Each month I’ll be keeping track of our net worth on this blog. The reason for making our net worth public is to not only hold myself accountable, but to provide a record so I can review my progress over time. I’ll be giving a brief analysis on our results for the month and discuss any changes I’m thinking of making.
The net worth report below includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for December, 2018 is 81%. This is up substantially from last month’s 72%.
The MCTWI is a way to provide a more stable and “true” valuation of the stock market by adjusting for overly high or low P/E ratios. As a reminder – the MCTWI tells you how much your stock investments would be worth assuming “normal” valuation rather than the current valuation in the market.
If the market was suddenly revalued at the long-term average of 15.68x earnings rather than the current 19.36x earnings, then your stock market investments would be worth roughly 81% of what they are currently worth.
The fact that over the last year the MCTWI is moving up towards 100% implies that the market is slowly moving towards “true value”. We are still quite a ways away, but at least things are moving in the right direction.
Without further ado, here is our net worth report for December, 2018:
Our performance for the month far exceeded the S&P 500, primarily to my stock options. The S&P was down by 9.03% for the month, but were up 0.6%.
Assets
Brokerage (+4.3%):
The value of our brokerage account was up by $111,467.76 because we moved the cash from the exercise of my stock options into our brokerage account. I did some quick calculations and it looks like our actual stocks were down about 6% for the month. This is about what I’d expect, as our investments are primarily blue-chip, moderately conservative investments that should outperform in down markets and possibly underperform in bull markets.
There aren’t many other conclusions to be drawn from this performance, as the results of the underlying investments were largely clouded by the large amount of cash we put into our accounts.
Retirement Accounts (-1.5%)
This includes a 401(k), two IRAs, and two Roth IRAs (one of each for my wife and me). The only account we are currently contributing to is the 401(k).
I have absolutely no idea why our retirement accounts outperformed the S&P by so much. We are contributing $1,250/month to our 401k, but that wouldn’t account for the outperformance. My guess is that it’s due to our international allocation in our IRAs.
529 accounts (-2.6%):
The outperformance for these accounts make a bit more sense, as the $1,000/month that we are contributing is substantial compared to the $40k account balance.
Assuming both of our kids go to college, both accounts will be liquidated in about 20 years. Based on my calculations, these accounts should pay for 90%+ of the total 4-year cost at a state university. The remaining amounts will be paid out of our then-current cash flow.
Checking (-8.5%):
Our goal is to keep about $50k in cash in our checking account. This is due to an abundance of caution. I work in an inherently unstable field (sales) and my income varies widely from month to month. Keeping a good chunk of cash in our checking account helps me sleep well at night.
In addition, we have a separate checking account to handle the income and expenses for our rental properties.
Not much to say here. The change in the balance here is due to moving some money around. We are below our desired $50k balance, but I expect us to get back up to that number in a few months.
Private investments: unchanged
We have 2 separate private equity investments. Since there’s no way to value these investments I will continue to keep them valued at my initial investment amount. Hopefully I’ll one day be pleasantly surprised to see that the companies are worth something.
Stock options: big change!
This was the biggest change for the month. In Nov, 2018 I decided to start tracking the value of our stock options. To calculate the value of the options I used a reasonable guess at the fair market value of the shares.
Then, in early December we got the good news that we were going to have a chance to sell some of our shares. The even better news was that our shares were going to bought at a much higher price than I expected.
I sold all of my vested shares for a gross profit of about $570,000. On December 28, 2018 I received a check for just under $267,000 (yes, the total tax bite was about 53%). The entire $267k was moved to our brokerage account, ready to be deployed as soon as more reasonable valuations are available.
I still have a few unvested options, and I’ll continue to track the value of those.
This exercise has made me realize that I need to do a better job of tracking/calculating the after-tax value of our investments. After all, a $500k account balance in a 401k is worth a lot less than a $500k account balance in a Roth IRA. The 401k is actually worth about 70% of the stated value, due to the need to pay full income taxes on any withdrawals.
Rental properties (+2.5%):
I revalue our real estate at the end of each quarter. Based on Zillow, our rental properties increase in value by $26,032 in the 4th quarter. I’ll happily take a 10% annual increase in the value of the properties. Given that we are leveraged approximately 3-1 for these properties, that results in a 30% annual return.
Primary residence (+0.7%):
Just like the rental properties, I adjust the value of our house at the end of each quarter. Not much change here – the value of the property was up by less than 1%. I don’t really care too much about the value of our house, as we hope to live here forever, so the value doesn’t matter.T
Total Assets (+0.5%):
Our assets were up by a decent $32,937.08, which is solid performance given the performance of the S&P.
Total assets after adjusting for MCTWI (+5.6%):
If we remove the effects of the recent market downturn, our assets were up a much more impressive $305,146.28. The huge difference between our actual assets and the MCTWI-indexed assets is due to:
- The aforementioned $270k from my stock options
- The remaining ~$35k outperformance is due to our large cash holdings and the updating of the value of our rental properties.
Liabilities
Just a note on the numbers below – since these are liabilities, a negative number (reduction in liability) is good, while a positive number (and increase in liabilities) is bad.
Credit cards (+149.5%)
We pay our credit cards in full each month. The amount owed varies from month to month due to when we pay the credit card bill, what we charged that month, etc. I don’t worry too much about changes here. It’s a huge increase in % terms, but the actual amount was just $1,826.51.
Rental mortgages (-0.2%)
This was a pretty standard month – we tend to pay down just over $1k on our rental mortgages every month.
Primary residence mortgage (-0.4%)
Although I don’t really consider our house to be an asset, I definitely consider our home loan a liability. I think it would be difficult to retire early with substantial mortgage payments hanging over our heads. We need to have this paid off before I can really consider retirement.
We are making steady progress on this, but we have a long way to go to pay this loan off completely. This reduction is larger than normal due to the timing of the mortgage payment (we ended up having 2 payments applied this year).
Total liabilities (-0.1%)
Most people would be well served by spending less time worrying about the value of their assets (especially equities, which vary wildly) and instead focus on the steady progress of paying down liabilities.
We still have over $1M in debt but the number is dropping fast. At the average rate that we’ve been paying down mortgages over the last few months (about $2,000/month) we’ll be under $1M in debt in about 23 months. That will be a fun milestone to finally hit!
Total net worth
Our net worth was up by $34,391.34 (a 0.6% increase) for the month. I’m pretty happy about this number.
Our asset allocation is unchanged from last month:
| Category | Amount | % |
| Equity | $3,712,380.57 | 69% |
| Rentals | $562,675.56 | 10% |
| Primary residence | $1,101,546.33 | 20% |
| Cash | $36,635.96 | 1% |
These numbers are pretty close to where I’d like them to be at this point in our lives. Most of our money is in investments (stocks, mutual funds, and money markets). This category has the highest expected returns as well as the highest volatility.
Our rental real estate allocation (10%) effectively takes the place of bonds in our portfolio. Real estate provides relatively steady returns and is largely uncorrelated with the stock market.
I’d prefer if the equity in our primary residence was a smaller percentage of our overall net worth, as we hope to never move, which means the value of the house doesn’t matter. My hope is that over the next decade or so we’ll get this percentage down to 10%, even as we pay off our mortgage, by growing the rest of our investments.
Conclusion
Any month you get a $270,000 check is a good month. It’s a bit unfortunate that the big event was overshadowed by a mini-meltdown in the stock market, but the upside is that we are quite a bit closer to seeing fair value in the market. I’m chomping at the bit to get rid of the ~$750k in cash we are currently holding. If we were able to invest that money at an average of 3% dividend, we’d immediately increase our passive income by ~$22,500/year. That would be fantastic.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?
Why did you not start buying when the markets were down 20%? Just wondering what size correction would entice you to start buying, and how would you scale in?
Congrats on a great month when markets were having the worst December since the Great Depression.
Well, the problem is that when the market is 50% overvalued, a 20% drop still leaves it overvalued. I think that’s where we are now.
The good news is that I think we are getting closer to fair value, and I’m going to start more intensive research on some of the stocks I’ve had on my watch list for a while.
Was introduced to your blog this am from Gen Y Finance Guy. Looking forward to following it! I am also in a sales career and deal with the ups and downs that come with it!
I’m in a similar situation you currently are in and have been in the past, where I have a lot of excess cash (roughly $1 million) that needs to get invested. Sadly, the cash has been building up for 3 years and I haven’t had the guts to put it in the market or towards any investment for that matter. When you earned your 7 figure commissions, did you invest it all at once? Was there a mental hurdle you had to clear before you were able to invest it due to the amount?
I am 30 years old and have read all the statistics on money in the market for a long time horizon, but can’t get over the idea of the possibility of a 50% market decline. Would love to hear your thought process on investments after your big years. For what it is worth, I use Wealthfront for my investments.
Will continue to follow the blog!
Thanks for stopping by!
First, congrats on taking the plunge with a career in sales. I firmly believe that the skills you learn in sales will serve you throughout your life.
I can empathize with your cash “problem” (although it’s a great problem to have). My approach to investing large commissions checks has been dependent on what’s going on with the market and whether or not I can find reasonable valuations.
When I got my first 7-figure check in 2012 I immediate invested the money. We bought our rental properties (which have turned out to be great investments) because housing prices seemed cheap at the time. We used some of the money to buy our current house, and I invested the rest in the stock market over the course of a month or two.
My approach to the check I received in 2017 has been very different, as I felt the market was dramatically overvalued in 2017. I’ve been slowly buying $20k – $50k chunks of stocks when I find an investment I think is interesting and fairly valued.
If you are worried about a downturn and are afraid to invest your money I’d suggest that you just dollar cost average into the market. If you have $1.2M then pick a reasonable timeframe (maybe 1 year) and then buy into the market in equal sized chunks over 1 year. Maybe you invest $100k per month for 1 year. That should help alleviate some of the worry about investing the entire amount right before a crash.