I’m not going to sugar coat the obvious here… the Tako family net worth declined in 2018. The year 2018 turned out to be a perfect showcase for stock market volatility.
Most of the year the stock market was in a happy place — The economy was growing, consumers were borrowing and spending more, and unemployment was also super low (all of which are important ingredients for a rising stock market).
It looked as if 2018 was going to be yet another year of positive stock market returns. The first half of the year was going great… Then, good old Mr. Market went on a bender in November and things just got crazy!
In the remaining two months of 2018, the U.S. stock market declined by almost 20% from its highs in October. The S&P 500 ended the year down -6.24%.
Where the markets led the way, our net worth followed…
Our Year End Net Worth
In 2018 the Tako family net worth fell by -3.58%, giving us a total net worth of $2,984,373. Yep, we fell under the $3 million mark at the end of last year.
Taken into context against the losses of the S&P 500, that doesn’t sound so terrible, but really our net worth fell by $110,689. This is a HUGE amount of money to lose.
Compared to the S&P 500 you might say “That’s not so bad!”, but it’s worth noting we have a few disadvantages that continue to be a drag on our net worth:
- We pay taxes. A lot of our money is held in taxable accounts, so we pay real-world taxes on our earnings. The S&P 500 doesn’t have to pay taxes.
- At this time, we hold around 30% of our taxable accounts in cash. Cash earns practically nothing. The S&P 500 return is a 100% invested figure and thus has the potential for bigger returns.
- Fees are also included in our net worth number. Unlike the S&P 500, real people have to pay fees.
- We routinely use money from our taxable accounts to pay for living expenses. The S&P 500 number doesn’t include the cost of food, shelter, travel, and entertainment. Financially independent people need to eat, unlike an index.
If you dig into the chart above, you’ll notice that our net worth was helped immensely by gains in the real estate category. The local real estate market cooled off significantly in 2018, but it still remained quite positive for the year.
Without that very positive contribution, our 2018 declines would have been far worse. Thank you, local housing market!
This didn’t stop Mr. Market from crushing all of our other accounts however. It created the first annual decline in the Tako family net worth since we started this Financial Independence Journey.
About The Taxable Accounts
Taxable accounts 1 and 2 are our primary investment portfolios, and hold nearly 2/3rds of our net worth. This is where the majority of our dividend income is generated (and where most of our losses occurred). Those two taxable accounts are now worth a combined $1,887,068.97.
We mainly hold individual stocks in these accounts, but also a few REITs, a couple Preferred Shares, and some cash in these accounts.
Actually A LOT of cash. I call it our Big Fat Cash Pile. Around 30% of our taxable accounts is in cash right now.
Dividends from these taxable accounts amounted to $51,230 for the year. I went into more detail on this figure in my December 2018 Dividend Income & Expenses post, but our annual dividend figure did not exceed our dividend growth goal for 2018 (goal is explained here).
About The Tax Deferred Accounts
The Tax Deferred Accounts 1, 2, and 3 are our various 401k’s and IRA’s. These tax deferred accounts are invested mainly in Vanguard Index funds, along with a little employer stock left over from when we both worked at public companies.
Annual performance of these accounts was reasonable considering the declines in relevant indexes (minus some very small fees) for the given funds or ETF’s.
Tax Deferred Account 4 is a small IRA that I invest in individuals stocks. Performance in this account has been good. I started this account in 2016 with $7,068.64. This account has now grown to $14,021, but this number is down -3.39% from its high at the end of 2017.
Although I report these accounts as part of our net worth, we mostly just leave the tax deferred accounts alone to grow. We’ll probably wait until the “official” retirement age of 59.5 before actually tapping into them.
In other words, we don’t currently use these accounts to generate income or otherwise fund our lifestyle.
About The Cash Account
The cash account included in our net worth is a bank account we mainly used for paying regular monthly bills.
This account was up slightly to $8,904, but this change is hardly significant. Really, the amount in this account fluctuates all the time as we pay bills — like our mortgage, daycare, food, utilities, etc.
Every few months we regularly refill our cash account with cash from the taxable brokerage accounts (as necessary), mainly using our passive dividend income to fund our lifestyle expenses.
About The Real Estate Equity
The real estate equity category is the value of our home, as represented by a “best estimate” of our home equity. As I’ve mentioned on the blog over the years, we live in a very high cost of living area. While the local market has cooled down considerably, owning a home is still very expensive in this area (a Seattle suburb).
Zillow estimates the value of our home at $885,716. (That’s a 5.5% increase over 2017)
Like most people, I feel that Zillow’s zestimate values tend to be a little inflated. So, like last year I continue to use 90% of Zillow’s estimate for the value of our home. 90% of Zillow’s estimate is $797,144.
Using (recent) comparables from homes sold in my neighborhood, the 90% number seems like a fairly accurate representation of what we could actually sell our home for today.
We also continue to pay down our mortgage every month, which grows our equity in the home. The balance of this mortgage is now down to $279,142. Subtracting one value from the other gives us $518,002 in home equity.
In general, I would say that the local real estate market has been very good to us, and the continued growth of large tech companies in the area (like Amazon, Microsoft, Facebook, and Google) continue to fuel the rise of local home prices.
This is unlikely to change anytime soon. I fully expect local home prices will continue to rise as these major employers continue to grow in the area (we’re like a cheaper version of Silicon Valley).
Ultimately that growth (and accompanying high salaries) should keep driving-up demand for homes close to those local tech company campuses.
The most common definition found floating around the internet for “Financial Independence” maintains that individuals who are FI no longer need job income to live.
But are they really financially independent from the whims of the stock market? Could they continue to live that same lifestyle with a decade of bad returns? (Yes, “lost decades” really do happen.)
Being able to say “yes” to that question has always been one of the key motivators in my quest for Financial Independence. That’s real independence. Job independence is only one part of the FI equation.
Although 2018 was an ugly financial year for the Tako family, we continue to live (primarily) off our investment returns. The markets may value our assets up or down on any given day, but the cash we actually spend is largely generated from dividends.
… and no, this blog doesn’t really make any money either.
To put this another way — We’re extremely isolated from the effects of a volatile stock market. We don’t need to sell when the market is down in order to generate cash for living expenses.
This gives the Tako family considerable financial security that keeps me sleeping very well at night. In fact, I can honestly say that I didn’t lose a wink of sleep when the market fell 10% during the last week of 2018. I merely shrugged my shoulders and went about getting a good night’s rest.
Yes, our net worth fell under $3 million dollars, and that’s kind of a bummer… but we continue to remain A LONG WAY from the poor-house. With over 8 years of expenses stashed away in cash (primarily in money market accounts), our financially independent lifestyle continues to feel very secure.
Good luck to everyone in 2019!
[Image Credit: Flickr]