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 what changes I’m thinking of making.
February was a tough month. The market took a beating and so did our net worth. Our investment income was good but the one of our rental properties is vacant and that’s going to a drag on our performance until the unit is rented out. See our Investment Income – February, 2018 report for more details).
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 on how the MCTWI works, a value of 1 is fair value, values lower than 1 represent overvaluation and values higher than 1 represent undervaluation. The further from 1 the more the overvaluation or undervaluation. By my estimates, the market continues to be significantly overvalued.
To calculate the “true” value of your investments (that is, what their price would be at the stock market’s long-term average valuation) you just multiply the value of your investments by the MCTWI. So if your total portfolio of domestic stocks is worth $100k at today’s valuation, you should use the value of .6*100,000 = $60,000 in your planning. That is – the value of your portfolio assuming the long-term valuation of the stock market is only 60% of the current valuation.
Without further ado, here is our net worth report for February, 2018:
S&P 500 performance for February, 2018 = -3.89%
Our net worth was down -1.71%, which is about half of the market’s drop for the month. This is exactly what we expect – our real estate and large cash reserve means we will underperform when the market is up and outperform when the market is down.
Our MCTWI adjusted net worth was down -.92%. This is the second consecutive monthly drop in our MCTWI adjusted net worth.
Assets – stock market
In August of 2017 I started reporting all of my equity assets using both their actual value as well as the Money Commando True Wealth Index (MCTWI). If you’re not familiar with the concept, it’s a method I created to remove the effects of excessively high or low valuation in the stock market. The idea is to produce a net worth that is more indicative of the actual value of investments rather than changes in the stock market valuation. The MCTWI should fluctuate much less than the actual stock market and is especially resistant to the irrational exuberance or despair that occasionally influences the market.
Brokerage accounts – This is our early retirement fund and where most of our net worth is. Our investments were down a bit more than the S&P 500. There were no additions or withdrawals from this account, so this is all due to the performance of the market. Note that I’m now reporting this account as just the value of our actual investments. I’m not including the cash in our brokerage account (that’s now being included in under “Assets – Other”).
Retirement Accounts – 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). These were down by $4,247.04 (-0.6%) for the month.
These are our longest “long-term” investments, as we can’t touch them for at least 18 years (when I turn 59.5). During that time I would expect these accounts to double twice, resulting in an account balance 4x larger than it currently is. Knowing that we can’t touch this money for that long is oddly reassuring.
These accounts have a combined worth of around $715k, so I’d expect them to be worth around $2.86M in 18 years when we can access them. The plan would be to let the tax deferred accounts continue to grow for as long as possible, with the goal that we wouldn’t pull money out until RMDs (Required Minimum Distributions) when I’m 70.5 years old. The hope is that we’d never need to touch the Roth accounts and we’ll pass that money on to our children. Under current tax law that money would be tax-free, but who knows what the tax law will look like in 40 or 50 years.
529 accounts – We contribute $500/month to 529 savings accounts we’ve set up for our 2 kids. Assuming both of our kids go to college, these will be liquidated in about 20 years. Despite contributing $1,000 to the accounts we were down by $308.83 for the month. Brutal.
Total stock market assets: The total unadjusted value of our stock market investments at the end of the month was $2,476,401.86. That was about $84k lower than last month wipes out all of January’s gains.
Total stock market assets adjusted for MCTWI: After adjusting for the market’s high valuation, our stock market assets are worth $1,492,312.88. As described in my introduction to the concept of the MCTWI, in times of high valuation (like today) your stock market investments are actually worth less than their current price. In this case, the math shows that a diversified portfolio of domestic stocks or a domestic index fund is actually worth about 60% of the current price. You should expect that, over time, your portfolio will eventually converge on the MCTWI calculation of the value of your investments.
This would imply either a significant “correction” (AKA – a stock market crash of 40%) or a prolonged period of time where stock prices go nowhere but earnings keep growing. This would allow valuations to catch up to prices.
Assets – Other
Checking – 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. This is roughly 6 months of expenses.
Private investments – 2 separate equity investments in startups. 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. No change this month.
Rental properties – On the last day of each quarter I adjust the value of the properties based on Zillow’s estimate. No change this month.
Primary residence – Just like the rental properties, I adjust the value of our house at the end of each quarter. No change this month.
Brokerage – cash – This is the cash we are holding in our brokerage account. This is money that’s earmarked for investments and I’m just waiting for some compelling valuations so I can commit some or all of this money. This is the proverbial “dry powder”.
Total Assets – Other – The big payment for work on our house made this category look pretty bad. Overall these assets were more or less even, with the only changes coming from a slightly smaller checking account balance.
Liabilities
Credit cards – 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.
Rental mortgages – All properties are currently rented, which means our tenants paid down $551.88 of the balances on the mortgages for our rental properties. Thanks guys!
Primary residence mortgage – We paid $1,112.96 on our mortgage this month. 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.
Total liabilities – Total liabilities were down by $2,765.12 for the month (a 0.26% decrease) to $1,080,892.52.
We still have over $1M in debt. At the current rate of paying down our mortgages (about $2,200/month) we’ll be under $1M in debt in about 37 months. That will be a fun milestone to finally hit!
Total net worth
As described above, I’m calculating my net worth both with and without adjusting for the Money Commando True Wealth Index.
Current net worth is $4,992,013.07, which was down a massive $87,086.55 from last month (a 1.71% decrease). We’ve fallen back below the $5M mark after a mere 2 months above it. We are almost certain to be back above $5M this month as I expect a ~$200k tax refund to come in sometime this month.
The more accurate MCTWI total net worth is $4,007,924.09, which was down $37,185.68 from last month. This is the number I tend to concentrate on, as I feel it better represents our true net worth. It’s much more stable and less affected by the market’s mood swings.
Here’s a graph of our net worth per month so you can see the year over year comparison.
It’s fun to see the big jump from last year. The huge commissions I earned last year combined with the stock market run resulted in a 50% increase in our net worth.
How did everybody else do this month? Have you been riding the stock market to hit new net worth numbers each month? Any thoughts on the big volatility in the market at the beginning of February?