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 March, 2020 is 81%. This is up 11 percentage points from February, 2020.

If the market was suddenly revalued at the long-term average of 15.78x earnings rather than the current 19.45x earnings, then your stock market investments would be worth roughly 81% of what they are currently worth

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

Our net worth for the month was down 4.2%, which significantly outperformed the S&P’s return of -12.35%. 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 (-14.0% Month, -22.3% YTD):

I think everybody knows what happened in March – the market got crushed. The overall market was down 23% through March 31st, so we slightly outperformed the market. Of course, as I’ve said before, I don’t really care all that much about our net worth – I’m much more interested in our monthly investment income.

That said, it’s obviously never fun to see the value of your investments go down, but lower stock prices mean more attractive valuations.

Retirement Accounts (-1.9% Month, -3.0% 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).

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 (-19.7% Month, -15.6% 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.

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 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 (+66.4% Month, +132.5% 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.

I’m actually very curious to see how the amount of cash in our checking account grows over the next few months, seeing as how we are spending nothing on restaurants, bars, and other “going out” activities.

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 (+1.9% Month, +1.9% YTD):

Well, this is exactly why we own real estate – it tends to be less volatile than the stock market. It’s pretty great to see some these valuations rise while the rest of our investments are tanking.

Primary residence (+6.7% Month, +6.7% YTD):

The house next door was sold this month, and I think the new comp is what caused our valuation to rise. As I’ve said before, I don’t care too much about the valuation of our home, as we hope to never sell it, but it’s nice to know that there’s increased equity here just in case we want to tap into it at some point.

Total Assets (-3.7% Month, -7.4% YTD):

Our assets are down over $550,000 in 2020. That’s a pretty rough start to the year.

The good news is that although valuations are down, my job is stable, we have plenty of cash, and I’m much more concerned with our investment income than net worth.

As I mentioned above, the S&P 500 was down 23% in 2020 Q1, so the fact that we are only down about 1/3rd as much is a great sign. As expected, our rental properties and regular investments are providing some ballast to our overall net worth.

Total assets after adjusting for MCTWI (-2.9% Month, -6.2% 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 (-91.0% Month, -75.7% 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.

Rental mortgages (-0.2% Month, -1.0% 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% Month, -0% 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.

Our March 1st payment was actually credited in February and our April 1st payment was credited on April, so that’s why there was no change this month.

We are making steady progress on this, but we have a long way to go to pay this loan off completely.

Total liabilities (-1.2% Month, -1.1% 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 first 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 (-4.2% Month, -8.7% Year)

Although it’s never fun to see your net worth fall by more than $250k in a month, I’m actually a bit surprised that we performed as well as we have. I’m still hoping that the market will fall to at least fair value, at which point I hope to deploy the rest of our cash.

When you look at our net worth over time you can see that despite all the carnage in the market, our net worth has only dropped to approximately the level it was in May, 2019. That’s not too bad.

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).

As you can imagine, these numbers are pretty different from last month. Equities have fallen from 62% to 58%, our rentals are 1% more, and our primary residence is 3% higher.

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, 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

March was another 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.

I put some of our cash to work, but we are still sitting on over $300k in cash that I’d like to deploy as soon as there are more interesting valuations in the market.

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