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 June, 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 June, 2020:
Our net worth for the month was up 1.1%, which underperformed the S&P’s return of 1.99%. 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 (+1.4% Month, -8.1% YTD):
Our investments continue to recover after the bloodbath earlier this year. It certainly feels like the market has gotten ahead of itself, and I wouldn’t expect these prices to last too long, but as I’ve said before, I’m much more concerned about the income from our investments than the value of the investments.
Retirement Accounts (+2.5% Month, -2.2% 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), 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.
This account has recovered nicely from March’s lows, largely due to the continual investments I make every paycheck to our 401k.
529 accounts (+8.1% Month, +7.0% 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 (-2.8% Month, +152.0% 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, 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 (+2.4% Month, +4.4% YTD):
We update the value of our rental properties at the end of each calendar quarter.
This is a very solid increase and equal to about 9.6% annualized.
More impressive is when you consider the increase in value compared to our equity in the properties. We have about 55% equity in the properties, which means that a 2.4% increase in the value of the properties is actually a 4.4% increase on the value of our equity, and THAT is 17.6% annualized. And that is just one of the ways in which we profit from our real estate investments (the other ways are reduction in mortgage principal, monthly cash flow, and tax deductions).
Primary residence (-1.8% Month, +4.8% YTD):
We update the value of our primary residence at the end of each calendar quarter. Fairly substantial drop in Q2, which by itself almost cancels out all of the increase in value of our rental properties.
Total Assets (+0.9% Month, -1.0% YTD):
Our assets are down about $78k in 2020. At this point it’s very conceivable that we could end up even or slightly up by the end of 2020.
Total assets after adjusting for MCTWI (+0.8% Month, -0.2% YTD):
This is a better indicator of our performance. It’s interesting that when you adjust for changes in market valuation we are pretty much flat for the year (down just $11k).
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 (-145.1% Month, -92.9% 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, -1.7% 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, -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.
I’m currently working on refinancing our loan, which will reduce our interest rate by 150 basis points and reduce our monthly payment by approximately $850/month.
Total liabilities (-0.1% Month, -1.8% 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 (+1.1% Month, -0.9% YTD)
Solid performance. It’s hard to be anything other than pleased when I see our net worth increase by almost $71k in a month.
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
Nothing too exciting this month – just watching our investments do what they are designed to do – throw off passive income, which we reinvest.
I’m curious how our passive income will end up this year, as Disney has suspended their 1H dividend and Wells Fargo cut their dividend by 80%. Will we still be able to hit our goal of $115k in passive income? At this point it seems unlikely.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?
Hey MC,
Hope you are well.
Are you bringing money to the table on your primary residence refinance?
Nope – we aren’t paying anything other than ~$1,500 for the refinance fee. I thought about doing a cash-out refi to further increase our cash position, but I’m generally against increase any debt at this point in our lives.
Are you refinancing to a 15 or 30 year?
30 year. We looked at a 15-year loan, but I prefer the flexibility of having lower required payments. We will likely pay down the mortgage on a roughly 20 year schedule, but I like the ability to stop making extra payments if we find something more productive to do with the cash.