In May, our month over month net worth declined by .73% in USD and 2.31% in EUR to $122,613 and €114,165 respectively. Our liquid net worth was $89,945/€83,747 after closing on the last day of May.
May was a surprisingly busy month. Some major changes:
- I've valued my defined benefit pension and added that to the illiquid part of our net worth.
- I've exited all cryptocurrency positions.
- I've transferred a sizable amount of money away from individual stocks to my so-called Wiseguy Portfolio.
Valuing a Pension
Defined benefit pensions are still a thing in Germany, and since I've been working here, I've been steadily adding value to mine. My employer has never mentioned my pension to me (which is just baffling), but I can see the withdrawals from my paycheck every month, and the pension plan custodian contacted me shortly after moving here. I knew it existed, but it's only been the past few years that I've paid much mind to it.
The pension works like an annuity:
- My employer and I both pay 50/50 into the plan.
- The contributions are payments for promised future income streams.
- The income I can expect from each contribution is the contribution amount multiplied by an annuity rate, which is - I believe - calculated by combining my expected retirement date, current expected returns, and life expectancy. This exact formula is opaque, but they publish their annuity rates regularly.
- If I die before my wife, she's entitled to half the annuity stream until her death.
- The payouts are adjusted by cost of living changes. Theoretically, there's not much risk from inflation.
- I am required to pay into this plan as long as I'm working within this career.
Every year, the pension provider sends me a letter telling me the previous year's contributions and my expected yearly pension. From that I can divine a value of this income stream.
To do that, I first value the income stream as if I were about to enter retirement. That's done by using a present value calculation, which discounts future cashflows to a start date. My assumptions are a 2% discount rate (debatable), and my life expectancy limits the years of payments (also debatable).
That value then gets discounted to today. For that I'm using the years until my legal retirement age as the number of periods, and I'm using the 10-year Treasury bill as the discount rate.
All this adds up to a value that is much less than the value of the contributions that my employer and I have spent on this plan. Since I can't touch that money no matter what, it's only a minor intellectual annoyance. But the value of this annuity only really makes sense if my wife and I live well beyond our life expectancies.
Since I'm using fluctuating Treasury rates as my discount rate, and since that discounting process has an outsized impact on the value of the pension today, our net worth has been negatively impacted by the upward movement of interest rates. Had I been factoring in the pension all along, its value would have cratered these past few months.
This is purely a "time value of money" phenomenon and doesn't mean a loss of current purchasing power. However, I want the net worth calculation to accurately reflect how assets and cash flows sources are accruing over time, and similar to valuing a home - the value of which is at least somewhat fictive - this pension should be included. Otherwise it means that the money spent on it is basically lost, which is not the case.
Leaving Crypto
Image: the collapse of Terra was a scary event for anyone in the vicinity of crypto. I feel bad for all the people who've lost money in that scheme.
Crypto is in a world of pain right now, and since it's so speculative, I didn't want to stick around. It's as simple as that. I took a small loss, and the cash helped me buy a present for my wife.
Using ETFs
As I've written about extensively, I'm going to be adding most of my savings to a basket of ETFs that I'm calling the Wiseguy Portfolio. I sold off some of my stocks to get started on this. Some positions were closed entirely, and some others were merely trimmed since they were outsized positions that were larger than I could actually handle when the going got rough.
It's easy to think you can handle a bunch of risk, but it's harder to actually live with the consequences of taking on too much risk. It's better to underestimate what you can handle. Additionally, is extra risk necessary for your goals? Do you need to hit a home run with a specific investment or are steady gains enough?
Increasingly, I also feel like the time spent analyzing stocks is mostly a waste of time. I've been asking myself a lot recently whether I'm getting much value from it. Does the worry pay for itself? Could my ears be doing something more productive than listening to earnings calls? In my daily/weekly/monthly stress allotment, should I be using so much on this one activity?
I went into stock picking because Germany and the United States both had punitive tax regimes towards "foreign" funds. Germany's system has relaxed a lot, and the worst thing about using ETFs is that I need a U.S. broker to whom I'm lying about my actual residence, and I have to keep track of all tax information myself and translate it back to euros (thanks MiFID ii!). But if that's the worst thing, it sure beats the terror of wondering whether company x will ever regain some high price that I was anchored to.
Spending and EOC
Since it's summer, and since that means a lovely European summer break, we've spent some money on vacations. It hasn't been too much, but it's definitely a cost.
I've been re-listening to the Millionaire Next Door, and it's been hitting me differently this time around. I always learn something from it, and this time it has to do with Economic Outpatient Care. Am I spending more than I otherwise would because I get monetary gifts (usually small ones) from my family? Do I feel wealthier than I am thanks to subsidies from family? It's a question I have to untangle, and if I come to any conclusions, I'll share them here.
Until next time, stay healthy, and give your friends and family big hugs.
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