Author Topic: What's your investment rate of return?  (Read 9400 times)

bigchrisb

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What's your investment rate of return?
« on: January 03, 2013, 03:20:59 PM »
Anyone else track their investment rates of return?

I track mine, to try to keep myself accountable, and to keep my investment choices in perspective.  My investment choices have included more leverage than I typically see on this board, with approx 63% debt to equity. Evidently the leverage hurt during the downturn, and has helped in the recovery. My asset allocation is about 50% individual Australian stocks, 10% US stocks (Vanguard ETF), 20% rest of world international stocks (ETF) and 20% Australian LICs/ETFs. The LICs and ETFs range between 0.07% and 0.18% MER.

I have been tracking this  since I started the margin loan account in early 2008. Things I account for are:
- Any transaction costs (brokerage etc)
- Interest
- Tax payable on dividends and distributions
- Capital gains tax payable if I sold up

I track three key numbers (all on a compound basis)
- Total pre tax return.  I've averaged 8.52%
- Total post tax return.  I've averaged 5.24% on this
- Total post-tax, real return (using Australian CPI data, which has averaged 2.8% over this period). I've averaged 2.44% on this.

In other words, based on my actual performance, over this period my safe withdrawal rate would have been been only 2.44%, which is lower than I would have hoped (and somewhat scary when starting with an 8.5% nominal return!)

The really scary thing is how this would look with just money in a bank account.  Interest rates in Australia over this period have been high by global standards, at about 4.8% pre tax.  Post tax, cut that back to 2.95%, or just breaking even with inflation.

I figure there isn't much I can really do to improve the headline rate of return.  However, I can improve the tax rate by structuring these investments through a company, rather than in my name, resulting in a 30% rather than 38.5% marginal tax rate - that should boost the real return to 3.16%. 0.72% doesn't sound like much, but it's almost an extra third on my real return!  Doing these numbers every now and then seems to hit home the importance of keeping costs and taxes low.

Anyone else track (and get scared by) their return numbers?
 
 

SMC

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Re: What's your investment rate of return?
« Reply #1 on: January 03, 2013, 03:41:29 PM »
I haven't, but I am interested in doing so.  What method/formula are you using to calculate?  It'd be a simply calc if one just invested a lump sum once, but if you're investing varying amounts on a month-to-month basis it becomes a bit complicated...

bigchrisb

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Re: What's your investment rate of return?
« Reply #2 on: January 03, 2013, 04:07:58 PM »
A big complex spreadsheet, that has evolved, rather than been designed.

Effectively, what I did was to download a table of all transactions from my brokerage, then apply a daily compound rate to each line item.  The way I've treated it is to have a column for each of money in and money out of the account, compounded based upon post tax rates:
- New cash invested - compound from the day deposited.
- Dividends reinvested - compound from the day reinvested
- Cash withdrawn - compound from the day withdrawn
- Dividends paid & withdrawn - leave in nominal dollars* (I should probably treat this as a compound value too?)
- Effects within the portfolio (interest, purchases, sales are all effectively ignored, and the sum value remaining is treated in nominal values)

Add up the compound value of the deposits, and subtract the withdrawals. Compare this with the current value of the account.  Then:
- Add back any value from negative gearing (if interest exceeded dividends)
- Subtract capital gains tax outstanding
to get the post tax position.  Then solve the rate of return to get a zero net position (i.e. what rate my effective return is equivalent to).

Its far from ideal (its a 600 row by 30 column spreadsheet), but its worked for me.  Interested if anyone else has a simpler or better method?


JohnGalt

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Re: What's your investment rate of return?
« Reply #3 on: January 03, 2013, 04:25:29 PM »
If you just have starting value (with date), contributions by date, withdrawals by date, and current value (subtracting out taxes, margin, or anything else that isn't already accounted for -or taxes could be considered withdrawals) - the XIRR function in excel should work for you (though I'll admit I've never tried to account for all of that with it).  It gives you the rate of return accounting for periodic contributions/withdrawals if you set up the starting amount and contributions as negative values and withdrawals/current amount as positive values. 

My annualized returns since I started seriously investing/tracking in mid 2011 are 10%.  12% in my self directed selections (mostly dividend stocks balanced with some gold/bonds/cash), 6% in my 401k (modified permanent portfolio).  Taxes aren't included - but are negligible since most of the money is in 401k/IRA/roth IRA accounts.   

happy

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Re: What's your investment rate of return?
« Reply #4 on: January 03, 2013, 05:26:27 PM »
Hey BigChrisB,
I've been really impressed by your position and your ability to carry such leverage/risk. I wish I'd been so knowledgeable and motivated at your age.
I'm so pleased you've posted your real return of about 2.5%, because thats what I've figured Aussie shares to run at once you pay tax on the money to invest, then tax on any profits you make. Sucks eh?


The only way around this in Australia that I know of is:
1. "Old man money":  to put as much as you can into super, now limited to 25k/year for the concessional tax rate:   you are only taxed 15% on entry and once you are 60 it all comes out tax free i.e. no tax on the growth/capital gains etc. If you are pulling in a good income,  your 9% compulsory income will cover a substantial proportion of the 25k. 30years of 25k at 6% will yield about 2mill in todays dollars

2. "Young man money" : cutting expenses and saving is more effective than investing here, since the return of investing is only 2.5% and you have fewer years to compound. Every year of expenses you can save ( by reducing expenses as well as saving) is really important. So to retire before 60, starting at 30 years: save 1years expenses every year and do it roughly @45 (live on half of remaining income after super), or 2 years expenses every year for 10 years and do it at 40 (live on one third of remaining income after super).  You won't need quite that much because of compounding @2.5% but its a rough plan.

With real estate in our country looking like it must correct at some point, the most I think one can hope is that values will hold, and it will no longer provide a guaranteed return with regard to capital gain..The only other option is cheap positively geared rentals ( like Arebelspy), but I'm not sure there's much of this to be had Down Under.

Frugal is the new rich!?

bigchrisb

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Re: What's your investment rate of return?
« Reply #5 on: January 03, 2013, 08:10:57 PM »
Certainly agree with the "old man money".  I've been making full use (25k) of salary sacrifice to super for the last few years (since the start of 2009), and being in a low tax environment (both contributions and earnings) certainly helps things along.  However, I'm 30 now, and under the current rules, won't be able to use this money until I turn 60.  Given how frequently the rules around super get changed, I have no idea what the rules are likely to look like once I can access it (at whatever age that gets increased to).  I guess long story short, I'm keen to use super for its tax breaks, but not prepared to have it as my only savings vehicle, due to the policy risk surrounding it.  I'l just let it keep contributing at 25k/year for the foreseeable.

Like you, I struggle with the idea of residential real estate here.  Its boomed so hard, for so long, that at best I can see it flat lining in real returns for a decade, will likely flat line in nominal terms (real term depreciation), and at worst, crash.  All while being cash flow negative (in this country). Not an appetizing investment vehicle for me at the moment.

With regard to stocks, at least some real return is better than nothing!  Over the time I've been investing in shares, I've put in a net total of $220k and have about $45k in returns ($726k of shares - $460k in margin loan).  I figure even with this, I'm still generating $550/month in real returns, and that's been over a fairly rocky investment period. A few times that is enough for me to live off, so FI isn't that far off.

I'm trying to drive the "young man money" a bit harder by investing through a company, rather than my own name.  The company tax rate is a bit of an advantage compared to my personal tax rate, so it gets a slight advantage on tax on contributions and gains, but not as good as super.  To offset that, I have full autonomy on when and how it is used, and the franking credits of the income tax paid get kept, so I can defer income to later years when my marginal rate may not be as high.

That said, my best investment has far and away been a holding in a private company (which is also my employer).  That's averaged about 33% annual (pre-tax) return.  However, that's been a very active asset, with the return being as much sweat equity as conventional return on equity.

I'm reasonably comfortable that even with low rates of return, FI/RE by 35 is viable for me, but sure would be much easier if real returns were a bit more buoyant.  I guess it all comes down to:
- Spend less
- Save more
- Minimize investment costs, including taxes
- Be patient

dragoncar

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Re: What's your investment rate of return?
« Reply #6 on: January 03, 2013, 09:47:06 PM »
Pretty much zero.  I'm terrible.

Here's a cross-post from ERE:


happy

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Re: What's your investment rate of return?
« Reply #7 on: January 04, 2013, 12:10:06 AM »
I've been making full use (25k) of salary sacrifice to super for the last few years (since the start of 2009),.... However, I'm 30 now, and under the current rules, won't be able to use this money until I turn 60.  Given how frequently the rules around super get changed, I have no idea what the rules are likely to look like once I can access it (at whatever age that gets increased to).  I guess long story short, I'm keen to use super for its tax breaks, but not prepared to have it as my only savings vehicle, due to the policy risk surrounding it.  I'l just let it keep contributing at 25k/year for the foreseeable.

Glad to see you are looking after your old man money: I'm not necessarily suggesting you put in more than the 25k, for at your age, this will give you sufficient oldman money for a modest lifestyle. When I was your age (a few decades ago),  I was very suspicious about super and govt rule changes, so I by and large ignored super, so I agree very much with your cautiousness! Unfortunately I put in very little above the compulsory2% in those early years, which in retrospect was an error of judgement.

2.5% real return is certainly better than nothing.(.ie leaving money in the bank); like you I wish it were better.

Quote
I guess it all comes down to:
- Spend less
- Save more
- Minimize investment costs, including taxes
- Be patient

+1. The only other thing to add is to keep reviewing things as circumstances/rules change. (Or become an entrepreneur and build a successful company.)
FI at 35: you've done really well, congratulations!

marty998

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Re: What's your investment rate of return?
« Reply #8 on: January 04, 2013, 01:21:11 AM »
happy...I believe the cheap positive cash flow rentals are out west of Woop Woop.

For those of you wondering where that little town is please google Priscilla Queen of the Desert for an insight into Aussie humour.

Prices have been falling (slightly) for 2 years and are probably on the way up again. Can't see a crash coming, unless you look at the gold coast which is down about 40%. I reckon surfers paradise will one day be the first suburb in the world to show negative prices i.e. people will be paying you to take their apartments away from them.

I tried to calculate my rates of return, but it became rather difficult very quickly.


happy

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Re: What's your investment rate of return?
« Reply #9 on: January 04, 2013, 02:43:03 AM »
happy...I believe the cheap positive cash flow rentals are out west of Woop Woop.
So they say, but can you rent them?

The Gold Coast has been the darling of real estate investors for years as the place that is "hot"...the bubble is due to burst there. 

yolfer

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Re: What's your investment rate of return?
« Reply #10 on: January 10, 2013, 03:18:58 PM »
Darrow from "Can I Retire Yet" just posted an article with a few ways to calculate your overall investment return:

http://www.caniretireyet.com/computing-your-overall-investment-return

I used the simple one, which is:

((balance_of_investment1 * return_of_investement1) + (balance_of_investment2 * return_of_investment2))/(sum_of_all_money_invested)

You find your balance of each investment as of 12/31/2012, and then look up the 2012 return (on Vanguard funds, it's in the "Price & Performance" tab)

I was happy to learn that my 2012 overall investment return was 12.16%. Here are my investments, and their individual returns:

Code: [Select]
Investment              2012 Return
VFORX in 401k           45.08%
AMZN in 401k*           15.56%
VSMGX                   11.76%
VBTLX                    4.15%
VGTSX                   18.14%
VIPSX                    6.78%
VFSTX                    4.52%
NAESX                   18.04%
VGPMX                  -12.98%
VGSIX                   17.53%
Business investment         0%**
Emergency Cash           0.30%
Physical Savings Bonds   0.72%
Lending Club             6.13%

* Amazon does their 401k matching in the form of AMZN stock.
** Invested in a local business. They haven't started paying the loan back yet, per the loan terms.

I created a spreadsheet to help you with the calculations if you're interested...

https://docs.google.com/spreadsheet/ccc?key=0Am8qaK8Qf80edFVuMVN4N3FYeXNpb0lZU2x3Y3VMQ2c

Let me know if it's helpful and/or if you find any errors in my math.

sol

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Re: What's your investment rate of return?
« Reply #11 on: January 10, 2013, 03:39:06 PM »
Vanguard list 1, 3, 5, and 10 year returns on all of my investments.  Due to the way the recession falls neatly between those time buckets, my total returns look great, like 10% before inflation.

Part of me knows this is misleading, but the part that uses a 5% total return in my retirement forecasting spreadsheets is thrilled right about now.

skyrefuge

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Re: What's your investment rate of return?
« Reply #12 on: January 11, 2013, 07:02:00 PM »
I just use Quicken's "Investment Performance" report, which uses the "Internal Rate of Return" formula (the same as using XIRR in a spreadsheet).

My investing life (1998 to date): 6.55%
The OP's "early 2008 to date": 6.95%
2012: 14.34%

bigchrisb

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Re: What's your investment rate of return?
« Reply #13 on: January 13, 2013, 03:59:56 PM »
Thanks for the responses.  It certainly seems that recent time has been a period of lower than "long term average" returns.  Will be interesting to see how this goes in the longer term.

With my numbers, the thing that hit me most, is that my post tax real return was actually lower than the dividends I've been paid.  My philosophy has been to hold dividend paying stocks, and plan on the dividends providing an inflation adjusted income stream.  However, in practice, to maintain spending power, it looks like I may have to be re-investing a portion of my dividends in the draw down phase?

happy

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Re: What's your investment rate of return?
« Reply #14 on: January 14, 2013, 12:32:02 AM »
I don't really know the answer to your question but the amount you intend to live off will have a big effect on your marginal tax rates and whether the  dividends are franked. If you are retired and living off a moustachian amount of <$37k, then the marginal tax rate falls to 19c and overall you are taxed @ 9.6% ( ie tax on 37k = $3572.) So the taxman will refund the difference if the dividend is fully franked at 30%. What I'm saying is that once your income falls post retirement, the nasty effect of the Aussie tax rate eating away at your returns diminishes, so your post tax return should improve. Unless of course you want to retire on an income over 40 or 50k.

IF the super rules stay roughly the same (IF, that is), your old man money will come out of super tax free at 60 years and not effect your marginal rate, and you should have enough of it. So you are trying to live off your dividends for 25years (FI @ 35?) and don't necessarily need to preserve the capital longer than that, so a 4% SWR should very adequately cover this. I'm not an accountant or a mathematician so its too hard for me, and it would be helpful to run some projections.... but maybe you won't need to top up from the dividends, depending on what margins of safety and what income you desire.

The problem I see is that investment returns and dividends will fluctuate, and if one is trying to live on 35K without tapping capital, and the dividends fall by 50% one year you have half as much to live off, which on 35k is getting tight. One reason why a less volatile rental stream as an adjunctive income stream post retirement might be useful (even if it not a great ROI, as long as its better than the cash rate).

Tiptree

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Re: What's your investment rate of return?
« Reply #15 on: January 14, 2013, 03:16:16 PM »
Not sure if it is luck, or skill, or just a statistical outlier, but over the past three years, my annualized rate of return has been between 19% and 20%.  That doesn't include taxes (I have one taxable account and a couple of IRA accounts.  Taxes would diminish the returns somewhat, but I generally hold onto my winners and remain tax-efficient when possible).  I only go back three years because I went to 'all cash' in 2008, avoiding at least part (most?) of the market decline.  Starting inching my way back into the market in 2009.  My returns prior to 2008 were no where nearly that good.

I invest only in individual stocks, and I have been doing this for 16 years now.  There have been some growing pains along the way, but hard-earned experience has finally started to yield fruit.  I have been a devotee of a particular investment web site (is it OK to mention such things here? I am a just-registered newb, so I don't know the protocols yet!), and their approach and rich set of investment ideas has been extraordinarily fruitful. 

Now, if only those worthless mutual funds that I have to choose from in my 403B account could do the same...I need keep my non-403B funds performing at a high rate to compensate for their distinct mediocrity!

yolfer

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Re: What's your investment rate of return?
« Reply #16 on: January 14, 2013, 03:55:56 PM »
Not sure if it is luck, or skill, or just a statistical outlier, but over the past three years, my annualized rate of return has been between 19% and 20%...

I invest only in individual stocks, and I have been doing this for 16 years now.  There have been some growing pains along the way, but hard-earned experience has finally started to yield fruit.  I have been a devotee of a particular investment web site (is it OK to mention such things here? I am a just-registered newb, so I don't know the protocols yet!), and their approach and rich set of investment ideas has been extraordinarily fruitful. 

It's OK and encouraged! As long as you're not shilling for the site or spamming the forums, it's totally cool to link to 3rd-party stuff you think is useful. Especially if you're getting 20% rate of returns :)

bo_knows

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Re: What's your investment rate of return?
« Reply #17 on: January 15, 2013, 07:24:29 AM »
Vanguard and ING are telling me my 1yr respective returns are:

Current Employer 401k (I only started 1.5yrs ago) - 17.8%
Previous Employer 401k - 18.66% (13.96% over the past 2 years, though it won't let me calculate further back, even though I've had this for 8 years)
IRA -  12.2%
Post-tax - 17.1%

Vanguard starts to get wonky if I go further back, because I didn't heavily invest in post-tax until the last 2-3 years. 

jpo

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Re: What's your investment rate of return?
« Reply #18 on: January 15, 2013, 10:27:45 AM »
5% since I started investing in late 2010. Since I started I've continually decreased my percentage of individual stocks in favor of index funds.

Mr Mark

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Re: What's your investment rate of return?
« Reply #19 on: January 15, 2013, 09:43:57 PM »
This is danger of the swr concept. Even a few years of returns are ephemeral. Any loss of core capital hurts. Dividends, I want safe dividends!

MMM s approach is to decouple his short termcash flow requirements from his investments in the market. His rental property, safely increasing in real value in line with GDP growth, throws off enough tax advantaged cash to sustain his cashflow needs. The rest of the stash grows. On average say 7%.  Some years, not so much.

A middle ground works too. Dividend stocks help, annuities, loans to local businesses, equity in local businesses, some rental income, ....

But I think diversity is key, and imagining a monolithic stash throwing off a 4%SWR is misleading.

John74

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Re: What's your investment rate of return?
« Reply #20 on: January 15, 2013, 09:59:27 PM »
Using XIRR, I get a 14.4% annualized rate of return since January 2000. That's before taxes and inflation. Most of the gains come from aggressive investments post 2008 crash.

bigchrisb

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Re: What's your investment rate of return?
« Reply #21 on: January 17, 2013, 05:50:15 PM »
In the two weeks since I've posted this, I've realised how silly a post it really was, at least for me.  My stock investments are highly leveraged, and as such, move a great deal with the market.  For example, with the rally over the last two weeks, my numbers changed significantly:

- Total pre tax return.  Changed from 8.52% to 10.42%.
- Total post tax return.  Changed from 5.24% to 6.41%
- Total post tax, real return (using Australian CPI data, which has averaged 2.8% over this period). 2.44% to 3.6%.

In other words, the noise of two weeks market movement swamps the total return over 5 years of investing.  I'll keep tracking these numbers, but on this basis, I'm not going to stress too much about them.  Will be interesting to look back on this in another 10/20/30 years, which might be more meaningful!

happy

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Re: What's your investment rate of return?
« Reply #22 on: January 17, 2013, 08:04:33 PM »
Hi Chris,

Not so silly, since its deepened your understanding.  Hope I'm not bugging you with my postings, since we are essentially on different tracks ATM: I'm much more interested in old man money and concentrating on super. However my asset allocation is otherwise heavily in real estate and at some point in the next few years I need to change that: and will probably be moving something into private shares. So I have been starting to study investing in terms of what I would do if I suddenly get 6 figures to invest..... a friend of mine who I thought knew a lot about these things, pulled some money out of real-estate and put it in shares: substantially trading, but some to hold... I wondered at the time, but held my tongue since I thought he knew more than I did. After about 3-4 years he revealed he hadn't lost money but hadn't done much above inflation. He'd just come up with an exciting new strategy: Index funds! Doh! At the time I wished I'd said something. So I'm hoping to do better. You've been doing it, so if I post something you think is wrong I'd really appreciate if you could let me know and why so I can learn.

The volatility is why I am tracking such things in detail even though I have almost no control over my current public shares, trying to get used to such effects. Having lived through several recessions, interest rates of 17%, and inflation rates of over 11%, pre-CGT, housing prices doubling in 2 months in Sydney etc etc, there are certainly different strategies for different times.

Just for comparison my Super is running at  YTD 7.5% (over a few weeks!!),11.8% past 1 year, 1.3% 5 years, and 10 year return 6.4%.   Last year the 10 year return was 5.5% if I remember correctly - not much over 5 anyway.   (In previous decades, 10 year returns were like 10-15%, and forecasting on 8% return was thought ridiculously conservative.)  Yeah, so roughly as much action in 2013, as  in the last 5 years (5x1.3 = 6.5 without compounding)....

bigchrisb

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Re: What's your investment rate of return?
« Reply #23 on: January 17, 2013, 09:32:14 PM »
No, more discussion is always better!

I'm very skeptical about residential real estate, particularly in Australia, where people seem to forget how volatile (yes, values can go down as well as up) residential real estate is, due to the last 15 years of Australian data being rather favorable for owners.  Just ask some of the US/UK/Euro readers about house price deflation...

However, in some ways, some of the biggest issues with residential real estate as an investment actually help it out.  What I'm thinking of is:
- Price transparency.  As you only get a price when you go to sell it, owners are much less likely to panic sell with short term price volatility.  This makes it appear lower risk to owners (just as if you only checked share prices every 10 years, you wouldn't care much about the volatility!)
- Transaction costs.  Because it costs so much to buy and sell houses, we tend to hold for longer periods of time
- Liquidity.  Because you have to sell the lot (you can't sell just the bathroom), there is a stronger driver not to fritter investment funds away into consumption.

Perhaps these hi light again the importance of behavioral in finance - I'm always tempted to buy stock, and reset the password to the account, so I'm not tempted to check it or trade it (forcing myself to just buy and hold).

To be honest, despite all my dabbling, I really reckon you can't go wrong with a long term accumulate and hold of low cost, broadly diversified funds, be they LICs, ETFs, or unlisted index funds.

If we are investing for lifestyle (and my investments are intended to support a lifestyle), then maybe the only thing that should really be tracked is the income generated from them - that's far more stable than my capital value, that's for sure!




 

happy

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Re: What's your investment rate of return?
« Reply #24 on: January 17, 2013, 10:43:28 PM »
Yes I agree with you. Hence your interest in dividends.

Having grown up in and around Sydney, capital gain of residential real estate has always been a given ( capital gain was even better>15 years ago) and a home mortgage becomes a bit like compulsory saving/investing, especially since its CGT free.  Real estate is more volatile than it looks, especially if you look at a micro market... but you're right, its hidden since we tend not to trade it so often. 

Prophets of doom regarding the Sydney market have been around for a while, but really for the first time in the last 12 months, I've started  think the time of zero capital growth may be upon us  and starting consider re shaping my stache. The market is still creeping up where I am, but I doubt I've kept up with inflation in the last 3 years.

At the end of the day the way things are now structured in Oz, its easier to not spend it than to make it! (unless you do well as an entrepreneur).