We hit another big milestone – our net worth was up by over $1M for the year! See below for the details.
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.
I track our net worth in both the “real” numbers and the Money Commando True Wealth Index (or MCTWI for short). 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.
The net worth report below includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for December, 2019 is 65%.
If the market was suddenly revalued at the long-term average of 15.75x earnings rather than the current 24.37x earnings, then your stock market investments would be worth roughly 65% of what they are currently worth
Without further ado, here is our net worth report for December, 2019:
Our net worth for the month was up 3.1%, which slightly outperformed the S&P’s 3.02% return. Our mix of cash, real estate, and equities means that our performance should be less volatile than the stock market – we should underperform when markets are up but outperform when markets are down.
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (+2.9% Month, +21.5% YTD):
Our investment return closely matched the S&P’s return this month. Our equity investments were up about $88k for the month and $550k for the year.
In total, we are up an awesome 21.5% for the year, which has propelled us over the $3M mark.
Retirement Accounts (+4.1% Month, +35.4% YTD)
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).
Of course, any withdrawals from these accounts will be taxed at our marginal income tax rate, which means we should probably be valuing these accounts at a ~30% discount.
In addition, I’ve decided to switch all new contributions to my 401k to Roth contributions rather than standard deductible 401k contributions. This is because my 401k account balance is approximately $780k, which projects to something like $3.36M at age 72 (when I would need to start taking RMDs). A quick and dirty calculation shows that the RMDs on that balance will be approximately $140k in the first year. With that much income we’ll be unable to use a large number of tax reduction strategies. As a result, I’m switching to using Roth accounts for new contributions, with the intent of doing a Roth IRA rollover from my 401k/IRA once I’ve stopped working. The amount we’ll roll over each year will be determined by our income that year.
529 accounts (+4.5% Month, +64.4% YTD):
These accounts outperformed the S&P 500, which makes sense given that these accounts are invested 100% in S&P 500 index funds and we contribute $1,000/month to the accounts. The accounts are valued at approximately $62k, which means our contributions alone increase the value by about 1.6% monthly.
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 (-37.9% Month, -50.4% YTD):
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.
We are still below our $50k goal and we went the wrong way again this month. I’m not too worried about fluctuations over a few months (again, I’m in a field with inherently unstable income). However, if our balance continues to drop over another ~3 months then we’ll look at the situation.
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.
I’ve heard that there might be a liquidity event for one of my private equity investments later this year. It’s nothing other than a rumor at this point, so I’m not going to adjust my valuation until it becomes real.
Stock options: (+0% Month, +500% Year)
I was able to cash in all of my vested options during liquidity events in December, 2018 and January, 2019. As a result, all increases in this category are due to newly vesting options.
These options vest quarterly. One block of stock vested on October 1st and the next will vest on January 1st. I’m valuing my stock options at the price used for the most recent liquidity event.
Rental properties (-0.6% Month, +36.3% YTD):
This was the first time that the valuation of our properties has dropped over a 3 month period. Looking at the numbers, about half the properties’ value increased over the course of the quarter and the other half decreased, so there doesn’t seem to be a systemic issue here. Of course, you never like to see a negative number, but I’m not too worried here.
Primary residence (+4.9% Month, +1.4% YTD):
I don’t worry too much about the value of our house, as we are hoping to never sell the house (we’d be happy to live here forever). However, I do track the value just so we have a complete picture of our finances.
That said, it’s always better to see a gain than a loss. In addition, the house next door just sold, which will almost certainly cause the Zillow valuation estimate to increase in Q1 2020.
Total Assets (+2.5% Month, +19.9% YTD):
Our assets were up $185,504.36 for the month, and we are up $1,243,618.56 for the year. That’s right – our net worth increased by over $1M in a bit less than a year!
Total assets after adjusting for MCTWI (2.4% Month, +10.9% YTD):
This is a better indicator of our performance for the month. The adjusted number indicates that about 9% of this year’s 19.9% gain was due to changes in valuation in the market. That is, PE ratios have been climbing and new investors are paying more and more for future earnings. At some point, that trend will reverse.
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 (+568.7% Month, +72.2% YTD)
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, especially since that 568% increase was only $4,466.
Rental mortgages (-0.8% Month, +39.7% YTD)
This year we had a big jump in our liabilities due to the mortgages on the rental properties we purchased.
We are chipping away at these mortgages, and we’ve been paying off about 0.2% of the balance each month. We paid an extra $5k towards the mortgage on one of the properties we own with my mom, as the balance in the checking account we use for that property had too much cash in it. We’re choosing not to take any distributions for now, so all additional cash that builds up is used to pay down our mortgages.
Primary residence mortgage (-0.5% Month, -2.6% YTD)
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.
Total liabilities (-0.3% Month, +17.8% YTD)
The older I get the more I think that reducing liabilities is more important than increasing assets. This is for a few reasons.
First, liabilities are more stable than assets. That is, the value of your assets (equities, real estate, and even bonds) depend on external factors that you have no control over (market valuation, popularity of different investment types, interest rates, etc.) Liabilities, on the other hand, aren’t generally affected by outside factors (unless you have an adjustable rate mortgage). You can more easily track and monitor progress on paying down liabilities, and that progress is pretty much linear.
Second, reducing your liabilities reduces the chances that you’ll get financially wiped out. Consider two scenarios. In the first scenario you have $5M in assets and $4M in liabilities. In the second scenario you have $1M in assets and $0 in liabilities. In both cases you have $1M in net worth.
Which of these is the safer situation? Clearly the second one. If there’s a 20% reduction in the value of your assets then in the first situation you have a net worth of $0 and in the second situation you have a net worth of $800k. Of course, the reverse is true – a 20% increase in assets will result in a $1M increase in net worth in the first situation and just a $200k increase in the second situation.
Total net worth (+3.1% Month, +20.3% Year)
Our net worth was up $188,962.92 for the month. This is the largest increase in 2019, barely eclipsing January’s increase of $181,148.56.
For the year our net worth is up by $1,057,841.14. It’s really amazing how fast our net worth has grown now that we’ve got the snowball rolling downhill. Our investments are making a much larger contribution the increase in our net worth than my salary and/or savings are.
We’ve seen solid growth in our net worth since I started tracking the number in June, 2016, with the biggest jumps in the middle of 2017 when I received my huge commission checks.
Here’s what our asset allocation looks like:
And here’s what it looks like if you exclude our primary residence (which I don’t really consider an asset).
This is only slightly changed from last month – our stock allocation increased by 1% and cash allocation has decreased by 1%. This is not due to any purchases. It’s entirely due to the increase in the value of our stock investments.
Ultimately I think the perfect asset allocation for us would be something like 75% equity, 15% real estate investments, 5% primary residence, and 5% cash.
I’ve had some people ask about the lack of bonds in our portfolio. Our rental real estate allocation effectively takes the place of bonds in our portfolio. Real estate provides relatively steady returns and is largely uncorrelated with the stock market.
In addition, I don’t particularly like bonds right now. With rates at their current levels you’re locking in a below-inflation return.
Conclusion
December was a great month. We hit a bunch of new high-water marks – our total passive income for the year was just under $100k and our net worth increased by over $1M for the year.
No matter how you slice it, 2019 was a phenomenal year for us.
We continue to hold quite a bit of cash (about $400k total) and I would really love to find someplace interesting to put it.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?