Mid Year 2013 Current Asset Allocation and Net Worth Growth – January-June 2013

Hello there everyone! Jacob here! The past few months have been quite eventful, with starting to do animal trials for our Alzheimer’s disease therapeutics in graduate school, getting engaged, and now, with the awesome Tour de Personal Finance going on!

Anyhow, with 2013 now being half over, it’s time to review the progress on my net worth goals I’ve realized so far this year! So, without further ado, let’s get started – first with reviewing my net worth growth during the 1st half of 2013! As always, if you have any questions, please ask via email or commenting below!

As I’ve mentioned before, the goal of this running net worth and asset allocation progress update series is twofold:

• 1) To share how I (as a fairly normal non-financial professional) approach various financial issues that come at me throughout life so that you can use my learnings to assist you in your financial decision-making, and
• 2) To make me more accountable in sticking to my various financial goals that I set forth by periodically evaluating my status and making adjustments.

Overall, I would say that the 1st half of 2013 went amazingly well from a financial perspective. I’ve been able to make a lot of progress towards my personal, professional, and financial goals (even raised a total of $11,000 for the MS Society with my MS Bike Ride!). And, I’ve been able to invest significantly in to reaching my blogging goals with the help of several amazing staff writers on the site the past few months! On top of that, the overall market has been doing very well during the past 6 months!

With all of the up and down that has occurred, let’s take a look and see how it affected my net worth progress…shall we?

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.

To remedy this, since October of 2011, I’ve started using a system of calculating my liquid net worth, which includes all of my various equity and fixed income holdings but excludes 1) my equity and debt related to my condo and 2) the amount of savings I have accumulated so far during the year earmarked to pay the tax man. I’ve decided that doing the analysis in this fashion helps me remain more objective in making financial decisions without being influenced by assets that are needed for shorter-term living/tax expenses.

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

Overall Net Worth Growth

From 27-December-2012 (when the last portfolio update was computed – see link below for more information) to the beginning of July, 2013 the S&P 500 index increased 13.68%. Pretty awesome by any standard you think about really!

2nd Half of 2012 Portfolio and Net Worth

During that time period (January-June 2013), my liquid net worth (excluding condo ownership and unpaid tax savings) increased 14.54%, which seems just about right since I follow a passive investing approach.

Condo Equity Growth

I still currently have 19.88% home ownership in my condo, with this accounting for 16% 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. 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 and maxing out my Roth IRA, then saving an equivalent amount in an after-tax account, and then using any that is then left over to contribute close to the maximum allowed for my Individual Roth 401k account.

Permanent Portfolio Performance Update

In November 2011, I became fascinated/interested enough in Harry Browne’s Permanent Portfolio asset allocation strategy in order to give it a small trial run with my own money (less than 1% of my liquid net worth). As such, I’ve decided (for fun!) to start tracking the performance of my small ETF version of the Permanent Portfolio in order to compare it to how the market is doing.

While holding the Permanent Portfolio from the end of December 2012 to the end of June 2013, the Permanent Portfolio decreased in value by 6.27%. During this same time period, the S&P 500 index increased by ~14%. 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, 34% of my net worth is invested in fixed income instruments (cash or bond funds), and 66% is invested in equity.
  • This is 4% off from my targets for these categories of 30% (fixed income) and 70% (equity). So, it is still within my +/- 5% allowable band limits.

• Equity Allocation
  • In the equity portion of my portfolio, 74% is invested in US Domestic Equities with the remaining 26% being held in international equities. 
  • This is within the tolerance banding limits of my equity breakdown targets of 70% and 30%, respectively, for US Domestic and international holdings. So, no action is needed at this time regarding this component of the analysis.

While the overall percentages for these categories look fairly good, a detailed look (table/listing below) at the allocation breakdown reveals the real story and provides for better analysis of the current state.

Remember: In order to maximize the benefits of your asset allocation strategy, a red flag goes off if your current % allocation in a category is greater than +/- 25% change from the target allocation. This is my trigger that I need to rebalance that aspect of my portfolio.

Analyzing my current asset allocation percentages, it appears that my current asset allocation is aligned with my target levels within the +/- 25% band limits. Thus, no action is needed at this time. 

My Next Moves For The 2H2013 Time Frame Will Be To Do The Following:

• Begin saving for the 2014 Tour de Vine National MS Society Fundraising event.
  • Next year, I’ll again be looking to contribute 5-10% of my annual income to the bike MS event that I do each year.
  • Thus, I’ll be looking to get an early start on saving the cash for this (using automatic monthly bank transfers to my ING Direct savings account) starting in August 2013.
• Use my 1% home value home maintenance fund to fix various small things that are broken around my condo after 3 years of use. 
  • These things include a closet door off the hinges, the light-switch in the bathroom not working all the time, the towel rack in the bathroom needing to be re-attached, 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.
• Set up and contribute to an Individual Roth 401k Account with Vanguard.
  • I added a new financial goal added during the 1st half of 2013 to continue building, optimizing, and balancing a Three-Legged Stool for Retirement
  • Since I am in the 15% tax bracket, I first maxed out my Roth IRA for 2013.  My next move has been to contribute an equivalent amount in an after-tax investment account in order to have money that is accessible for needs prior to retirement.
  • Now that I have completed that, I am going to work towards contributing to a Roth Individual 401k with Vanguard.
  • However, I hit a small hitch when I was notified by Emily at Evolving PF (a big thanks for the heads up by the way!) that I actually cannot count my graduate fellowship income as “earned income” for Roth IRA contribution purposes. This was quite shocking because I still have to pay all the taxes on it, but since the income is not reported on a W2, I cannot count it as income I can save for retirement. In order to read all of the details, check out Emily’s great post here.
  • Nevertheless, this leaves me with having to count on my self-employment income as the only “earned income” I can utilize for retirement savings / contributions. Because of this, I’ll have to make sure that my self-employed income (minus the tax-deductible portion for self employment tax) gets high enough this year to cover both 1) my Roth IRA contributions which I have already maxed out and 2) any contributions I want to make my Roth 401k before starting to contribute to my Roth 401k!
  • It’s important to note that with Individual 401k’s, even though you can  make contributions for a certain tax year up until the April tax deadline, you must have the account open by December 31st of the year you want to make the contributions for.
  • Since adding a Roth 401k component to my Individual 401k technically counts as a “new account,” I will need to make sure to have the Roth 401k portion set up before the end of this year, even if that means only funding it with $1k (which is the minimum required by the Vanguard STAR Fund, the fund that Vanguard offers with the lowest possible required minimum contribution).

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.

How about you all? How did you progress with your net worth in the January-June 2013 time-frame? What are your thoughts about the strength of the market right now? 

What financial challenges are you currently facing?

Share your experiences by commenting below!