Each month I’ll track 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 give 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 valuation (that is, PE ratios that are higher or lower than the long-term market average). 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 January, 2020 is 65%. This is unchanged from December, 2019.
If the market was suddenly revalued at the long-term average of 15.75x earnings rather than the current 24.27x 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 January, 2020:
Our net worth for the month was down 0.2%, which slightly underperformed the S&P’s return of -0.04. 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. In January our investments did a bit worse than the S&P and that explains our overall underperformance.
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (-1.5% Month, -1.5% YTD):
Our investment return trailed the S&P’s return this month and were down a total of $48,143.73.
This is a bit of a mixed bag. It’s obviously never fun to see the value of your investments go down, but lower stock prices mean more attractive valuations.
Retirement Accounts (+0.1% Month, +0.1% 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.
Not much interesting here. The value of these accounts were essentially flat – the market was down but I continued my regular contributions to my 401k.
529 accounts (+3.5% Month, +3.5% 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 $67k, 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.
Given that our kids are 6 and 4, we are approaching the point where we have enough money in these accounts and it will make sense to stop contributing. My advice to clients is to fund your 529 accounts so they’ll cover roughly 75% of your kids’ projected college costs. The problem of course is that nobody knows how much college will cost when their kid goes to school, or what school the kid will go to, or whether or not the kid will get any scholarships. As a result, it’s best to slightly underfund the accounts, and there are penalties for pulling the money out for non-education related expenses.
Checking (+93.2% Month, +93.2% 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 but 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: (+33% Month, +33% Year)
These options vest quarterly and a new block of stock vested on January 1st. I’m valuing my stock options at the price used for the most recent liquidity event.
Rental properties (+0% Month, +0% YTD):
We revalue our rental properties at the end of each quarter. No change this month.
Primary residence (+0% Month, +0% YTD):
As with our rental properties, we revalue our primary residence at the end of each quarter. No change this month.
Total Assets (-0.2% Month, -0.2% YTD):
Our assets were down $14,832.35 for the month. That’s actually a lot better than would be expected from just looking at our brokerage accounts. As expected, our rental properties and regular investments are providing some ballast to our overall net worth.
Total assets after adjusting for MCTWI (+0% Month, +0% YTD):
This is a better indicator of our performance for the month. The adjusted number indicates that the market’s valuation moved a bit towards a “normal” valuation over the course of the month. If you factor this valuation change into the numbers then our assets were essentially flat for the month.
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 (+59.5% Month, +59.5% 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, as long as we aren’t carrying a balance from month-to-month.
Rental mortgages (-0.6% Month, -0.6% YTD)
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 $7k 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 (-0.2% Month, -0.2% 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 (-0.2% Month, -0.2% 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 (-0.2% Month, -0.2% Year)
Our net worth was down $12,747.67 for the month. The last time our month was down month-over-month was in August, 2019. That’s a pretty good run.
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 current 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 decreased by 1% and cash allocation has increased by 1%. This is entirely due to the decrease 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. This will require some additional investments in rental properties, as our primary residence will eventually be paid off and the current value of our house is ~$1.7M. This means we’ll need to eventually have real estate worth ~$5.1M in order for our rental property equity to be worth 3x our primary residence.
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
January was a good month. We finally hit my goal of trailing 12-month passive income of $100k. At this rate it seems very likely that we’ll hit the $120,000 goal in early 2022.
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?