Introduction
I am way, way behind on my monthly updates, so I’m going to try to catch up on all of my reports over the next week.
I track and publish our net worth each month both as a way of keeping us accountable and perhaps to inspire other along their own financial journey.
Here’s what our net worth looked like for September:
Our net worth change for the month was -8.9%, which slightly outperformed the S&P’s -9.34% 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.
Money Commando True Wealth Index
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 quick and dirty 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.
My net worth report above includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for this month is 80%. This indicates that the stock market is likely a bit overvalued.
If the market was suddenly revalued at the long-term average of 15.97x earnings rather than the current 20.03x earnings, then your stock market investments would be worth roughly 80% of what they are currently worth. The recent downturn has caused the stock market to get closer to fair value than it’s been in quite a while
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (-9.5% Month, -2.2% YTD):
Our stock market investments were down roughly in line with the S&P 500.
Retirement Accounts (-1.7% Month, -21.8% 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), 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 ~40% discount (to account for federal and CA state taxes).
We are roughly tracking the S&P 500, which makes sense, because these accounts are primarily invested in the S&P 500. These accounts are down over $300k for the year. Rough.
529 accounts (-0% Month, -12.1% YTD):
We are contributing $500/month/child into these accounts, and given that our kids are 8 and 6, we are approaching the point where we have enough money in these accounts and it will make sense to stop contributing.
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.
Our monthly contributions roughly countered the market’s return, leaving us essentially flat for the month.
Checking (+33.1% Month, +57.6% 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.
Private equity: (+0% Month, +0% YTD):
We now have 6 separate private equity investments. Since there’s no way to find the current value of these investments I will continue to keep them valued at my initial investment amount unless/until we are provided information about an updated valuation.
No change this month.
Stock options: (+0% Month, +0% Year)
No change this month.
Rental properties (-4.4% Month, +8.5% YTD):
I update the value of our rental properties at the end of each quarter.
Looks like the real estate bubble is starting to pop a bit. We are still up 8.5% for the year, but down for the quarter.
Primary residence (-13.0% Month, +4.0% YTD):
I update the value of our primary residence at the end of each quarter.
Oooh – big drop in the value of our house. We lost about $400k in net worth on this asset alone!
Total Assets (-8.1% Month, -1.4 YTD):
Huge decrease in assets, but slightly better than the S&P. It’s crazy to see that we lost almost $1M in paper net worth in 30 days!
Total assets after adjusting for MCTWI (-8.1% Month, -0.6% YTD):
To get this number I adjust our brokerage, retirement accounts, and 529 accounts based on the MCTWI. Our checking, private equity, stock options, rental properties, and primary residence values are NOT adjusted for the MCTWI.
Liabilities
Just a note on the numbers below – since these are liabilities, a negative number (a reduction in liability) is good, while a positive number (an increase in liabilities) is bad.
Credit cards (-83% Month, -94.9% 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, +0.9% YTD)
We are chipping away at these mortgages, and we’ve been paying off 0.2% – 0.3% of the balance each month. The yearly total has increased because I found an accounting issue with how I was tracking one of our loans.
At the rate we are paying off our mortgages we are 20+ years from retiring these loans.
The increase in the YTD was due to an accounting issue.
Primary residence mortgage (-0.4% Month, -2.0% YTD)
At our insanely low interest rate I don’t see any reason to pay this off early. I expect we’ll hold this mortgage for the next 29+ years.
Total liabilities (-0.5% Month, -1.2% YTD)
Liability reduction is much steadier and more predictable than the increase in the value of our assets. I expect that we are about 20 years away from being debt free (unless we decide to accelerate our payments for some reason).
Total net worth (-8.9% Month, -1.4% YTD)
We’ve dropped significantly under $10M, and it doesn’t look like we’ll be back about $10M anytime soon. I’m not too worried about it – all we can do is keep chipping away at our debt, saving money, and let time work its magic.
Conclusion
I’m not sure if I’ve ever lost $1M in a month before. But hey, you take the good with the bad, right? Hopefully we’ll see a market rebound in the next few months and we’ll be able to hit $11M in the next year.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?
$1M in a month is a big one but 40% of that is tied to the value of your home that only gets updated quarterly, which by it’s very nature will likely lead to more dramatic moves on each quarter end assumption a market that isn’t flat.
I prefer to hold the value of our house at cost + improvements. We bought our current house based on a value we locked in right before the first Covid lock downs happened in March. We did purchase only 50% of the property from my in-laws and that is the cost basis we hold is 50% of the formal appraisal we got when we agreed to do this.
We also know but are not factoring this into our net worth that the other 50% that we did not buy is currently coming to us through inheritance one day. Actually, the estate of my father-in-law (mother-in-law passed away in 2021) is set to be split 50/50 between my wife and her sister.
That said, I help my father-in-law manage his financials and in doing so know that right now he has enough other assets that the value of the property would come to us and the other assets would satisfy the other 50% of the estate to my sister-in-law. If at any point this changes, we will do one of two things:
(1) set up a separate investment account to help make up the difference so that we don’t have to take on a mortgage on the property to give my wife’s sister her part of the inheritance.
(2) Offer to buy additional equity to counter balance the gap.
The other thing for us is that our house doesn’t even get valued through Zillow or Redfin so we couldn’t really update it regularly without a formal appraisal. Speaking with my buddy who is a local RE agent and broker, the property value nearly doubled during the run up and even with the softness, we are still undervaluing the property by at least $500K in total.
Would you do this any differently?
Happy New Year!
Dom
P.S. Race to $20M?