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 – March, 2018 report for more details).
The net worth report below includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for March, 2017 is .64. This is up from February’s value of .60. The P/E ratio for the market has dropped from 26.3 in January to 24.32 in March. This change was enough to push the MCTWI up by 6.6%.
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 .64*100,000 = $64,000 in your planning. That is – the value of your portfolio assuming the long-term valuation of the stock market is only 64% of the current valuation.
Without further ado, here is our net worth report for March, 2018:
S&P 500 performance for February, 2018 = -2.54%
Our net worth was up 3.87%, which is significantly outperformed the market. This is due to our large tax return (more details below). In addition, our large cash reserve and real estate holdings mean we should outperform the market when it’s down.
Our MCTWI adjusted net worth was up 4.21%.
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 – investments – 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.
The value of our investments jumped in March because I bought $75k worth of Exxon (XOM). The money for the purchase came out of our “Brokerage – cash” account. You’ll note that this account was up by less than $75k – that reflects the negative performance of the market in March.
Total increase of $58,195.29 for the month.
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 $1,654.26 (-0.2%) 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 $710k, 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 $132.09 for the month.
Total stock market assets: The total unadjusted value of our stock market investments at the end of the month was $2,532,810.80. That was about $56k higher than February.
Total stock market assets adjusted for MCTWI: After adjusting for the market’s high valuation, our stock market assets are worth $1,632,996.44. 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 64% 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 up huge due to receiving both our $197,974 Federal tax refund and our $65,658 California state tax refund. It’s pretty fun to see >$300k in our checking account, but about $120k will be used for some work on the house over the next few months. Once the house work is paid for we’ll keep $50k in the checking account and move the rest of the money to our brokerage accounts, where it will wait until some interesting opportunities present themselves.
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. The total value of the rental properties are up to $958,978, which is a solid $14,094 increase from the start of the year. That’s a 1.5% increase, which is a 6% annualized increase. I’d be very happy if our rental properties appreciated by 6%/year!
Primary residence – Just like the rental properties, I adjust the value of our house at the end of each quarter. Apparently Zillow believes our house is worth $57,850 LESS than at the beginning of the year. I don’t put too much stock in these numbers. First, we are hoping to live in this house forever. Second, the Zillow estimate bounces around pretty regularly (which is why I only update the values quarterly).
Brokerage – cash – This is the cash we are holding in our brokerage account. As I mentioned above, this is down because I purchased about $75k worth of Exxon stock. However, we also received about $5k in dividends, so in total this account was down about $70k.
Total Assets – Other – The big tax refunds guaranteed a big increase in assets for the month, despite the big decrease in the estimated value of our house.
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 $1,061.21 of the balances on the mortgages for our rental properties. Thanks guys!
Primary residence mortgage – We paid $1,116.78 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 $552.96 for the month (a 0.26% decrease) to $1,080,339.57 (a minuscule .05% reduction from last month).
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 36 months. That will be a fun milestone to finally hit!
At the rate of $2,200/month, it will take 491 months (40.9 years) to pay off all of our debt. Of course, each mortgage payment pays down a larger portion of the loan, so the reality is that we should be debt-free in about 20 years, assuming no additional payments towards principal. Our general thinking is to pay off the mortgage on our residence ASAP but make no additional payments on our rental property mortgages.
Total net worth
As described above, I’m calculating my net worth both with and without adjusting for the Money Commando True Wealth Index.
Our unadjusted current net worth is $5,185,333.20, which was up a massive $193,320.13 from last month (a 3.87% increase). We’re back above the $5M mark, which is pretty cool. Of course, these huge tax refunds were a one-time event and won’t be repeated, so I’ll have to get future net worth increases the hard way – through saving and investing.
The more accurate MCTWI total net worth is $4,285.518.83, which was up $173,280.11 (4.21%) 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.
And here’s a graph of our net worth for each month
Once we hit June we’ll start having 3 years worth of data to compare.
How did everybody else do this month? Have you been riding the stock market to new highs each month?