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Personal Net Worth Calculation

So, I do a monthly balance sheet to calculate my net worth to keep me on the right track.  Now I’ve ran into an accounting problem: how to value my long-term, long-only, passive, index-tracking equity portfolio. I think it doesn’t make sense to value the portfolio on its market value because the volatility of equities renders the net worth calculation nonsensical. (F.ex, If the portfolio decreases in value by 5k during the month, while I save 3k of my after-tax pay, my net worth would decrease by 2k just because of stock market volatility, even though I managed to save 3k…)

Any ideas ?

If you're the first out the door, that's not called panicking

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My net worth has declined over the past few months as well, that’s how it is… Did you have the same thoughts as the market was rising? Gotta take the good times with the bad.

We’re gonna win so much, you may even get tired of winning. And you’ll say, 'Please, please. It’s too much winning. We can’t take it anymore. Mr. President, it’s too much.' And I’ll say, 'No, it isn’t!' We have to keep winning!

Yes I did. I’ve been trying to figure out this problem for quite some time now. The issue here isn’t a rising/declining market, it’s the volatility. The bigger the portfolio is compared to your monthly savings/ other non-volatile assets, the less the net worth calculation actually reflects your actual net worth, if you value the portfolio on its market value.  

If you're the first out the door, that's not called panicking

marking to market is fine. Why are you concerned?

If it’s an emotional driven response then you risk tolerance is a lot lower than you appreciate.

What are you trying to measure? If you want to measure how much you are saving, which is correlated but not actually your networth, then measure the cost basis of investments. That will tell you what you’ve saved, but your networth can be meaningfully higher or lower. 

rawraw wrote:

What are you trying to measure? If you want to measure how much you are saving, which is correlated but not actually your networth, then measure the cost basis of investments. That will tell you what you’ve saved, but your networth can be meaningfully higher or lower. 

That’s what my buddy does, I think it might be the best solution. 

If you're the first out the door, that's not called panicking

Galli wrote:

marking to market is fine. Why are you concerned?

If it’s an emotional driven response then you risk tolerance is a lot lower than you appreciate.

I disagree. If you bought your house in 2004 for 200k and in 2007 some real-estate agent came by and assessed your house to be worth 500k, would you really think that your net worth has increased by 300k? You plan on living in that house for the next 20yrs, its short term price volatility has nothing to do with your net worth.   

If you're the first out the door, that's not called panicking

Maybe you can do it based off some type of intrinsic or target value using an assumed rate of return, like pensions do to calc their funding status but regardless, you are using questionable methods to value level 1 assets. Maybe a psychological problem but definitively not an “accounting problem”.

We’re gonna win so much, you may even get tired of winning. And you’ll say, 'Please, please. It’s too much winning. We can’t take it anymore. Mr. President, it’s too much.' And I’ll say, 'No, it isn’t!' We have to keep winning!

Codtrawler87 wrote:

Galli wrote:

marking to market is fine. Why are you concerned?

If it’s an emotional driven response then you risk tolerance is a lot lower than you appreciate.

I disagree. If you bought your house in 2004 for 200k and in 2007 some real-estate agent came by and assessed your house to be worth 500k, would you really think that your net worth has increased by 300k? You plan on living in that house for the next 20yrs, its short term price volatility has nothing to do with your net worth.   

Yes your net worth increased. You can sell it and rent something out while investing the money. You don’t even need to sell, you can finance the property and rent it out. Always mark to market. 

I love my cheese. I got to have my cheddar.

If it’s on a long term basis, do not mark to market on a daily basis. Use annual basis instead. Doing so you might solve for a short term volatility what is exactly not your concern.

It is much more of concern how to value your human capital than a financial one.

play it again, Sam

Codtrawler87 wrote:

Galli wrote:

marking to market is fine. Why are you concerned?

If it’s an emotional driven response then you risk tolerance is a lot lower than you appreciate.

I disagree. If you bought your house in 2004 for 200k and in 2007 some real-estate agent came by and assessed your house to be worth 500k, would you really think that your net worth has increased by 300k? You plan on living in that house for the next 20yrs, its short term price volatility has nothing to do with your net worth.   

Yes your net worth increased. You either need to decide you aren’t measuring net worth or understand net worth is not subject to what you bought it for, but what it’s worth. 

House example and stock example are both are part of your net worth. If house price went up, you obviously benefit. However, you sabotaged the example using the real estate agent, since that is not substantiated by market action. If someone came and offered you $200k more for the same house, are you going to say you didn’t make $200k? 

“I think it doesn’t make sense to value the portfolio on its market value because the volatility of equities renders the net worth calculation nonsensical.”

Sorry, this statement doesn’t make sense at all.  You can choose to ignore volatility for practical purposes, but that’s the price of the stocks. They are established through real price action of identical units of securities, not some theoretical BS like you made up for the house. In other words, price action “proves” the price of a stock at the moment, even though it can change a lot in the future. It’s not the price appraised by some stock broker or your cousin Boris. 

“Visit the Water Cooler forum on Analyst Forum. It is the best forum.”
- Everyone

Volatility still exists ur just not getting a price check. 

I love my cheese. I got to have my cheddar.

ohai wrote:

House example and stock example are both are part of your net worth. If house price went up, you obviously benefit. However, you sabotaged the example using the real estate agent, since that is not substantiated by market action. If someone came and offered you $200k more for the same house, are you going to say you didn’t make $200k? 

“I think it doesn’t make sense to value the portfolio on its market value because the volatility of equities renders the net worth calculation nonsensical.”

Sorry, this statement doesn’t make sense at all.  You can choose to ignore volatility for practical purposes, but that’s the price of the stocks. They are established through real price action of identical units of securities, not some theoretical BS like you made up for the house. In other words, price action “proves” the price of a stock at the moment, even though it can change a lot in the future. It’s not the price appraised by some stock broker or your cousin Boris. 

The point I was trying to make with the house example was to show that if your holding period for an asset (be it your equity portfolio or your house) is long (20-30years), the effects of the month-to-month volatility of your assets on your net worth lessens the informational value of your personal balance sheet.

Say my goal is to accumulate 500k of assets in 5 years. I buy an asset (equity/house/bonds, whatever), and all of the sudden the asset’s value spikes to 500k. Did I reach my goal ? From an accounting perspective, people would probably say yes. But from a personal balance sheet perspective, I’m not so sure.  

If you're the first out the door, that's not called panicking

ohai wrote:

House example and stock example are both are part of your net worth. If house price went up, you obviously benefit. However, you sabotaged the example using the real estate agent, since that is not substantiated by market action. If someone came and offered you $200k more for the same house, are you going to say you didn’t make $200k? 

You’re forgetting the holding period. Potential sale can happen in 20 years at the earliest. 

If you're the first out the door, that's not called panicking

You are over thinking this… 

“Say my goal is to accumulate 500k of assets in 5 years. I buy an asset (equity/house/bonds, whatever), and all of the sudden the asset’s value spikes to 500k. Did I reach my goal ? From an accounting perspective, people would probably say yes. But from a personal balance sheet perspective, I’m not so sure.”

Yes, you did make your goal. Now you can just put your $500k into US Treasuries and guarantee your financial goal. Personal “balance sheet” != accounting?

Volatility over a long period makes your future net worth uncertain, but it’s still range based - either $500k +/- 30%, or $1 million +/- 30%. The second one is still twice as good as the first one. 

“Visit the Water Cooler forum on Analyst Forum. It is the best forum.”
- Everyone

Darned volatility. broken heart 

“Mmmmmm, something…” - H. Simpson

Wait, are we assuming homes are in net worth?

#FreeCVM #FreeTurd #2007-2017

where is lord of pensions?

"You want a quote? Haven’t I written enough already???"

RIP

Lol actually a good example would be like bitcoin. For example say you had 100k and it rose to 1.5 million. You could be worth 1.5m but you are capped to a weekly sale of 20k a week. So you couldn’t even liquidate it fast enough to recognize your net worth before it tanked in less than a year. 

I love my cheese. I got to have my cheddar.

This is dumb. Volatility of assets isn’t a variable in net worth calc… If you don’t like its effect on month-to-month calcs then only update portfolio value quarterly/annually.

Hey Hamilton, have a holly jolly Christmas.

Codtrawler87 wrote:

The point I was trying to make with the house example was to show that if your holding period for an asset (be it your equity portfolio or your house) is long (20-30years), the effects of the month-to-month volatility of your assets on your net worth lessens the informational value of your personal balance sheet.

It looks like the answer is to liquidate your long-term investments in index funds and convert to cash - this would greatly increase the “informational value” of your personal balance sheet.

Mobius Strip wrote:

Codtrawler87 wrote:

The point I was trying to make with the house example was to show that if your holding period for an asset (be it your equity portfolio or your house) is long (20-30years), the effects of the month-to-month volatility of your assets on your net worth lessens the informational value of your personal balance sheet.

It looks like the answer is to liquidate your long-term investments in index funds and convert to cash - this would greatly increase the “informational value” of your personal balance sheet.

Thank you for your 2 cents!

If you're the first out the door, that's not called panicking

Maybe you can move all your index funds into a SPE and then you can buy and sell it to yourself before any mark. If the value drops sharply, just book goodwill.

We’re gonna win so much, you may even get tired of winning. And you’ll say, 'Please, please. It’s too much winning. We can’t take it anymore. Mr. President, it’s too much.' And I’ll say, 'No, it isn’t!' We have to keep winning!

just to double down on ohai’s comment, you should be adjusting your risk allocation to match your risk tolerance. if net worth volatility bothers you and you can achieve your goals by investing in fixed income securities instead and experience a smoother balance sheet experience over time, maybe that is better suited to you. if you have a high risk tolerance and you meet your goals, you can either decide to lock in the certainty or adjust your goals higher. pretty simple. CFA level 3 covers this in entirety.

I just trying to figure out how to track my asset accumulation so that month-to-month volatility doesn’t make the month-end calculation pointless.This has nothing to do with risk tolerance. I really couldn’t care less what my portfolio is worth in 2-3 years. I’m actually hoping that my index tracking portfolio will tank massively this year so that I can deploy the war chest I’ve been accumulating. 

Anyways thanks for the input fellas!

If you're the first out the door, that's not called panicking

Then just use a rolling 6M or 12M average…

I mean, it kind of seems dumb.  Tracking your net worth on a monthly basis but whining because its noisy or volatile on a monthly basis.  Maybe just not track in on a monthly basis?enlightened

#FreeCVM #FreeTurd #2007-2017

i track my net worth religiously. but i should have been storing monthly data to chart it (would have been cool to see the fluctuations) as of right now i just keep the end of the year net worth calc. but i may change that up! might req too much work tbh though lol. plus it isnt as pretty in data form!

I love my cheese. I got to have my cheddar.

I track my net worth monthly. The monthly move mostly depends on how the market is doing so I guess if you wanted you could also track details of the movement i.e. Unrealized gains = xxxx Contributions = xxxx or like some people have mentioned price the investments quarterly, semi-annually etc

I receive broker quotes on my home on a quarterly basis and third-party appraisal annually. Also, my entire portfolio (stocks, bonds, house, rental properties, kids) is audited by big four annually, rotating providers every three years. It’s really the only way my net worth can have any credibility to outsiders.

you basically need to come from a target school pedigree/work at prestigious firm in the US/have a really good connection.

- AF hivemind