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.
September was another good month and our net worth was solidly higher. The net worth report below includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for October, 2018 is 71%. This is up significantly from last month’s 67%.
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. If the market was currently valued at the long-term average of 15.68x earnings rather than the current 22.22x earnings, then your stock market investments would be worth roughly 71% of what they are currently worth.
Without further ado, here is our net worth report for October, 2018:
Long-time readers will notice that I’ve changed the format slightly – I’m now including the numbers as of the end of 2016 and 2017. This is mostly for my own benefit, as it’s helpful for me to see how much things have improved in just under 2 years. Seeing visible progress helps keep me motivated to continue saving and investing.
Our performance for the month crushed the S&P 500 – we were down 3.3% and the S&P was down 6.84% for the month. Even more impressive was our performance when scaled using the MCTWI. Our assets were actually UP by 1.7% using the MCTWI. This is largely because although the overall market has been overvalued (and corrected in October), my investments were less overvalued and corrected less than the market in general.
Assets
Brokerage: -$123,065.07 (-4.8%)
Ouch.
It’s not often that your equity investments drop by over $100k in a single month. As mentioned above, the good news is that our investments dropped by less than the general market. This is because my investments are slightly more conservative and less overvalued than the market in general.
Retirement Accounts: –$28,746.42 (-3.5%)
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 performance here was slightly better than the market for two reasons. First, we are continuing to contribute to my 401k account. Second, we have some international investments, and that provided some ballast to the portfolio.
529 accounts: –$2,647.89 (-6.1%)
I’m not sure why these accounts were down more than the S&P 500, as all of the money in these accounts is in the S&P. It’s especially confusing since we contribute $500/month for each of our 2 kids.
My guess is that it’s a timing thing – the contributions are made on the 15th of each month.
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: -$32,366.97 (-32.7%)
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 made our final payment on the landscaping work and our house remodel is officially done. We also paid 1/2 of our property taxes, so that hit our cash flow as well.
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. Hopefully I’ll one day be pleasantly surprised to see that the companies are worth something.
Stock options: $104,495.48 (new)
Although I’ve had these stock options for ~10 years, I’ve never included them in my net worth. This is largely because stock options are notoriously difficult to value (the company I work for is private). I’ve always just treated our stock options as a mini lottery ticket – we aren’t relying on the money, but if they are eventually worth something then that will be a nice surprise.
I’ll update the value of my stock options whenever the fair market value of our stock is updated. This happens every year or so.
Rental properties: unchanged
I revalue our real estate at the end of each quarter. No change this month.
Primary residence: unchanged
Just like the rental properties, I adjust the value of our house at the end of each quarter. No change this month.
Total Assets: -$186,826.35 (-2.9%)
This is about what I would expect from my portfolio – due to our real estate and large cash holdings we should be roughly half as volatile as the overall market. It’s still a big shock to see your assets drop by $186k in a single month, but the stock market giveth and the stock market taketh away.
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: -$2,952.47 (-77.0%)
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. I think the big reduction was just due to the timing of our payments.
Rental mortgages: -$5,096.34 (-1.0%)
Big reductions in our rental mortgages, mostly related to the timing of the payments.
Primary residence mortgage: -$1,147.86 (-.2%)
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: -$9,196.67 (-0.9%)
Reducing our liabilities by almost 1% in a single month is fantastic. Months like this are a reminder that you can’t affect the valuation of your assets, but you have direct control over your liabilities. So even during a month where our assets were crushed, we were still able to see progress on some aspect of our finances.
We still have over $1M in debt but the number is dropping fast. At the average rate that we’ve been paying down mortgages over the last few months (about $2,200/month) we’ll be under $1M in debt in about 20 months. That will be a fun milestone to finally hit!
Total net worth
Our net worth was down by $177,629.68 (a 3.2% decreas) over October 2017. That’s a big hit.
However, using the MCTWI to filter out the effects of changes in valuation, our net worth was actually UP almost $100k for the month to $4.3M. I use the $4.3M net worth, not our actual net worth of $5.3M, when I run projections, as I feel that the MCTWI-adjusted number is a much better indicator of our actual net worth.
Here’s a graph of our monthly net worth so you can see the year over year comparison:
Now that we have 3 years worth of data you can see how much our net worth jumped since 2016. This was due to the combination of a surging stock market and the large commissions I earned in 2017.
Although it’s tough to see your net worth take such an enormous hit in such a short period of time, the silver lining is that perhaps we are on the cusp of a nice big pullback that will result in more attractive valuations. I am dying to put all of our cash to work.
How did everybody else do this month? How was your net worth affected by October’s pullback?
It looks like not only did you update the format of this monthly post but the website has changed to hasn’t it?
Like you, I work for a private company and have both stock and options. We only revalue the value of the company once a year, so I’m anxious to update those values in my October report. I know the back of the napkin valuation methodology, so I’m expecting a 40-50% increase in my equity, but not sure what that translates to for the options (which I currently value at $1/option).
You have a sharp eye – yes, I changed the format of the website as well.
The great thing about options is that a 10% increase in the value of stock can lead to a much higher % gain in the value of the option. Here’s a simple example:
You have an option with a strike price of $9. The stock is currently valued at $10. Your option is worth $1.
Let’s say the value of the stock increases by 10%, from $10 to $11. The value of your option is now ($11 – $9) = $2. The value of your option has increased by 100% on a 10% increase in the value of the stock. BOOM!!!
Great month, Commando. I very much enjoy seeing the various part of your net worth move around.
I have such reservations when it comes to 529 plans because of month’s just like Oct 2018. Over time tax-free growth swells the account so much that I have no worries about funding college for a child. All of sudden, the market moves against and it isn’t that the account is completely wiped out, but what if there is only enough to fund 3 of the 4 years or worse, half?
I can certainly see the benefit of such 529 plans, but struggle with a 2008 scenario right when a child is set to head off to college.
The good news is that you can change your asset allocation as your child approaches college age.
My suggestion is to start switching away from a 100% equity allocation when you child hits ~10 years old. If you reduce your equity exposure and increase your fixed income allocation by 10%/year, your kid will be at 20% equity/80% fixed income at 18 years old.
The other thing to remember is that you don’t need to use the 529 at 18 years old – you can use the money for any of the 4 (or more) years of college. If the market is down during your kid’s freshmen year then you can just pay the first year out of cash flow and use the 529 for later years. This gives your 529 some time to recover.