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Fund return "stress testing"

Discussion in 'Managed Funds & Index Funds' started by bazza52, 22nd Feb, 2007.

  1. bazza52

    bazza52 Member

    Joined:
    4th Dec, 2006
    Posts:
    17
    Location:
    Canberra
    After reading Steve's LoE articles, I thought I'd better stress test our fund returns with a 2% interest rate rise, and compare to leaving cash in a PPoR offset account.

    Current story is;
    • Cash and LoC
    • 50% Margin Loan
    • I won't list all the funds here but Navra WS is 40% of portfolio
    • Assuming 10% fund return
    • Assuming 2% growth

    I think I've missed something, because it seems that after rates go up just over 1% (see attached spreadsheet), an offset saves the same amount? We are currently capitalising Margin Loan interest, but I have included 2 scenarios in the spreadsheet.

    Being new with fund investing, I appreciate any feedback and corrections!! :)
     

    Attached Files:

  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    You're taking out tax first and then calculating expenses ... you need to calculate return minus expenses and THEN you pay tax on the remainder. I see that you do discount the interest costs by the tax rate ... but I think you would be better to do it the way your accountant would ... it will give a more accurate result. (You may get the same result - I haven't checked it in detail).

    Fundamentally, with an assumed total return of 12% (10% distribution + 2% growth), you've not got much buffer when interest rates hit 10%. You really need a lower LVR (your actual LVR is nearly 70% when the LOC is taken into account) if you really think that 10%+2% is the best you can do on your portfolio.

    As you've shown, your "risk free" return is pretty high - you need to think about whether the returns you can get with a high LVR and a conservative return on your portfolio justify the risk !!

    Perhaps some diversification into more growth funds would help ?
     
  3. bazza52

    bazza52 Member

    Joined:
    4th Dec, 2006
    Posts:
    17
    Location:
    Canberra
    Thanks for the quick reply Sim.

    That makes a fair bit difference, much nicer outcome (updated in spreadsheet).

    After speaking with our planner, and also from reading on this forum, I gather that 10% distribution is a good (yet conservative) figure to use for planning.

    The purpose of this fund strategy is to generate some cashflow while we are paying back a family debt on our PPoR (gone any day!:D). Next step we plan to get a CG IP soon.
     

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