“Houston — We have liftoff!”
While 2018 was a rather ho-hum year when it came to stock market returns, 2019 was an entirely different story. 2019 was like being tied by the ankles to a rocket ship, and then getting launched into the atmosphere at 18,000 mph. It was a wild ride.
While ‘one more rotation around the sun’ is a rather absurd delineator of investing performance, returns in 2019 definitely moved the needle…
Year End Net Worth
In 2019, the Tako family’s net worth grew by 25%. At the end of 2019 we had a total net worth of $3,733,597. It was quite a “rocket ship” of a year!
A $4m net worth now seems like a realistic possibility!
After 2018’s decline, it’s really good to see solid performance from our investments again in 2019.
Taken into context against against the S&P 500 however, these returns might not seem particularly impressive…. but there are a few important facts to remember here:
- We live off of our portfolio. We routinely use money from our taxable accounts to pay for living expenses. The S&P 500 does not have to include the cost of food, shelter, travel, and entertainment. Financially independent people need to eat, unlike an index. Our annual expenses in 2019 were $74,001.
- We purchased a new car in 2019 with cash. The cost was $10,400.
- We pay taxes. A lot of taxes! A significant portion of our assets are held in taxable accounts, so we pay real-world taxes on our earnings. The S&P 500 doesn’t have to pay taxes.
- The S&P 500 is a 100% invested figure and thus has the potential for larger returns. At this time, we hold around 20% of our taxable accounts in cash. Cash earns very little, but it does provide incredible stability for a family with bills.
- Fees are also included in our net worth number. Unlike the S&P 500, real people have to pay fees.
Frankly, I’m extremely pleased with this number. This year’s ‘rotation around the sun’ provided incredible investing returns! This is our largest annual jump in net worth since I started keeping track!
Unfortunately such large increases are very far from the norm. I try to tell myself every day that Mr. Market could easily take this wonderful gift away at any time.
To put it simply, Mr. Market is just as likely to return -29% as he is a positive 29%. This past year we were just lucky to be gifted with a very positive result.
The Taxable Accounts
Taxable accounts 1 and 2 are our primary investment portfolios. These brokerage accounts hold nearly 2/3rds of our net worth. This is where the majority of our dividend income is generated. We mainly hold individual stocks in these accounts, but also plenty of cash, a couple REITs, and one remaining batch of Preferred Shares.
These two taxable accounts are now worth a combined $2,439,210.
Unfortunately, if you look at the year-over-year net worth change in our accounts, Taxable account 2 appears to languish with a mere 22% return. This unfortunate side effect happened because I withdrew cash heavily from this account in 2019. I paid for a lot of our living expenses, and the new car from this account.
Despite heavy cash usage in 2019, around 20% of our taxable accounts remain in cash .
Dividends from the taxable accounts amounted to $58,576 for the year. I went into more detail on this figure in my December 2019 Dividend Income & Expenses post.
The Tax Deferred Accounts
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 increases 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. Unfortunately, performance in this account lagged in 2019 primarily due to the effects of the Trade War with China. I view this as a ‘non-event’ and expect returns will improve once all that nonsense is sorted out.
Although I report these accounts as part of our net worth, we mainly just leave these tax deferred accounts alone to grow. We don’t use these accounts to fund our lifestyle right now.
We’ll probably wait until our “official” retirement age before tapping into these accounts.
The Cash Account
The cash account included in our net worth number is a bank account we mainly used for paying regular monthly bills.
This account was at $14,226 at the end of 2019. This is not a significant change because the amount in this account fluctuates all the time as we pay bills — like our mortgage, daycare, food, utilities, and so forth.
Every few months we regularly refill this cash account with cash from the taxable brokerage accounts (as necessary), mainly using passive dividend income to fund our lifestyle expenses.
Real Estate Equity
The real estate equity category of our net worth is the value of our home (as represented by a “best estimate” of our home equity). While the local market really slowed down in 2019, owning a home is still very expensive in this area (a Seattle suburb). Zillow estimates the value of our home at $865,388. This is a 1.94% decline from 2018.
My feeling is that Zillow’s zestimate values tend to be a little inflated, so I continue to use 90% of Zillow’s number to estimate the value of our home. 90% of Zillow’s estimate for our home is $778,849.
We also continue to pay down our mortgage every month, which grows our equity. The balance of this mortgage is now down to $270,890. Subtracting one value from the other gives us $507,958 in home equity.
Last year we saw big home equity gains. This year the value our home equity declined. Oh well!
While it certainly was disappointing to see the value of our home decline in 2019, it’s important to remember this is just an estimate of what our local RE market is doing.
If I look at homes recently sold in my neighborhood, this 90% number actually seems a conservative estimate for what we could actually sell our home for today. Most of my neighbors have been able to sell for over $800k.
There’s no doubt that the year 2019 saw an incredible $749k increase in our net worth. It’s been said that “hubris doesn’t generate superior investment returns”, so I’m doing my best to remain humble about this fantastic increase.
It’s certainly fun to daydream and think we could hit $4 million in 2020, but I should point out that significant political and economic challenges lie ahead that could greatly affect the value of our net worth. Elections, trade wars, geo-political instability, wars, or even a recession could happen. All of these events would greatly effect how the markets value our assets.
My goal isn’t to worry about the wild swings in net worth that might happen in 2020. Instead, my goal is to continue living (primarily) off our investment returns and let the market do what it does best.
Mr. Market might value our assets up or down on any given day, but the cash we actually spend is still largely generated from dividends. I hope to grow this even further in 2020. Look for an upcoming blog post on my 2020 dividend growth goals very soon.
(And no, this blog isn’t a significant money maker either. I remain a relatively small and obscure personal finance blogger that doesn’t earn significant money from blogging.)
Still, 2019 was an incredible year for the Tako family’s net worth. I can’t help but be pleased with this positive return.
Best of luck to all investors in 2020!
[Image Credit: Flickr]