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 September, 2019 is 71%.
Here’s how the MCTWI has trended over time.
As you can see, the market worst overvaluation (where the graph is lowest) was in January, 2018. The market was closest to fair value in December, 2018, but has since trended back towards greater overvaluation.
If the market was suddenly revalued at the long-term average of 15.75x earnings rather than the current 22.1x earnings, then your stock market investments would be worth roughly 71% of what they are currently worth
Over the long term, you would expect the MCTWI to eventually converge on 100% (that is, the long-term average). We were headed that way for almost all of 2018, but starting in January, 2019, the trend has reversed and the graph has been moving lower, which indicates overvaluation.
Without further ado, here is our net worth report for September, 2019:
Our net worth for the month was up 0.9%, which trailed the S&P’s 1.87% 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. That appears to be what happened this month.
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (+1.8% Month, +11.9% YTD):
Our investments exactly mirrored the S&P 500 – both were up by 1.8% for the month.
We are up a very solid 11.9% for the year, and we only need another ~4.5% to hit the $3M mark.
Retirement Accounts (+0.3% Month, +24.2% 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).
I think I have some sort of accounting error, as there’s no reason for us to underperform the market, given that these investments are mostly invested in the S&P500 and I am making contributions to my 401k every month. However, we are still up a very solid 24.2% for the year, which is fantastic.
529 accounts (+3.0% Month, +42.8% 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.
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 (+77.3% Month, +9.9% 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 we are slowing working our way back towards the $50k mark. We should hit this mark in October, at which point all excess cash flow will be sent to our brokerage accounts for investment.
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, +300% 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, the next block vesting in October. I’m valuing my stock options at the price used for the most recent liquidity event.
Rental properties (+2.7% Month, +37.2% YTD):
I revalue our properties at the end of each quarter. Having our rental properties appreciate by 2.7% in one quarter is pretty amazing, as that’s about the amount of appreciation that I assume we’ll average per year.
The great thing about real estate is that it’s a highly leveraged investment. So although our real estate equity (value of properties – mortgages) is only $751,53.88, we control $1,455,223 in real estate. A small percentage increase in the value can result in large gains in dollars. In this case, the 2.7% increase in valuation results in our net worth increasing by about $38k.
Primary residence (-2.8% Month, -3.3% YTD):
Just like the rental properties, I adjust the value of our house at the end of each quarter. No change this month.
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.
Total Assets (+0.9% Month, +13.7% YTD):
Our assets were up $66,628.46 for the month, and we are up $855,122.98 for the year. Pretty awesome.
Total assets after adjusting for MCTWI (0.9% Month, +10.5% YTD):
This is a better indicator of our performance for the month. The adjusted number indicates that about 3.2% of this year’s 13.7% 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 (+2.5% Month, +28.7% 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.
Rental mortgages (-0.2% Month, +41.3% 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.
Primary residence mortgage (-0.2% Month, -1.7% 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, +18.9% 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, don’t vary from month to month. You can more easily track and monitor progress on paying down liabilities.
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 to be in? Clearly the second situation is much safer. 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.
This was a pretty “regular” month. We paid $2,436.47 towards our various mortgages.
Total net worth (+1.2% Month, +12.6% Year)
Our net worth was up $68,969.23 for the month.
For the year our net worth is up by $657,847.79. 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).
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.
Conclusion
Another solid month is in the books. So far this has been a great year – if this pace continues we will have seen our net worth increase by about $1M in 2019.
We continue to hold quite a bit of cash (about $350k 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?
Where do you place your cash while you wait to buy more investments?
Right now it’s all just sitting in a money market fund. For a while I had it in a short-term bond fund, but I ultimately decided I didn’t like the additional risk from holding bonds and I preferred to be in straight cash.
Same here. We have it in a Money Market Account. I thought about putting it somewhere else, but I always came to the same conclusion, a MMA.
BTW, we are thinking about putting Solar Panels as well. I was wondering if you can share how did you get to your IRR calculation. I read your post about Solar Panels, but I didn’t see how did you get your IRR number?
I have a follow-up to the solar panel post that’s partly finished, and it includes some information on my return calculations. I’ve also calculated the actual return from the first year of solar panels.
The IRR projection in my original post was provided by the solar company, and was calculated based on our local electricity rates, expected solar generation, and expected increases in the cost of electricity over time.