Quarterly Investment and Net Worth Review

April 6, 2009 by  
Filed under Financial Planning, Investing

net_worthThe first quarter of 2009 has ended. Thus, it’s time to formally re-visit a couple of performance metrics in the Mr. and Mrs. ToughMoneyLove financial empire. (OK – our financial realm is more like a hamlet than an empire but it’s still important to us.)

Financial Performance – Separating the Wheat from the Chaff

By “performance metric” I am not referring to our credit scores. I don’t know my credit score – never have. In fact, my goal after we pay off our remaining mortgage is to never use credit again. Show me someone who brags about their high credit score and I’ll show you someone who is a cherished and captive target of the credit score industry, no more  – no less.

For us, the premier financial event in the first quarter was paying off the mortgage on our second home. That won’t be reflected as a change in our net worth because it just swapped cash for debt. It also won’t show up in our investment returns, even though by paying off the mortgage we realized a tax-free return of 5.75%, the interest rate on that mortgage.

Quarterly Investment Returns

All of our investments are included in what I refer to as our retirement portfolio. These are the assets we will use to provide income when I stop practicing law (or when I substantially cut back). These include what will be our “retirement emergency fund” as well as mutual and exchange traded funds with a long term horizon.

For the quarter ending 3/31/2009, the internal rate of return for our retirement portfolio was -5.53%.  (The “portfolio internal rate of return”  is, stated simply, the rate of return produced by each dollar in an investment for the amount of time that dollar is in the investment. It includes re-invested dividends.)

One benchmark index – the Dow Jones Industrial Average – fell 13% in the first quarter so by comparison, our 5.5% drop doesn’t look too shabby.

There were two asset classes in our portfolio that sort of anchored us to a “better than the Dow” performance. The first was Vanguard Inflation Protected Securities (VIPSX) which gained 5.25% in the first quarter. We triple-overweighted in VIPSX in 2007 when I became concerned about inflation. The inflation hasn’t hit yet but the safety aspect of inflation protected Treasuries has attracted a lot of buyers, driving prices up.

The other anchor is also a safety play (for our retirement emergency fund): I-Bonds. Ours were acquired beginning in 2000 and are collectively yielding over 5%, all tax deferred and inflation protected.

In the second quarter we will continue to increase our cash-equivalent holdings to lower our overall market risk. I am also investigating and testing strategies for creating alternative income streams from (mostly) passive web properties.  I approach this effort as a way to compensate for a diminished retirement nest egg. Assuming a 4% portfolio withdrawal rate in retirement, generating $1000/month in relatively passive online income is the equivalent of having an additional $300,000 invested in the market.

Net Worth Changes

Our net worth is an important measure of our financial progress. I have had lots of people (mostly other bloggers who love talking about credit scores) disagree with me on this point. If you have a guaranteed government pension (with cost of living adjustments) that will meet all of your needs, then you don’t need to care about net worth. That doesn’t apply to us.

Our net worth fell by 2.1% in the first quarter, all due to the 5.5% loss in our investments. Compared to the end of first quarter 2008, our net worth is 6.1% lower. Not too bad under the circumstances. Investor Warren Buffet lost 40% in personal net worth in 2008. Who’s the genius now Warren? (Sorry – couldn’t help myself on that one.)

Assuming that the stock and real estate markets have found a bottom (who can tell?), we should see substantial positive movement  in our net worth through the remainder of 2009.

Comments? Criticisms? How are your numbers looking after the first quarter?

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6 Responses to “Quarterly Investment and Net Worth Review”
  1. kitty says:

    “we realized a tax-free return of 5.75%, the interest rate on that mortgage.”
    Was 5.75% your mortgage rate? If so, why do you compare it with tax-free investments? Mortgage interest is tax deductible, so your after tax rate of return is actually smaller – depending on your tax bracket – better compared with taxable investments.

    So, for comparison purposes, it is best compared with taxable bond interest (I say bond rather than CD because bond’s interest is simple interest and CD interest is compounded interest and your mortgage interest is not compounded – it is actually getting smaller as you repay the interest).

    • Kitty – You make a good point although the tax benefit of mortgage interest is often overstated. The real benefit applies only to the extent that your itemized deductions exceed your standard deduction. If you file a joint return and have a total of $15,000 in deductions (including $12,000 mortgage interest), you are only benefiting by $4100 ($15,000-$10,900) multiplied by your effective tax rate. So you can’t really compare the mortgage payoff to a fully taxable investment either.

  2. SJ says:

    “Show me someone who brags about their high credit score and I’ll show you someone who is a cherished and captive target of the credit score industry, no more – no less.”

    This is so true and funny… but to achieve the dreams that people think promised it’s the only way.. That said I do track my credit report to see if weird things pop up…

    And kitty’s point is pretty good, comparing apples w/ apples etc.

    My first quarter is just slow n’ boringly climbing… grad salary, no real needs/expenses …
    Tho I am finally getting long-term investments set up (yay~~~)

  3. My Journey says:

    My networth is so deep in the negative range that I just don’t feel the need to track just yet (thank you law school loans and a mortgage)! I know we have traded comments on fixed annuities and insurance related products.

    Where are these in your net worth? What are your thoughts on these products?Why do/don’t you have them?

  4. kitty says:

    @TML – it depends on individual circumstances. I live in NY state where state income taxes alone can be more than standard deduction.

    I don’t know of your situation, so I certainly cannot say if in your case it was all deductible or not. I assumed it was because from what I read you have high income and two houses, so I thought income and property taxes alone are likely to give you enough deductions, but living in NY state, it’s easy to assume incorrectly.

    However, the fact that CD interest is compounded while mortgage interest is paid on ever reduced principal is often overlooked. Bonds act more like interest-only loans, but they are closer to mortgage interest than CDs. I do understand the desire not to have a mortgage in retirement, though. After all, I did pay off mine several years ago. My interest was 7% though, it was taken when rates were higher. But… if I decided to upgrade now, I’d probably take a mortgage for the price difference instead of paying cash – the rates are too low to pass.

    My first quarter was OK too, helped a lot by the recent rally. My rate of return in 401K are also -5.5% since last year. Outside of 401K, I am ahead – helped by the fact that my employer’s stock is up since last year and is only down 10% since 2007 (although it’s down 23% since it’s multi-years high last summer). I have more of it than I should have: legacy of years of participating in ESPP with only a few sales. Sold some in 2007, planned to sell in 2008 but missed the opportunity; really need to sell more of it this year. Overall my net worth grew this quarter. This can change if the market turns down again.

  5. Roger says:

    Not bad, Mr. TML. Sounds like you fared better than many in the recent downturn.

    Overall, I’m relatively stable for the first quarter. The advantage of being young and just starting to invest is that the amount of new money I’ve been adding to the pot is as much (or more, in some cases) than the amount I’ve lost in this downturn. Hopefully, I’ll be able to profit when things pick up again.

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