Each month I publish 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 May, 2020 is 75%. This is down 2 percentage points from April, 2020.
If the market was suddenly revalued at the long-term average of 15.78x earnings rather than the current 20.93x earnings, then your stock market investments would be worth roughly 75% of what they are currently worth
Without further ado, here is our net worth report for May, 2020:
Our net worth for the month was up 2.2%, which underperformed the S&P’s return of 4.76%. 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 (+5.3% Month, -9.3% YTD):
The stock market continued to recover in May with a solid increase of 4.73%. Despite our cash allocation we outperformed the market. Looking at the numbers a bit more closely, it appears this outperformance was largely driven by our small allocation of international investments.
Retirement Accounts (+3.8% Month, -4.6% 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.
This account has recovered nicely from March’s lows, largely due to the continual investments I make every paycheck to our 401k.
529 accounts (+15.5% Month, +7.7% YTD):
Not much to say here – we are contributing $500/month/child into these accounts, and 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. Given their ages, it’s reasonable to expect the money to increase by 3x by the time they go off to college, and that would result in roughly $90k/kid.
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.
Assuming both of our kids go to college, both accounts will be completely 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 (+12.3% Month, +159.3% 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, and given the events of the last month, I think more people are understanding the value of cash.
We are at our $50k balance, so I’ll start taking the excess above $50k and moving it to our brokerage accounts to be invested.
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, +51.3% Year)
These options vest quarterly and a new block of stock vested on April 1st. I’m valuing my stock options at the price used for the most recent liquidity event. This block of options has a strike price substantially higher than my previous blocks of options, which means the valuation is lower (this block was worth $6,125 and the previous 4 blocks were worth $11,375 each.
The next block of options will vest on July 1, 2020.
Rental properties (+0% Month, +1.9% YTD):
We update the value of our rental properties at the end of each calendar quarter. No update this month.
Primary residence (+6.7% Month, +6.7% YTD):
We update the value of our primary residence at the end of each calendar quarter. No update this month.
Total Assets (+2.6% Month, -1.9% YTD):
Our assets are down about $140k in 2020. Given how bad/weird 2020 has been that’s actually not too bad.
The good news is that although valuations are down, my job is stable, we have plenty of cash, and I’m much more concerned with our investment income than net worth.
Total assets after adjusting for MCTWI (+2.3% Month, -0.9% 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.
You’ll note that our net worth adjusted for the Money Commando True Wealth Index is significantly more stable than our unadjusted net worth. That’s what we’d expect in times that changes in the market are due to changes in valuation rather than changes in underlying fundamentals.
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 (-133.2% Month, -115.8% YTD)
We pay our balances in full each month, so the ebb and flow of our balance is more reflective of when our payment is made than anything else.
Rental mortgages (-0.2% Month, -1.5% YTD)
We are chipping away at these mortgages, and we’ve been paying off about 0.2% of the balance each month.
At the rate we are paying off our mortgages we are 20+ years from retiring these loans.
Primary residence mortgage (-0% Month, -0.9% 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.
It looks like there was no update here just due to when our payments were made. The May payment was actually made on April 30, so the payment is reflected on April’s report.
Total liabilities (-0.4% Month, -1.7% YTD)
We continue chipping away at our liabilities. Although all of our debts are “good” debt (mortgages on income producing property or our primary residence), I’d still rather have no debt, and I’m eagerly looking forward to when we start paying off the loans. The smallest loan (for one of our rental properties) should be paid off in 5-7 years, and after that the rest should start falling faster.
Total net worth (+3.3% Month, -1.9% YTD)
This month continued the recovery after the devastation of March. We’re still down a bit YTD but not by much. I still think it’s possible to end 2020 with net increase in our net worth for the year.
When you look at our net worth over time you can see how volatile the last few months have been.
Asset Allocation
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).
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 rental properties 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, especially given that the Fed has cut interest rates to 0%. Why would you lock in sub 1% returns (which will almost certainly underperform inflation) when you could buy real estate with higher (although more variable) income?
Conclusion
The craziness in the market continues. The markets were down big in February and March but have rebounded strongly since then. Where will we go from here? Nobody knows what’s coming next, but I am feeling pretty good about our current investments and our strong cash position.
I continue to look for places to invest our cash.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?