December, 2018 Net Worth Update and Year End Review

UPDATE: I made a mistake when I initially posted this. In my spreadsheet, I double counted one of our credit card liabilities. We were still down for the month, but not quite as much as I originally wrote here. The updated numbers are $37,014.97 and €32,497.78 respectively. I'll leave the post as-is though since from a high level it remains correct.

Our net worth dropped in December to $36,153.59 or €31,741.52. That's a one month change of about -4.75%.

Since the majority of whatever wealth we have is in the form of stocks, we were hit hard by the sell-off in equities. Anyone paying attention to the markets this past month would have seen the kind of fast paced elevator down that market pundits have been scaring us about for years. Our savings rate didn't spare us from the damage.

We're still well up from a year ago though, and that's the perspective I want to keep in mind. Equities are for long-terms positions. I'm not a trader, and month to month moves whether up or down can only cause heartbreak if you get too emotionally invested in them.

This month had a few novel transactions worth mentioning. I got my Christmas bonus, which I always appreciate. At the same time, we had to pay our estimated taxes to the German government for the fourth quarter, so it was basically a wash. We also received a bit of Christmas money from relatives and a larger sum from a relative specifically earmarked to support a hobby of my wife's.

Year-End Review

So how'd we do this year? Our net worth is up around 33% in dollars from one year ago. That's entirely savings-rate based since our equity positions have been all over the place. As that net worth number grows, any year over year growth is going to come increasingly from investment performance.

Investment Performance

And my investment performance this year was bad at a YTD drop of 13% (I'm only considering my taxable brokerage account). Some of it was just the way the markets moved. For people following the US markets, it was a volatile year with big drops in February and then the last months of the year, but if you were invested in just about anything outside of the US, ho ho ho, you had a rough year.

How could I have known that at the exact moment I'd begin investing in German companies, it was at the peak of the German market? I began buying in October 2017, and this chart is the daily chart of the DAX from the past year:

It's actually uncanny how some of my German purchases happened at the exact tops of their cycles. The companies seemed cheap when I bought them, and they seem cheaper now, but that doesn't mean anything in the near term. The German companies were a drag on my performance over the whole year, even when I was doing well in other parts of the portfolio.

Some of the bad performance was from me trying things and discovering I don't have the temperament for them. I tried shorting some stocks, and I tried day-trading a few times. They're not my thing, and I'll avoid those activities in the future. Doing either triggers too much adrenaline and fear in me. Regardless of investment performance, I just don't want to live like that.

I also changed investment strategies in the middle of the year. I did a lot of backtesting and research to come up with a reasonable strategy, and I implemented it. I'm trying to control risk as best I can with smart position sizing and clear sell rules, but I do recognize that this strategy can be extremely volatile. As we get older, I have some ideas for how to reduce risk further within this current strategy, but for now, I'm being aggressive within my rules.

Recognizing my previous mistakes, I wrote a long document explaining the strategy and the rules. I've already referred to this document at times when I doubted my current approach, which makes this one of the best decisions I've made all year money-wise.

Savings

For our savings, we were somewhere around 25%. It's not exceptional, but it's not horrible either. I'd like to get this number up in 2019, but there are some genuinely life-improving expenses that may need to take priority if they become a possibility.

In 2018, the big overarching expenses were our rent as well as a trip we took to the US. Moving doesn't feel worth it. Rents are going up in Germany, and by staying put, we get to keep our rent stable while prices rise around us. I've looked at smaller apartments in our neighborhood, and their prices are approaching ours despite their smaller size. We could move further away, but our life satisfaction would plunge. Plus, my wife doesn't want to move, and neither do I.

After deliberation, I am going to the US this summer. I bought tickets using credit card points, and my wife and I will take our trips separately. I'm not thrilled about that entirely, to be honest, but the cost savings are enormous to having more focused trips back rather than larger multi-family tours. She can also work while I'm in the US and vice versa, so there's less opportunity cost.

We saved a bit on our tax preparation costs too. There are some tax people recommended to expats like us who speak English, but ouch they can charge a lot. They're very good, so don't get me wrong, but at some point you have to ask if what you're getting is worth the unusually high price. In our case, we were getting our taxes back in two weeks (fast) and we could communicate in English. But we speak German, so why not find someone less expensive who's good enough?

We could also do our own taxes, but for now I'm more comfortable with a professional in Germany on our side, and I'll keep doing my own US tax return.

So there's a wrap-up of the year for this abroad saver. I've learned a lot this year, and here's hoping for a more effective and smarter 2019. Cheers and have a happy new year.

Margin

I sold some positions yesterday in my brokerage account. They passed my selling rules and on the whole I made a small profit with those positions, but I wouldn't have sold them except I wanted to close out my use of margin.

I used margin in my brokerage for the past year, and although my timing was shit, and its use probably amplified the loss I'm sitting on now, the loss isn't what bothered me about it. Instead, it was the mental games it played with me that forced me finally to shut it down.

Dangerous Thinking and Actions

I don't write this blog to give anyone else advice. I'm not a money professional, and I don't want anyone to think my word is correct or actionable. But I do want to point out a few of the dangerous lines of thinking and risks that margin use exposed me to, and maybe someone else will find this helpful.

Careless Security Selection

When it's borrowed money, I found it easier to buy stuff that I otherwise might not have bought. It was easier to say, I'll buy a bit more here on this pullback. I'll buy this security just 'cause. The dividend is higher than the interest I'd be paying. I'll day-trade just this once... twice... three times....

Looking at some of the stuff I'm still holding, all of that thinking was stupid. I have stuff I shouldn't have bought. I took risks that were unnecessary. I'm sitting on losses that will take several years to recover from. It's not the end of the world, but it was a mistake.

Constant Desire to Close Out my Margin Use

This is more stressful than financially destructive, but I thought a lot about my margin use, and I was always itching to sell to close it out. That's just stressful, and I don't want to live my life worrying about that. And speaking of stress...

Constant Need to Check the Portfolio

Because I was using margin, there was always the risk of a margin call. I never borrowed all that much, but the possibility was always there, and so I told myself I needed to regularly check the portfolio.

Well, if you constantly checked your portfolio this past year, you were probably pretty stressed out by it with all the volatility. Checking the portfolio probably contributed to some of the buying and selling that I regret in the past year because I got worried about a big crash wiping me out.

Playing Russian Roulette with Risk

As Nassim Taleb says, some risks are like playing Russian roulette with a gun that has hundreds of chambers. The likelihood of the bullet going off is low, and because it doesn't go off, you forget that there's a bullet in the gun.

I backtested the percentage of margin that I used, and the margin call bullet never went off in my tests. But it doesn't mean that it couldn't have. Especially because so much trading is done by computers, there's always the possibility that something crazy happens that causes a major after hours fall in prices that triggers the margin call. Because my broker insta-liquidates once that point has been reached, there was always the possibility of being forced to sell at crazy low prices even if the prices quickly recover.

That's an unacceptable risk. Last June, my broker had a glitch and sent out an email to many of its customers that their maintenance margin limit had been reached and their portfolio was liquidated. I literally woke up to read this email, and I'll never forget that feeling. The first thoughts were how I was going to discuss this with my wife. Perhaps World War III had started while we were sleeping and the world market crashed.

Eventually, I figured out that it was a glitch, but the fact that it was even a possibility that I could have considered hasn't sat well with me since.

This is Hard Enough

I buy individual stocks, and that's hard enough. Some of them may go bankrupt. I've sold a few for losses, which sucks, but on the whole, I believe that the portfolio will march higher as a group, despite some individual losers.

But using margin exposes me to something else entirely. It exposes me to permanent loss of capital based on price swings alone. It exposes me to risk that takes me out of the game entirely. My wife and I earned and saved this money by sacrificing pleasure now for gains later, and taking permanent capital loss risk with that is stupid and foolish.

Some instruments, such as shorting or options use, force you to use some kind of margin. I don't want to say that no one should do those things because they're useful. I respect smart short sellers. I respect that people can figure out options and appreciate the kind of insurance they can provide a portfolio.

But I don't have to. No one has to do that kind of stuff because just buying securities at reasonable prices in reasonable amounts and holding is hard enough without worrying whether I get to be in the game another day.

Cash Flow Parasites

It's that time of the year when I'm looking back at how we spent our money, and I'm considering where it all went and how to improve things next year.

The various categories I use to budget our money does illuminate things a bit. For example our biggest expense by far is our rent plus Nebenkosten (a German term for the utilities managed by the landlord bundled into the monthly rent payment).

But beyond that, the picture becomes murkier. We have transportation costs and various utilities and our BLOW categories, but what's the glue holding that together?

I don't have a way to add this to the spreadsheet, but I'm now considering cash flow parasites as overarching spending concepts that bind several categories together. Basically, these are purchases that require other purchases over time. The initial purchase fits into the budget as a single item, but over time that initial purchase requires incremental purchases later. This is similar to lifetime cost of ownership, but it's broader.

For example, let's look at some parasites that we don't own. The most obvious example is a car. The car itself has an initial upfront cost, but there are the following obvious ongoing costs:

• Fuel
• Insurance
• Repairs
• Parking
• Registration
• If purchased with a loan, then the ongoing interest cost
• Asset depreciation

That stuff is obvious. Less obvious are the following:

• Environmental harm and contribution to air quality health problems
• Risk of accident
• Risk of regulation
• Legal risk from poor driving or impaired driving
• Risk of theft or vandalism
• Municipalities being forced to devote ever more space for automobile use
• Stress from traffic
• Overcommitment of time due to transportation flexibility
• Opportunity cost from higher amount of money in cash emergency fund to cover emergency car costs
• Opportunity cost from spent car money not invested in compounding assets
• Opportunity cost from saving the money in cash to buy the car

Whenever I think of buying a car, all this stuff pops into my head. I remember the stress of driving. I remember the major repairs. I remember the couple of accidents I was involved in (not at fault). And after considering all that, and despite the downsides of not having a car, I just can't justify buying one again.

A less high stakes example of a cash flow parasite is a television. We don't own one because a television contains the following costs:

• The television itself
• The devices attached to it
• The content played through it
• The furniture used to display it
• The floor space given over to it
• The electricity
• The time devoted to it and the feeling that it should be used due to the invested money (a kind of sunk cost fallacy)
• The ongoing maintenance and replacement/upgrading of attached devices
• The exposure to advertisements and societal propaganda that convinces us what's normal and how much money we should be spending to be like the beautiful people on TV

One reason we don't own these things is because of the high negative cash flow costs I associate with them. But that doesn't mean I don't have cash flow parasites, so where are they in our budget?

Cell phones are a big one. We use iPhones, so there was a substantial initial cost to them, which has been tolerable because of their ongoing use (we don't upgrade regularly, and I hand my model to my wife when I'm done with it). But there are ongoing negative cash flow associated with them:

• Cellular costs (contract-less month-to-month)
• App and content purchases
• Connective cloud services
• Time spent
• Internet at home
• Stress from being always connected
• Stress from the impulse to upgrade or buy companion devices
• Depreciation of the phone itself
• Exposure to what's "normal", similar to TV, but maybe even worse due to social networks functioning like a "keeping up with the Joneses" 24/7
• Maintenance (battery replacement, headphone replacement, charging cable replacement, screen repair, phone cases)
• Electricity
• Risk of theft

So what's the overall cost to it? That's really tricky. Some parasites have a clear overall cost, but some are more elusive or are shared with other cash flow parasites. I think the 30,000 foot view is probably enough to say that the costs over several years are substantial. There was a time before I had an iPhone and a time after it, and the costs before were zero since it was a whole different category of expenses. There was no parallel to what we have today.

At the same time, there are major upsides to having an iPhone. I'm just not sure that if I could get a full accounting of the exact cost that I would say they were worth that exact number. Using a smartphone means sort of stumbling into ongoing expenses, but I'm not sure how to back out of those at this point. Even if I use an iPhone for 7 years, that's still less phone-value than using a landline phone that costs maybe 30€ for potentially several decades. What exactly is the goal of having this thing? Sometimes it feels essential and sometimes it's like a casino in my pocket.

I've mentioned it before, but travel back to the US is a major expense, and it contains several categories within it. Flights and hotels are just the start when you start to look at all the costs associated with it. Most Americans don't make trans-Atlantic trips at all, but we do regularly because we live on the other side of it.

And then really, one has to look at the cost of being an expat itself. We make all sorts of spending choices that we wouldn't have to make if we lived back in the States. Right now, I think it's worth it for several big reasons, but I'm tempted to sit down and try and do a full accounting of what it's costing us to be here.

When looking at the cash flow parasites, it doesn't mean there's no value within them. Seeing our families is worth spending money. The phones do have major safety benefits and they allow easy access to a lot of free content. Living in Europe has major upsides. But I'm going to try and look at my choices much more holistically and see if there's some overarching concept that's causing me to spend a certain way.