Introduction

Another year is in the books. It was a pretty terrible year in a lot of way, but for us financially it was pretty great. Our net worth ended at just under $7.3M, which was about a $1M gain over 2019.

Without further ado, here is our net worth report for December, 2020:

Our net worth for the month was up 3.5%, which slightly underperformed the S&P’s return of 3.8%. 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.

Money Commando True Wealth Index

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 quick and dirty 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 December, 2020 is 41%. This indicates that the stock market’s is substantially overvalued.

If the market was suddenly revalued at the long-term average of 15.88x earnings rather than the current 38.54x earnings, then your stock market investments would be worth roughly 41% of what they are currently worth.

I think this point bears repeating – the US stock market appears to be extremely overvalued based on PE ratios, and the stock market’s valuation is more than double its normal, long-term valuation.

Let’s take a closer look at our assets and liabilities.

Assets

Brokerage (+5.1% Month, 13.9% YTD):

The stock market had another crazy month (5%/month would be over 60% return PER YEAR). For the year our brokerage accounts are up about $432k. This is especially surprising because we made no contributions to these accounts this year.

Retirement Accounts (+0.8% Month, +12.0% 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), as we aren’t eligible to continue to the IRAs.

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.

Last month we maxed out our 401k contributions for the year, and we are not eligible to contribute to our IRAs, so there was no new money added to these accounts in December.

529 accounts (+9.4% Month, +41.0% YTD):

We are contributing $500/month/child into these accounts, and given that our kids are 6 and 5, we are approaching the point where we have enough money in these accounts and it will make sense to stop contributing.

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.

The 41% increase for the year looks impressive, but most of that increase is due to our contributions for the year rather than any outperformance by the underlying investments.

Checking (17.0% Month, +97.6% 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.

Our checking account balance is a bit lower than I’d like, so I’ll work on getting this back up to our $50k goal.

Private investments: (+0% Month, +10% YTD):

We have 3 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 unless/until we are provided information about an updated valuation.

No updates this month.

Stock options: (+0% Month, +87.2% Year)

These options vest quarterly and a new block of stock vested on October 1st.

The next block of options will vest on January 1, 2021 and should be worth $6,125.

Rental properties (+2.2% Month, +10.3% YTD):

Real estate has been on a tear across the country and our rental properties have been no exception.

Of our 10 rentals, 9 increased in value in Q1 and one decreased in value. Overall the value of our properties is up just over 10% for the year. What’s especially interesting about this is that the 10% increase is on the value fo the properties, not on our equity. If I calculated the percent increase based on our equity it would be approximately 2x higher(due to the leverage inherent in only putting down ~30% of the value of the property when purchasing it.

Primary residence (+0.7% Month, +10.7% YTD):

Although we only had a small increase in the value of our house in Q4, the yearly percent increase was almost exactly the average increase in the value of our rental properties.

Total Assets (+2.4% Month, +12.9% YTD):

Our assets increased in value by just under $1M over the course of the year. What’s incredible is that I had to do no work to get this gain. This increase in value is entirely due to the combination of making good choices in the past and the passage of time.

Total assets after adjusting for MCTWI (+2.4% Month, +12.5% YTD):

To get this number I adjust our brokerage, retirement accounts, and 529 accounts based on the MCTWI. Our checking, private equity, stock options, rental properties, and primary residence values are NOT adjusted for the MCTWI.

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 (+188.7% Month, -6.7% 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. The big increase for December was due to Christmas spending.

Rental mortgages (-0.3% Month, -3.1% YTD)

We are chipping away at these mortgages, and we’ve been paying off 0.2% – 0.3% 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 (-0.4% Month, -1.7% YTD)

We refinanced our mortgage in October, which lowered our payment by about $850/month. Our new interest rate is insanely low so it’s unlikely that we’ll pay this off early.

Total liabilities (-0.1% Month, -2.5% YTD)

We still have just over $1.2M in liabilities, but it’s pretty great to see that we reduced our debt by $30k this year. Most of that (approximately $21k) was due to our mortgage payments on our rental properties, and that feels like “free” money since the rent our tenants pay is more than enough to cover the mortgage payments.

Total net worth (+3.5% Month, +16.0% YTD)

Our net worth was up by about $243k for the month. That’s incredible. It’s amazing what the combination of saving, investing, and time can do.

We ended up with our net worth growing by almost exactly $1M this year.

Conclusion

It’s crazy that our net worth grew by $1M in one year. It took about 14 years to get our first $1M, and now we’ve added that much to our net worth in just 12 months.

Looking forward to 2021 it’s hard to imagine that we’ll see anything close to this performance. In fact, I would not be surprised if our net worth actually went down in 2021, as I think the market highly valued and likely due for a large correction.

How did everybody else do this month?  What’s your asset allocation, and how does it compare to your ideal allocation?