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 February, 2020 is 70%. This is up 5 percentage points from January, 2020.
If the market was suddenly revalued at the long-term average of 15.78x earnings rather than the current 22.58x earnings, then your stock market investments would be worth roughly 70% of what they are currently worth
Without further ado, here is our net worth report for February, 2020:
Our net worth for the month was down 4.4%, which significantly outperformed the S&P’s return of -8.22%. 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 (-8.2% Month, -9.6% YTD):
I think everybody knows what happened at the end of February – the stock market had its largest 1-week decline since 2008. As expected, the value of our portfolio declined in line with the overall market.
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 (-1.3% Month, -1.2% 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).
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.
We have a decent sized international allocation in our investment accounts (to offset our almost exclusively US investments in our brokerage accounts), and this explains our outperformance of the S&P 500.
529 accounts (+1.5% Month, +5.0% YTD):
These account values are NOT correct. The California 529 system went through some changes, and during that time our accounts have not been accessible. The increase of $1,000 for the month just reflects our contribution of $500 for each child.
I expect that we’ll have access to these accounts in early March, so the valuation for our March net worth report should be correct.
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 (-27.7% Month, +39.7% 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 bought a bunch of stuff in February – new outdoor furniture, plus flights for our two upcoming summer vacations. As a result, I expect the value of our checking account to drop again in March.
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, +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.
The next block of options will vest on April 1, 2020.
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 (-3.7% Month, -3.8% YTD):
Our assets were down $273,915.61 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 (-3.1% Month, -3.1% 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 (+69.1% Month, +169.7% YTD)
As I mentioned above, we made a bunch of purchase this month, leading to significantly higher spending than a normal month.
The good news is that we should be back on track in the next few months.
Rental mortgages (-0.2% Month, -0.8% 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 (-0.2% Month, -0.5% 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 (+0.3% Month, +0.1% YTD)
This is only the second time in the last 3 years that our liabilities have increased (the only other time was when we bought our two additional rental properties early last year). In this case it’s due to a perfect storm of a bunch of credit card purchases during the same month.
I expect that starting next month we’ll be back on track to reducing our liabilities.
Total net worth (-4.4% Month, -4.6% Year)
The combination of decreasing assets and increasing liabilities is not a good one for anybody’s net worth.
In our case, that combination resulted in our net worth dropping by $277,034.65 in one month. That’s now two months in a row with decreasing net worth. Definitely not a good way to start 2020.
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).
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
February was a rough month for our net worth. We are closely tied to the overall stock market, and a big drop in the stock market means a big drop in our net worth.
The good news is that a drop in stock prices hopefully means that we’ll finally have an opportunity to make some purchases with our stockpile of cash.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?
With this dip, which stocks do you have in your radar and/or which one are you buying more?
I’m about to post a short article on this, but in general I look for one of two things:
1. A very high quality blue chip that’s been taken down with the rest of the market (Visa, for example), or
2. A profitable company that’s dropped substantially more than the market.
Right now I’m looking at two sectors – bank stocks and oil stocks.
MC thanks for the post. I saw that you look for quality companies like me.
It will be really cool if you make a blog post once you buy something and your thoughts about it. At least for this black swan “Corona Virus” event.
Good idea. I’ll be posting an update on some recent purchases shortly.
Rough February and March is on track to be even tougher.
We had very little of our net worth tied to stocks in February, so we actually saw an increase of about $46,000 in our net worth.
This week I put about $60,000 to work in the following names:
USO
VTI
SPY
LUV
All positions have calls sold against them. My effective cost basis in all of these positions is a minimum of 40% below the recent highs.
I have $172,000 that should be available for investing tomorrow or Monday (from a 401k rollover). I liquidated the account to cash back in November of 2019 (lucky timing).
Dom
Dom – great to hear from you, as always.
Sounds like you made some solid moves – oil, a few market indexes, and Southwest (although I’m personally not a fan of airlines).
One question – why did you offset the purchases by writing call options?
I rarely ever buy any stock (index or individual name) without selling/writing calls against my positions. I’m much happier capping my upside return for the reduction in cost basis. I favor a larger margin of safety over unlimited upside.
For example, one purchase I made last week involved buying 100 shares of the SPY index at $252.95, which was 25.4% below the all-time-high set on 2/19/20.
When volatility explodes these premiums become very rich. I knew there was potentially more downside and I don’t believe this market is going to recover over night. I saw that I could sell the January 2021 $253 call for $30.36 or 12% of my purchase price.
This gives me an effective purchase price of $222.59, which at the time was another 12% below the current price. My effective cost basis is still below the current market low of $237.07 that happened today.
I’m more than okay capping my return on this particular position at just over 12% if I’m exercised. That said, I do think there is a high probability that it will expire worthless by expiration.
I also get to sit and collect the dividend until I’m exercised.
Dom