Thursday, June 4, 2009

net worth history

I believe that net worth is a very important measure of one's financial health. Keeping your net worth statement in mind when making financial decisions will usually lead you to make the correct choice. Most of successful personal finance comes down to trying to grow your net worth. With that being said, I wanted to look at my net worth progression over the past few years.

YEAR ONE May, 2006 to May, 2007
  • Net worth grew 108%
  • Started the year with $0.77 of debt for every dollar of assets and ended the year with $0.60 of debt
  • Started the year with a house value that made up 83% of our total assets and ended the year at 77%
  • S&P 500 index was up roughly 18% over the year

YEAR TWO May, 2007 to May, 2008

  • Net worth grew 40%
  • Started the year with $0.60 of debt for every dollar of assets and ended the year with $0.51 of debt
  • Started the year with a house value that made up 77% of our total assets and ended the year at 70%
  • S&P 500 index was down roughly 6% over the year

YEAR THREE May, 2008 to May, 2009

  • Net worth grew 5%
  • Started the year with $0.51 of debt for every dollar of assets and ended the year with $0.51 of debt
  • Started the year with a house value making up 70% of our total assets and ended the year at 66%
  • S&P 500 index was down roughly 38% over the year

YEAR FOUR PREVIEW The markets are due for a good year, and we are due for a large net worth increase as we fuelled the fire with extra funds during YEAR THREE. After all it can't get much worse than YEAR THREE.

What do you think a strong percentage long term annual compounded net worth growth rate would be?

Consider that a good investment rate of return is considered to be 10%+, but with net worth, debt is being paid off at the same time, and one's home makes up a good percentage of assets in most cases.


traineeinvestor said...

It depends on (among other things), your asset allocation which will, in turn, depend on factors such as age/proximity to retirement, number of dependants etc.

A person with a high amount of net worth tied up in their home may well find that fluctuations in the value of that home will have a significant influence on total return. However, the influence of the home should decline over time as more money is diverted to other investments. Likewise, a person who has acheived their financial goals may well choose to shift to lower risk assets with lower expected returns - in effect prioritising wealth preservation over wealth creation.

As a benchmark, you should be aiming to produce returns on your investments (net of tax) which are at least:

1. higher than the after tax cost of any debt you may have (including home mortgage). If yoru returns are lower than this, then you are better off paying down the debt (possibly subject to diversification issues and, if your circumstances so require, an emergency fund);

2. higher than the after tax return on long term government bonds of a highly rated country/government (generally being the lowest credit risk available).

The other way of looking at it is to work backwards and ask: what rate of return do you need to earn in order to acheive your financial objectives within the desired time frame? You should take into account furture savings expectations, taxes etc etc. Once you know the answer to this question, you can allocate your wealth to a portfolio of assets which collectively has at least the potential to meet your objectives. As a further part of this process, you should sk how realistic your assumptions are and how much risk you are assuming with yor asset allocation - in effect are you being realistic or have you spent too much time listening to the promotors of shoddy investment products?

When I last did this exercise two years ago, I cam up with a number of 6.7% pa (after tax) which I thought would be quite easy - until last year when I suffered large losses in the equities market and the real estate market.

optionsnut said...

My retirement planning is 6-8% target growth and i am much like you nearly 100% equities.

Yours like mine is similar in growth charts due to the 'elephant' syndrome.


Sampson said...

While good rates for investment returns can be set (based on historical equity markets growth rates), I don't think its as easy to define for net worth.

Networth % changes are too dependent on the base net worth used for comparison. Growing 100% when your networth is $10k is much different than if had $100k. It will also be dependent on income.

I believe that the $ amount increase in networth in relationship to one's salary (i.e. savings rate + growth on investments + debt paydown) is much more important.

DirtyOldMan said...

I think this is about reaching goals.

If your goal is to accumulate a billion dollars, you better show very high growth rates.

If your goal is to have a fairly secure financial future, now it depends. For example, I am in my early 40's and I have decided to slow down my saving rate, through either spend more or earn less (maybe both). Why? Because I have accumulated enough assets to reach my long-term financial goals. I do not need to grow my net worth as fast as in the past.

Do you think that a *insert number*% growth rate will enable you to meet your financial goals. If not, either increase your rate of growth somehow or maybe readjust your goals.

MG (moneygardener) said...

It is important to note that savings will really affect net worth in a big way when your net worth is lower. As you net worth grows, your rate of growth depends on equity markets, bond markets, real estate markets, etc. I would imagine that for anyone in their twenties or early thirties savings are the key factor to driving net worth growth. As you net worth grows over $300,000, savings has much less of an impact on growth. This is why early on it is difficult to determine what a good net worth growth rate is.

Sampson said...

I guess if one has a lot of their net worth contribution coming from investments (equities, fixed income, CDs, real estate etc), then eventually the returns on networth will paralel these numbers so 10% annually would be good.

Good job on the increases MG you got some fine looking ratios! Whatever your personal goals on the rate of change are. Like you, my debt:assets will soon be below 0.5.

Real estate will soon contribute less than 50% of my networth also (but if I include REITs too...)

Eden said...

"The markets are due for a good year"

What a statement. Would you care to back that up.

Some things to consider (yes, this is very U.S. centric, but Canada and the U.S. are very closely tied).

1) The U.S. equity markets are up 40% from their low point this year.

2) U.S. unemployment just hit 9.4% (U3) or 16.4% (U6), depending on how honest you want to be (hint U6 better reflects people's ability to spend).

3) U.S. treasuries are driving higher, which will lead to continued increases in mortgage rates...

4) Which will lead to increases in RMBS loses at banks.

5) Not to mention the looming impact of CMBS and credit cards.

6) Finally, P/E ratios are at staggeringly high levels (think 1999 bubble era) when you look at actual profits.

In other words, everything appears to be worse than earlier this year, but the market is up 40%.

That smells of speculation to me. Even if you are being generous, I wouldn't expect anything better than a flat market for the rest of the year.

Me, I expect another 50% drop or so by late fall.

MG (moneygardener) said...

Eden, Yes, the markets are due for a good year. Whether that good year comes now or later in a matter of debate. Whenver the S&P 500 falls by more than 50%, I would say the market is due for a good year. If you measure your year starting on March 9, 2009, I'll be the markets have a phenomenal year!

That being said if the markets fell 50% from here the S&P would be at 470 or so which would mean that it would plumb the March lows by quite a stretch. I am certain that will not happen.

Anonymous said...

MG: You are right about savings affecting net worth less and less as net worth grows ... unless one can grow its savings rate much faster than its net worth.

MG (moneygardener) said...

Even if you can grow your savings rate though, it won't mean much once your net worth is over a certain level. Reason being that one can only earn so much salary. I guess theoretically dividends can provide growth as well but I would include that in the market returns.

At a very large net worth:
Growth = Market Growth

At a smaller net worth:
Growth = Savings (including debt repayment) + Market Growth

Market Growth is defined by all asset markets
including real estate.

So savings matter less for the rich? Once you get your net worth to a certain point savings become less important?

Anonymous said...

Let's put numbers on it:

Net worth $100,000
Net worth growth: 10% or $10k
Savings: $1,000/month, $12K/year
So growth is roughly 50/50 market/savings

About 16 years later (rough numbers):
Net worth: $1,000,000
Net worth growth: 10% or $100k
Savings: Assuming 2.5% inflation, savings should be roughly $18k/year
So growth is roughly 85/15 market/savings

MG (moneygardener) said...

Well put Anon, very interesting.

Patrick said...

I don't necessarily agree that net worth leads you to make the right decisions. For example, considering only net worth, you'd pick the RRSP over the TFSA every time.

If you're aiming for financial freedom, it's about working toward having your passive income cover your living expenses.

MG (moneygardener) said...

Hi Patrick,

i agree. It really depends what you consider 'right' for you. This gist of what I was saying is that judging the impact of most financial decisions can be boiled down to affect on net worth.