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Hello there everyone! Jacob here! The past few months have been quite a whirlwind, fitting in serving as a Teaching Assistant to a Transport Processes class 10-15 hours per week along with my normal Alzheimer’s disease research in graduate school and keeping up with blogging.
However, aside from being pretty busy, the past few months have also been very productive! In mid November, our Alzheimer’s disease paper got accepted for publication in the journal, Biomacromolecules. Then, the week before Christmas break, I finished defending my Master’s Thesis and also completed the requested revisions to another manuscript we were submitting to the journal, PLoS One, which has some of the strangest capitalization formatting of any word I type these days! haha
Anyhow, with 2012 coming to a close, it’s time to review the progress on my net worth, financial, personal, and blogging goals I’ve realized this year and also think about setting new/revised ones for next year! So, without further ado, let’s get started – first with reviewing my net worth growth during the 2nd half of 2012! 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, the 2nd half of 2012 went amazingly well from a financial perspective, which is pretty intriguing given how little “active” management I did relating to my finances! I’ve been able to make a lot of progress towards my personal, professional, and financial goals. 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 pretty 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.
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!
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
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.
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 +/- 5% off of the target allocation. This is my trigger that I need to rebalance that aspect of my portfolio.
% Cash (money market target 5%) 11%
% Non-inflation Protected Bond Funds (target 15%) 14%
% TIPS Bonds (target 5%) 4%
% International Equity (Target 11%) 9%
% International Emerging Markets (Target 11%) 12%
% Domestic Large Cap (Target 8%) 6%
% Domestic Small Cap (Target 8%) 9%
% Domestic Small Cap Value (Target 14%) 14%
% Domestic Large Cap Value (Target 13%) 12%
% REIT (target 10%) 9%
Analyzing my current asset allocation percentages, it appears that my current asset allocation is aligned with my target levels within the +/- 5% band limits with the exception of the cash portion.
However, this is fairly expected, given that I decided to keep 1/4 of the lump sum inheritance I received in November in a cash-equivalent account. I’ve been carrying around 10% of my overall net worth in cash for quite a while now, and I feel pretty comfortable with that level. Because of this, I plan to adjust my asset allocation target to 10% cash. Keep an eye out of a post coming soon about my revised investing strategy!
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?
- 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 July-December 2012? What are your thoughts about the strength of the market right now?
Do you think universal life insurance policies are a good option for tax-favored investment growth (see details listed above)?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/mplemmon/3203403862/lightbox/