly because we are young and have high surplus income. We're not risking anything we can't afford to lose. Longer term, we'd tend to work on slightly lower LVRs and less aggressive strategies, but only once we have a portfolio that does what we need it to.

Stress Test: I usually play what-if scenarios (spreadsheet) and have at least a rough plan for how to handle things if they go wrong (eg. where to access cash from, and even which assets to sell first if it comes to that). Liquidity and flexibility are very very important. This is why policies such as no cross-collateralisation, interest only loans, variable interest rates, buffer money parked in offset accounts, and a good proportion of liquid investments are important. I currently tend to do my back-of-the-envelope calculations using 10% interest rates for real estate.

 

[perky29]

Typed out a long reply then lost it all. So will make it short.
SANF : Main worry is loss of job (if it goes to India??). Have worked towards getting portfolio self-sufficient.
LVR: On shares and IP's at around high 60's %.
BUFFER: I am happy with a buffer of around 10%, which is pretty much where we are at. Have made use of most of the lazy dollars.
RISK PROFILE : With some success over the past few years, have been pretty aggressive. Tried some different things which came off fairly well. Now would be classified as MEDIUM risk, due to uncertainty over job, interest rates etc.
STRESS TEST: Like to play with PIA and do what-ifs. Could deal with 2 to 3% higher interest rates if need to. Have played some what-ifs id the Dxxxxxx company- interest-free can actually get past ASIC (rubs hands with glee - if it really is possible, but not too concerned if it ain't).

 

[Corsa]

• We are all on a path to financial freedom
Definately! It wasnt a planned path to be on but now I realise I am on it, that is definatley the goal

• There are many different philosophies as to HOW to get there.
Buy as often as you can using a sensible proportion of your income to support (if applicable). Whether that be for growth assets or for positive cashflow...it doesnt matter....it's all fine if you are heading down a path that you feel comfortable with.

• Cashflow appears to be an important consideration
Cashflow is very key to making this equation work. Looking at the big picture (so your overall inflows and outflows) is very important.

• Efficiency in utilizing assets seems necessary


The following questions might then need answering:
• SANF: what keeps you awake and why?

Recently I had my own SANF issues. I realised that if interest rates did go up that my current lifestyle would be put at risk marginally (my savings would be reduced). So I ran my numbers and worked out if I fixed about 70% of my debt, then that means I would not be effected by any interest rate rise at least for the next 2 years.

Other than that, I fear that if I was retrenched I would be in trouble as currently I do support my properties each month through employment income. But ultimately I could just get another job if I needed to work through these types of issues.

• LVR: what is a reasonable level? (Please justify)
Being in my late 20's, my LVR has been always sitting between 80% to 90% from day one. I envisage keeping this LVR around 80% at least for another 5-10 years and then see what happens.

• Buffer: How much is necessary?

Each month, I save around 1% interest rate rise which effectively means that it would take interest rates 1% to rise before I was effected. I dont have cash reserves of 3-6 months sitting around, but I do have access to some equity/credit cards/sale of shares should a buffer need to be used. Other than that, if property costs are significant for the month for whatever reason, then my lifestyle habbits need to be cut back (ie dont go out as much for dinner that month, or dont get a facial etc)

• What is risk profile and in which risk category are you?
I consider myself in the high-medium group. I have borrowed a lot to procure assets over a short period of time, using some unconventional purchasing techniques like OTP and no money down. I say high-med as if I was actually high then I might have been doing wraps or developments, of which wraps I am not interested in and developments I dont have the cash or the know-how to be able to do this yet.

• How do you stress test your portfolio?
I look at the big picture. I look at all the inflows (both employment and investment) and all the outflows (both investment and personal) and make sure that I am saving at least 10% after all outflows are taken into account and that I am saving 1% interest rate rise.

I look at growth projections and equity availability so I can work out when I can next make a purchase.

 

[Peter Parker]

The following questions might then need answering:
• SANF: what keeps you awake and why?
• LVR: what is a reasonable level? (Please justify)
• Buffer: How much is necessary?
• What is risk profile and in which risk category are you?
• How do you stress test your portfolio?

SANF: Investing (including borrowing) has made no difference this.

An investment portfolio that is dependent on maintaining a high income job to sustain would not be satisfactory - it must pay (or nearly pay) for itself.

LVR: Currently <60%. There would have to be a massive crash until there is negative equity. Also determined by serviceability issues.

Buffer: Approximately three times annual living expenses kept in a mixture of easily accessible fixed interest and share-based managed funds (which also provides a measure of diversification and passive income as well).

Assuming the worst case scenario of 100% vacancy, no job and even higher interest rates this could keep things running for 12-24 mths.

This buffer amount does not include redrawable equity in loans.

Use is also made of landlords insurance to limit risks.

Risk profile: Medium. Willing to borrow heavily provided asset meets my definition of value and safeguards are in place. Will buy interstate for best deal, but not site-unseen.

Stress test: Asking a series of 'what ifs', eg:

a. Loss of job
b. Loss of rental income
c. Tenant damage
d. Vacancy
e. Periods of no or negative capital growth
f. Downturns in industries that are big in areas IPs are located

Then weigh these risks up against the certain failure of doing nothing.

Minimising risks

a. Avoiding large negative cashflows
b. Careful selection of location and property (tenantability and value)
c. Substantial buffer amounts
d. Geographical spread of IPs and investments
e. Not having all funds tied up in one property
f. Portfolio review every six months
g. Use of a single bank account for IPs to help monitor expenses
h. Planning for higher interest rates (12% or more)
i. Having a strategy for this (eg could pay off an IP)
j. Sufficient research prior to purchase

Regards, Peter

 

[Bear924]

The Questions

• SANF: what keeps you awake and why?
• LVR: what is a reasonable level? (Please justify)
• Buffer: How much is necessary?
• What is risk profile and in which risk category are you?
• How do you stress test your portfolio?

SANF - I think my SANF can be altered by not doing enough and by trying to do too much. Not enough and I lay at bed thinking I sould really do this and that. Too much and I lay in bed thinking 'how am I going to...'

LVR - 80% for aggressive investors with spare cashflow.. why.. many books I've read have suggested this level... avoids paying mortage insurance so obviously banks see it as a 'less risky' level then (let's say) 90%. If less aggression is required or cash flow is tight then I believe it comes back to the individuals circumstances.

Buffer - Depends on insurance, type of job, partners ability to fund empire if something happens. Buffer should last until income protection insurance kicks in.

Risk cat - Would currently put myself into the low risk cat. Plan to bring on more debt as appropriate which may increase risk rating. What is risk profile? Ability to respond to change in situation.. the higher your risk profile the less able you are able to respond to change. Change could include interest rates, job/business situation, marriage breakdown etc

Stress test - Heaps of what ifs run via a spreadsheet. Emotional stress test s little harder to test... may be based on previous experiece.

 

[Kennethkohsg]

Hi All,

I alluded to this new topic in the previous thread. (Re-assessing Strategy)

The following seems clear:
• We are all on a path to financial freedom
• There are many different philosophies as to HOW to get there.
• Cashflow appears to be an important consideration
• Efficiency in utilizing assets seems necessary

The following questions might then need answering:
• SANF: what keeps you awake and why?
• LVR: what is a reasonable level? (Please justify)
• Buffer: How much is necessary?
• What is risk profile and in which risk category are you?
• How do you stress test your portfolio?

I invite Forum members to give a reasonably detailed response to some of the above questions and thereafter I will be happy to respond with my few cents worth.

Regards,

Steve

*********************************************************
Dear all,

1. My SANF - Having Inner Self Peace, Love through Believing and Trusting in the Lord and His Grace as a child of God & doing Acts of Service towards Mankind

2. My LVR - Presently 80% for my growth Assets. Will eventually lower down to 50% when my property development business takes off in the medium term. Over the longer perspective, I will work on fully paying up once I can afford to pay off all my debts for the assets holdings for secuirty andsafety reasons through generating sufficient life-time income through multiple passive income streams for life worldwide.

3. Buffer - At this point in time 18-24 months of my family living expenses.

4. Risk Profile - consider myself to "High-Medium" risk taker at this point in time. Working on changing my proifle from Moderate-Low" risk taker in the medium term.

5. Stress-Test My Profile:

a. Ability to increase and expand my yearly property investing capability, both in terms of cash value and number of new investment property to be acquired.

b. Re-structure my property portfolio into Growth Assets and Security Assets. Growth Assets are 80% with more than 15% p.a returns while security assets are self-financing and less than 50% LVR and with returns of at least 5%p.a.

c. Generating new passive income streams sources through new businesses and investments.

d. Setting up income to set up self-financing Family Trust and Charity foundation to do charity works worldwide from 10% reserve accmulation from my investment returns/income sources.

e. Invest in Steve narva's Cashbond Annuity Plan and quality stocks worldwide.

f. continue to invest in my financial education and self-development courses and build my own personal wealth networks contacts world-wide.

regards,
Kenneth KOH

 

[qaz]

The following questions might then need answering:
• SANF: what keeps you awake and why?
• LVR: what is a reasonable level? (Please justify)
• Buffer: How much is necessary?
• What is risk profile and in which risk category are you?
• How do you stress test your portfolio?

SANF:

Basically that of not reaching my financial goals fast enough to enjoy them. I would like to be wealthy at a reasonably young age so that I can still enjoy having money while im young. I guess thats the main thing, just feeling like i'm not heading towards my goals fast enough.

LVR:

With property i'd go up to 100% LVR if the banks will let me. With shares, maybe 50%.

Buffer:

3-6 months or so i'd say.

Risk Profile:

Medium to high. I have no qualms about loosing money in the short term if I feel I will make more in the long term (assuming long term investment). But I would be a little iffy about investing large amounts of my money into investments that could loose all of their value or never recover after a hit.

Stress Testing:

Don't at this stage.