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 June, 2019 is 70%.
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 15.68x earnings rather than the current 21.15x earnings, then your stock market investments would be worth roughly 70% 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 June, 2019:
Our performance for the month was largely driven by the S&P’s increase of a massive 7.05%. We were up a smaller 3.0%, which is about what I’d expect given our mix of real estate, stocks, and cash. In general I expect that we’ll lag the market when it’s up and outperform when the market is down.
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (6.0% Month, +10.1% YTD):
June was a huge month for the market and therefor a huge month for us. Our portfolio is now large enough that a 6% increase in our brokerage account translates to almost $160,000 in gains.
We slightly trailed the market due to our cash allocation (about $300k of the $2.8M total). I continue to think that for us, holding a sizable cash allocation at this time is the right move. My hope is that I’ll soon be able to allocate the remainder of the cash, but that will require a big adjustment in the market.
Being up 10.1% for the first 6 month of 2019 is a pretty amazing feeling.
Retirement Accounts (+1.5% Month, +17.8% 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). The value of these accounts was down significantly less than the S&P due to our ongoing contributions.
I’m not exactly sure why our account was only up 1.5% for the month, but is up 17.8% for the year. These accounts are spread out across domestic and international index funds, so my guess is that international markets behaved differently in June than the domestic markets did, but I don’t really care enough about a single month of performance to go and actually do the research.
529 accounts (+9.0% Month, +34.4% 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 (19.9% Month, -31.0% 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.
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, 100% 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, with the next block vesting in July. I’m valuing my stock options at the price used for the most recent liquidity event.
Rental properties (-0.5% Month, +33.6% YTD):
I revalue our properties at the end of each quarter. This was one of the few times when the total value of our rental properties actually decreased in a quarter. Thankfully it was a small decrease (about $7,600), and likely just reflects normal variations in the property markets.
The yearly numbers look so good because we purchased 2 more rental properties a few months ago. As a result, the yearly numbers should be taken with a grain of salt.
Primary residence (-0.5% Month, -0.5% YTD):
Just like the rental properties, I adjust the value of our house at the end of each quarter. The valuation looks like it’s basically flat for the year.
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 (+2.4% Month, +11.8% YTD):
Our assets were up by an amazing $165k for the month. However, it’s a bit less amazing when I realize that most of this month’s gain was making up for last month’s losses.
Total assets after adjusting for MCTWI (+1.9% Month, +8.3% YTD):
This is a better indicator of our performance for the month. The adjusted number indicates that about 3.5% of this year’s 11.8% 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 (-5.1% Month, -49.2% 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, +42.1% 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, -1.1% 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, +19.3% YTD)
The older I get the more I think that liabilities matter more than 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 $2,271.24 towards our mortgages.
Total net worth (+3.0% Month, +10.3% Year)
Our net worth was up $167,369.94 for the month. This puts our net worth right back to where it was at the beginning of May.
For the year our net worth is up an astounding $538,503.20. 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 is.
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:
These numbers are a bit different from last month due to a number of stock purchases early in the month. 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 fantastic 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 $400k 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?