Happy New Year! It’s time again to do the final accounting for 2021 investment gains, and this is traditionally the one-time a year I look at our family’s net worth.
Why only once a year? Looking at net worth is a lot like taking the temperature. It’s changing constantly (like the weather), and almost certainly “wrong” only moments later.
Focusing on this ‘net worth’ number itself is probably not a good idea. Instead, it’s probably more productive to focus on the activities which improve net worth, rather than the number itself. Activities, like saving, investing, and traversing whatever financial storms the world might throw your way.
This is primarily why I try to ignore net worth in my blog posts. That said, it also feels great to occasionally see the progress of our hard work over time — Hence my once a year net worth post!
Year End Net Worth
Financially speaking, 2021 was an amazing year. At year-end, our net worth grew to $5,613,512. That’s an increase of $1,484,379 from last year. Holy Cow!
Yep, we broke $5 million this year! A gain of 35%! It was like we strapped a rocket ship to our net worth. Nearly every stock or fund we chose to own did extremely well in 2021. After a lackluster year in 2020, this was a fantastic improvement!
No, I’m not trying to brag here. All this growth seems outstanding to me, but it needs to be taken into context. When considered against inflation (nearly 7%), our real return is much lower.
Here’s the 3-year breakdown by each account:
Clearly, the gains were not evenly distributed across all of our accounts and assets. Our home value (for example) went completely crazy in 2021. Real estate alone drove a $400k gain for the year. That’s a crazy-pants 68% increase in one year!
Why did people start bidding-up real estate in 2021? That’s a very good question! I wish I fully understood why! (There seems to be a lot of factors). Even with no changes or improvements, our house is worth $400k more.
Meanwhile, the rest of our investment accounts made steady progress, mostly matching the S&P500 (they’re partly invested in index funds).
Still, this was the largest net worth increase I’ve seen since I started tracking the numbers:
Compared to the S&P500’s annual return of 27%, our results this year seem great! But here’s a few important things you should consider when looking at the results:
- 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 still need to eat, unlike an index fund.
- We pay taxes. A lot of taxes! A significant portion of our assets are held in taxable accounts. We pay real-world taxes on our dividends and capital gains. The S&P 500 doesn’t have to pay taxes.
- The S&P 500 is a 100% invested figure. This means the S&P has the potential for much larger returns during “up years” than portfolios which are not fully invested. At the end of 2021 we held around 7% of our taxable accounts in cash. Cash earns very little, but it does provide stability for a family with bills.
- Fees are also included in our net worth calculation. Unlike the S&P 500, real people have to pay fees on funds and (some) stock trades. While fees are not a significant expense these days (less than 1%), they do reduce our overall return.
Even considering all these ‘drags’ on our performance, I’m quite pleased with how our investments performed this year.
Taxable accounts 1 and 2 are our primary investment portfolios. These brokerage accounts hold nearly 3/5th’s of our net worth. This is where our taxable dividend income is generated (the dividend income number you usually see in my monthly reports).
We mainly hold individual stocks in these accounts, but also plenty of cash (about $250k in money market funds), and a couple of REITs.
These taxable accounts are worth a combined $3,395,570.
Unfortunately, performance of Taxable Account 2 was not as good in 2021. It lagged our other accounts primarily because this is the account where hold a few airline and energy stocks. They did terrible in 2020 AND 2021. Long-term who knows if the airlines are going to come back, but I’m trying to think long-term.
Dividends in our taxable accounts amounted to $63,238 for the year. I’ll post more information about this dividend income when I get around to writing my December 2021 monthly report.
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 comparable to the increases in relevant indexes (minus fees) for the given funds or ETF’s.
Tax Deferred Account 4 is a small IRA that I invest in three individual stocks. Yep, just three stocks and I started with a mere $8,000. Performance in this account was excellent in 2021, with a 28% increase over 2020. Due to the small number of holdings in this account it tends to be more volatile than other accounts. It continues to do extremely well.
While the taxable accounts (discussed earlier) are used to fund our lifestyle, our tax deferred accounts are simply left alone to grow. We don’t use these accounts to fund our lifestyle, and probably won’t for many years.
We’re going to wait until the “official” penalty-free retirement age of 59.5 before we begin using the money in 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 ended the year at $27,267, which was essentially unchanged from 2020 (a minor decrease only). The amount of cash in this account fluctuates constantly as we pay regular monthly bills — like our mortgage, daycare, food, utilities, and so forth.
Small changes in this account are totally expected, but we try to keep around 6 months of expenses in cash to deal with emergencies or other unexpected occurrences.
Real Estate Equity
Real estate equity is the value of our home equity (as represented by a “best estimate” of our home value). We do not currently own any rental properties (besides a few REITs).
Just like 2020, owning a home is still very expensive in our area (a Seattle, WA suburb). 2021 saw a steady increase in the price of homes in our area. Zillow estimates the value of our home at $1,379,800.
My feeling is that Zillow’s ‘zestimate’ tends to be a little inflated when I compare to other homes sold in our neighborhood. Just like previous years, I continue to use 90% of Zillow’s number to estimate the value of our home, which works out to be: $1,241,820.
Just like last year, we pay-down our mortgage every month, which grows our equity. The balance of our home mortgage is now $253,496.
Subtracting one value from the other gives us $988,323 in home equity. This is an amazing increase in just one year!!
While it’s fun to see our home equity increase like this, please remember this is only an estimate of what our local RE market is doing. My “90% of Zillow estimate” could be off by thousands of dollars.
When I look at recent neighborhood comparable home sales, they’re all over the place — from $1.2 to $1.7 million. It’s fairly safe to say the value of our home fits somewhere between those two numbers
After such an incredible year, I’m absolutely stunned to see the final results. Never would I have expected such an incredible gain during a pandemic… but investors had excess cash to spend and they bid-up the price of assets in 2021.
Obviously large market gains like this can easily go in the opposite direction when the tide eventually changes. I’m not going to suddenly increase my spending, or buy a silly sports car because of a market upswing. Caution is prudent. Market gains can fluctuate wildly (both positively and negatively), and it makes sense to keep our regular spending tied to dividend income (aka business earnings).
With the Shiller PE at an epic 39, I’m keeping plenty of cash in-hand, especially considering the Fed might raise interest rates any day now. Could 2022 see a big market downturn? I guess we’ll find out!
Thanks for a great 2021 everybody!
[Image Credit: Flickr]