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 October, 2019 is 69%.
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 15.75x earnings rather than the current 22.1x earnings, then your stock market investments would be worth roughly 69% 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 October, 2019:
Our net worth for the month was up 0.8%, which trailed the S&P’s 2.17% return. 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. That appears to be what happened this month.
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (+1.8% Month, +14.0% YTD):
Our investments slightly trailed the S&P 500 this month, probably due to our international allocation.
We are up a very solid 14% for the year, and we only need another ~2.6% to hit the $3M mark.
Retirement Accounts (+0.56% Month, +24.9% 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).
We are rapidly closing in on the $1M mark for our retirement fund. My estimate is that we’ll cross that mark sometime in 2022. 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.
529 accounts (+4.6% Month, +49.4% 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. The accounts are valued at approximately $60k, which means our contributions alone increase the value by about 1.6% monthly.
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 (+1.8% Month, +11.8% 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. I had hoped to get back to $50k in October, but I forgot that we have the first of our property tax payments due plus the property tax for one of our properties (the rest have an escrow account).
The goal is to get back to $50k by the end of December.
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: (+50% Month, +500% 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. One block of stock just vested on October 1st and the next will vest on January 1st.. I’m valuing my stock options at the price used for the most recent liquidity event.
Rental properties (+0% Month, +37.2% YTD):
I revalue our properties at the end of each quarter. No update this month.
Primary residence (+0% Month, -3.3% YTD):
Just like the rental properties, I adjust the value of our house at the end of each quarter. No change this month.
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 (+1.0% Month, +14.8% YTD):
Our assets were up $71,738.75 for the month, and we are up $926,861.73 for the year. At this rate it’s entirely possible that we’ll have seen our net worth increase by $1M in 2019.
Total assets after adjusting for MCTWI (0.9% Month, +10.0% YTD):
This is a better indicator of our performance for the month. The adjusted number indicates that about 4.8% of this year’s 14.8% 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 (-74.5% Month, -67.2% 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, +41.1% 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, -1.9% 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 (-0.4% Month, +18.4% YTD)
The older I get the more I think that reducing liabilities is more important than increasing 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, and that progress is pretty much linear.
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? Clearly the second one. 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.
Total net worth (+1.3% Month, +14.1% Year)
Our net worth was up $77,109.53 for the month.
For the year our net worth is up by $734,957.32. 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 and/or savings are.
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:
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.
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
Another solid 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?
Hey – I thought we agreed that you would slow down your growth to allow me to catch up…what the heck???
All joking aside, very impressive! You’re a stone throw away from $6M.
I’m looking forward to my own liquidity event coming up in January of 2020. I was able to convince the CEO of my soon to be the previous employer to cash me out of my equity position. I wrote a check for $105,000 a little over three years ago. With that I got 6,000 shares, my capital only purchased 2,100 outright and the other 3,900 were provided in the form of management loan shares giving me some nice leverage.
We got paid a dividend in May of this year, which was about $60,000 and I should cash out about $400-$500K in January. When all is said and done it will have amounted to a 4-5 X return on my capital (not bad for three years and some change). This is significantly higher than what I have been carrying the value at on my monthly updates (due to my conservative nature and the fact that I only update the value once per year).
I also have another 6,000 options that are hard to price, but I’m going to let those ride for now. If things continue going well this could lead to another multiple six-figure gain. Only time will tell. My guess is that they are worth about $120,000 today but I only carry them at $6,000 in my net worth.
I’m trying to catch up with you.
Dom
No, no, no. I’m trying to get as large a lead as possible, because once your business is fully up and running you’re going to blow by me like I’m standing still!
Sounds like the equity investment in your current/soon-to-be-former employer was a great one. Stock options are obviously the best form of leverage (zero cost, impossible to lose money, essentially infinite return on investment), but equity in an employer financed in part with a loan from the employer is a pretty close second.
One question – is there a reason you want to sell out of all of the equity? It sounds like the company pays a nice dividend. Why not hold on to some or all of the equity, rather than selling it and paying taxes on the capital gains.
One other idea – is there any way your employer would allow you to sell some of the equity in 2019 so you can spread the taxable gain out across multiple years? If not, you could look at using a DAF (Donor Advised Fund) to mitigate taxes. A DAF would allow you to donate your private equity now (meaning you don’t need to sell and pay capital gains, but you get to deduct the full value of the shares). Your employer could then buy out the shares from the DAF in January. Given you high income this year that could result in some serious tax savings, especially if you’re interested in making some charitable donations anyways.
Good questions!
I want to cash out of my equity position for several reasons:
(1) I will no longer be in a position of influence with the company.
(2) The dividend was a one-time thing that the private equity group financed by taking on more debt.
(3) I already watched my equity gets cut in half and then rise substantially to current prices due to a business blow – an operation we since closed down.
(4) The next liquidity event is supposed to happen sometime in 2021 if the markets are favorable. However, the last PE firm to invest in 2006 with a 3-5 year time horizon, got stuck and had to hold for 10 years. I don’t want to be locked up for another 5-7 years.
(5) I personally think the company is going to have a hard time scaling beyond it’s the current size.
(6) The desire is to go private equity again in a leveraged recap but that means more debt and more vulnerability in the face of a downturn. I think the next turn the company changes substantially.
(7) My grandfather taught me early that a bird in the hand was worth two in the bush. I think the easy money has been made and I think the downside outweighs the upside at this point.
(8) I need to take my chips off the table to free up the mental bandwidth. That way the CEO has nothing he can hold over my head (a conversation to be had in person for more context and color on this).
I did request that I get paid out in January based on YE valuation in order to defer the taxes into 2020 on this capital gain. My income is already projected at $750K for this year and I didn’t want any additional tax burden. I’ve already made a large tax move by buying land for $68,400 in return for a $342,000 tax deduction. This in addition to the tax efficiency my lifestyle has now that I have an S-Corp is huge to our household’s tax efficiency overall.
For me, keeping the options is my way to stay in the game, with nothing but upside. If the company does better than I expect, which I hope it does, they could be worth a substantial amount of money. There is no downside and it feels like I’m only taking half my position off since I have 6,000 shares and 6,000 options.
I have also negotiated an advisor role with the company starting in January 2020 that pays a nice $70,000 per year for up to 1 day a week.
Cheers,
Dom
Sounds like you’ve thought it through. The lack of liquidity is the major reason I decided to cash out all of my stock options earlier this year. This is especially true if the company doesn’t pay a dividend (meaning you might never get a penny in either dividends or capital gains).
And in your case, if you don’t think the company is going to continue to grow, then there’s no reason to hold on to the shares.
Awesome job arranging a consulting position. That’s a nice little “side hustle” to go along with the new business.
Hello Again,
Regarding the 529’s.
Do you contribute $1k/month for each account, a total of $2k/month?
Jay
It’s $500/kid/month, for a total of $1,000/month
No – we contribute $500/child/month, for a total of $1,000.