2012 Year-End Review – Current Asset Allocation and Net Worth Growth – July-December 2012

LIQUID NET WORTH GROWTH (NOT INCLUDING CONDO NOR BLOG/GRADUATE FELLOWSHIP UNPAID INCOME TAX SAVINGS)

In October of 2011, I had to make a fairly significant change in how I calculate my net worth and asset allocation percentages each month. The change pertained to the cash I consistently save up throughout the year in a high interest online savings account (Dollar Savings Direct) in order to pre-pay self-employed or unpaid (from my graduate research fellowship) income tax to the government in the form of quarterly tax payments. What was happening was that the balance in this tax savings account (which was being counted in to the cash portion of my asset allocation) was becoming too large, and it started to skew my asset allocation calculations. 

Keeping this important change in mind, let’s continue…

OVERALL NET WORTH GROWTH

Important Note: In general, I operate on the belief that I shouldn’t compare, measure, and/or gauge my financial success based on the performance of any market index. In particular, this comparison should and is not used to make changes in my financial planning. Instead, as I mentioned above, I prefer to think of if I am/am not doing well by if I am meeting the specific financial goals I set out for myself. However, I still do think it is interesting to track how the market does, and for that reason, I include the S&P500 performance in my progress updates. 


From 29-June-2012 (when the last portfolio update was computed – see link below for more information) to the end of December, 2012 the S&P 500 index increased 7.29%. Pretty awesome in my book!

My Personal Finance Journey – 1st Half of 2012 Portfolio and Net Worth

During that time period (July-December 2012), my liquid net worth (excluding condo ownership and unpaid tax savings) increased 29%.

At first glance, this looks pretty amazing. And, I admit that it was pretty shocking to me when I calculated this figure several days ago. However, I cannot take full credit for this growth amount. Approximately 10% of this gain was attributed to a surprise lump sum inheritance from my great grandparents on my dad’s side.

However, that still leaves an additional 10% gain over and beyond what the market realized during this time. Reflecting on what occurred during the time period and the fact that my overall earnings have not been that different than normal, the only thing I can attribute this to is consistent savings through dollar cost averaging and maintaining a good asset allocation. As you can clearly see in the picture at the top of the post of the S&P500 performance over the past 6 months, the market went down about 8% in November, but has since recovered back up to a nice level. During this time when the equity market was going down, I maintained contributions to my Individual 401k/Roth IRA/Individual Vanguard mutual fund account, almost exclusively buying more equity shares.

CONDO EQUITY GROWTH

I now currently have 19.88% home ownership in my condo (up from 18.4% at the beginning of 2012), with this accounting for 18% of my real net worth (so net worth subtracting the condo loan – this is different from the net worth figure discussed above).

As I continue to learn more and more about advanced personal finance topics, I have become quite sure about one thing – I am not the biggest fan of aggressively building up as much home equity as is possible. I’ll likely discuss this topic in detail in a future post, but the gist is that while I am sure that home ownership is a great idea for personal finance success, I don’t believe that pre-paying a mortgage far beyond what is required is a very good investment. Why is this? Because the money that you pay over and beyond what is required (even though it is saving a little bit on interest, which is tax deductible, so not really that much savings) is not gaining you any type of return whatsoever – it is essentially money stuffed under a mattress.

Instead, I have been taking the money I have leftover after maxing out my Roth IRA and using it to contribute close to the maximum allowed for my Individual 401k account. More about this in the next few weeks when I discuss my financial goals! 🙂 

PERMANENT PORTFOLIO PERFORMANCE UPDATE

While holding the Permanent Portfolio from 29-June-2012 to end of December 2012, the Permanent Portfolio increased in value by 2.75%. During this same time period, the S&P 500 index increased by 7.29%. So, looks like it did not perform better than the general equity market during this time period. However, one really cool thing I’ve noticed about this portfolio is that it is indeed very stable – with it never dropping or gaining more than 1% or so in any given month. So, just as Harry Browne predicted, eh?!

We’ll continue to keep an eye on this portfolio in 2013 and beyond. Should be interesting to see what happens!

REVIEW OF CURRENT ASSET ALLOCATION (EXCLUDES CONDO AND TAX SAVINGS)

• Overall Fixed Income / Equity Allocation
• Currently, 29% of my net worth is invested in fixed income instruments (cash or bond funds), and 71% is invested in equity.
• This is 4% off from my targets for these categories of 25% (fixed income) and 75% (equity). So, it is still within my +/- 5% allowable band limits. In 2013, I’ve decided to make a slight modification to my overall asset allocation percentages, so keep an eye out for a post on that soon! 

• Equity Allocation
• In the equity portion of my portfolio, 71% is invested in US Domestic Equities with the remaining 29% being held in international equities. 
• This is perfectly aligned with my equity breakdown targets of 71% and 29%, respectively, for US Domestic and international holdings. So, no action is needed at this time regarding this component of the analysis. 

MY NEXT MOVES FOR THE January-February 2013 TIME FRAME WILL BE TO DO THE FOLLOWING:

• Start contributing to my Roth IRA for 2013. The contribution limit for people under 50 years old has been raised to $5,500 for 2013 (up from $5,000 in 2012). So, that is good news! 
• Even though I could technically contribute several thousand more Dollars to my Individual 401k for 2012 up until April 2013, I think I will hold off, and instead focus on maxing out my Roth IRA for 2013 first.
• Reconcile all of my blogging business income and expenses and graduate fellowship income for 2012 and start figuring out what I’ll owe for taxes for 2012. 
• I have paid my regular quarterly tax payments this entire year very consistently. However, apart from the quarterly tax payments I’ve already sent in, I have around $5,000 extra tax savings in a cash account because I figured I would owe more money come tax time than just the quarterly tax payments. 
• If it turns out that I won’t need most of these extra tax savings, I could simply plop these funds in to my Roth IRA and almost be done contributing to that for 2013. 
• Use my 1% home value home maintenance fund to fix various small things that are broken around my condo after 2.5 years of use. 
• These things include a closet door off the hinges, the light-switch in the bathroom not working all the time, and some pipes under the sink that need to be re-caulked. Once I get these things repaired, I will then need to replenish the depleted funds in the home maintenance account. 
• Lastly, another thing I want to look in to is the possible use of a universal life insurance policy as another way to obtain tax-advantaged long-term savings. 
• During the three years that I’ve been blogging about personal finance, universal/whole life insurance products are generally regarded as a ripoff/waste of money compared to term life insurance as far as providing a low-cost death benefit. And, to be perfectly honest, I have agreed with this line of reasoning. 
• However, while reading a book recently, they were mentioning that if you are careful in selecting and setting up the correct universal life insurance policy, you can contribute money after-tax now and are able to withdraw the money tax and penalty free at any time in the future. 
• In this way, even though a universal life insurance policy may not be the cheapest/most efficient way of getting a death benefit, it might be a superior way to accumulate savings for retirement compared to a 401k.
• Has anyone researched the possibility of using a universal life insurance policy in this way?

WISH LIST 

• At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund, whenever more money is needed to increase my domestic large cap asset class holdings. This gives better, broader diversification to the US stock market.