I recently had to fill out an annual net worth statement for a bank holding a loan on some commercial real estate I own.  I recommend that everyone completes this exercise yearly.  You can gain financial insights by tracking the changes that occur over time.  If you are following the Financial Vitals Checklist, it is also motivating to see proof that your hard work is paying off by watching the growth of your net worth.  However, a net worth statement can do more than just add up all your assets and liabilities; it can also show your asset allocation or how much of each asset class you own. 

Besides stocks and bonds, my assets include real estate, businesses, and personal items.  I decided to examine my overall asset allocation and break it down into a few easy-to-follow graphs.  I am not recommending that anyone follow the same allocation as me.  In fact, I believe there are some significant flaws in my portfolio, which I will point out and attempt to rectify in the coming years.  

     I am not sharing my net worth at this point, but these are the actual percentages of each asset class in my portfolio.  My only liabilities are real estate debt, and I have subtracted this from the real estate asset values to ensure an accurate representation.  

My Asset Allocation

Assets

     Rental real estate comprises 33% of my net worth, while securities (stocks/bonds) are only 22%.  I believe that I am overweight in real estate, especially considering that my personal real estate (we have two personal homes) adds another 7%, and there is business-related real estate included in the value of my businesses. 

     Currently I have 10% of my net worth in cash.  I discussed this in My Goals for 2024 and plan on deploying cash this year to get closer to 5% by the end of the year.  

     I attempt to be very conservative in my business valuation.  Many people tend to overestimate what their business is worth, and in reality, many small businesses are not sellable.  This is why Built to Sell is in my Top 10 Business Book Recommendations for New Business Owners.  I take my business real estate equity, reserve cash in the bank, and a realistic multiple on the businesses I believe I could sell to make up the valuation.  I’d rather be low in my estimation and be pleasantly surprised at the time of a sale than the reverse.  

      The miscellaneous category includes the cash value of my variable life insurance policy (blah) and receivables from private lending that I conduct.  Personal assets include cars, art, jewelry, collectibles, etc.  Not included in these numbers are oil & gas assets (too hard to value), my wife’s retirement accounts (I generally don’t consider them), and real estate syndication investments (I just forgot).  Nothing that I left out would materially change this discussion.  

     My target asset allocation is:

50% Securities / 20% Real Estate / 20% Business Value / 5% Cash / 5% Other.

Asset Location – Securities 

     Securities are stocks, bonds, and financial derivatives.  Securities can be held in various investment vehicles, including multiple retirement plans and private brokerage accounts.  Each account has its own specific characteristics in terms of tax treatment and accessibility.  For retirement purposes, it is important to keep track of your asset location as well as the allocation.  The following graph demonstrates the location of my securities.

stock/bonds

     Roughly 62% of my securities are held in brokerage accounts.  I have maxed out my SEP IRA every year of my career, so I’ve done my best to grow assets inside my retirement accounts.  However, the government limits how much you can place in these tax-advantaged accounts.  Unfortunately, my SEP was invested with an asset manager for most of my career and has underperformed the broader market.  I will discuss this in a future post.  Since there is no limit to how much you can invest in your brokerage accounts, these accounts have grown larger than my SEP.  

     I was only eligible for a Roth IRA during my residency, and I have not performed backdoor Roth IRA conversions due to my SEP IRA.  I also discussed this in My Goals for 2024 and plan to remedy this oversight in 2024.    

     My asset location gives me tremendous flexibility in terms of retirement.  While I would like to have more assets in tax-advantaged accounts, I can’t access that money without penalty until retirement age.  I can access the funds in my brokerage accounts at any time.  While I will have to pay capital gains tax, this money can allow me to “bridge the gap” to retirement age should I quit working altogether.    

Asset Allocation – Securities 

     Digging further into the securities section of my net worth statement, I can visualize exactly what securities I hold in my accounts.        

     My total stock/bond ratio is an incredibly aggressive 94.5/5.5.  I would like this percentage to be 90/10, which is still a ratio associated with much younger investors.  However, there are several reasons that I am comfortable with such an aggressive security portfolio, which I’ll outline in a future post.    

     This chart demonstrates that I generally practice what I preach, with 66.2% of my securities invested in broad-based, low-cost index funds (Total US Stock Fund & S&P 500 Fund).  My ideal securities allocation would be:

75% Total US Stock Market Fund / 15% International Fund / 10% Total Bond Market Fund.

One of the reasons that I have yet to achieve this ideal is that I am “trapped’ in some legacy investments.  I previously had an asset manager for my SEP IRA and one of my brokerage accounts, and they put me in several different mutual funds.  Once I transitioned to managing my own accounts, I got out of all of them in my SEP but left the small-cap and large-cap value funds in my brokerage account so I wouldn’t have to pay capital gains tax to make the transition.  I calculated that the slightly higher fees were worth the tax avoidance.   

Asset Allocation Transition

     I still have 14% invested in individual stocks for the same reason.  Most of these positions were started in 2008-2011 before studying finance and investing.  For years, I hung onto them and have added some to the positions.  I would not make the same decision today, but since I have a significant capital gain in these stocks, I do not wish to sell them at this time. Eventually, I plan to slowly transition these individual holdings into a donor-advised fund (DAF), starting with those with the largest capital gains.  I discussed DAFs in my post, Charity Auctions: Generosity or Ego?    

     I have 7% invested in an international index fund, less than half my target allocation.  Although I have 4.3% in cash, which isn’t ideal, I use this cash to make monthly dollar-cost-averaging (DCA) investments in the total US stock market fund and the international fund.  I could figure out how to make monthly deposits into my brokerage account for my DCA, but I’m sitting on so much cash in my non-investment accounts that it doesn’t make a difference.  This just makes it easier, even if it is not optimal.   

Conclusion

     My current total portfolio is heavy on cash and real estate.  When my personal, rental, and business real estate are added together, they constitute over 44% of my net worth, and this is after I have sold several properties over the past three years.  This demonstrates how much real estate consumed my early investing life, which I’m still trying to unwind to achieve a more balanced portfolio.  Reaching my target asset allocation will be a multi-year process, as it requires that I sell some rental properties and increase my investments in securities. 

     My current securities portfolio is overweight stocks, specifically individual stocks.  To reach my target allocation, I must continue to sell individual stocks when appropriate, such as during any market downturn, and convert them into international funds, bonds, and the total stock market index fund.  Additionally, I will continue to purchase these funds using dollar cost averaging, raising their percentages toward the target.     

          The takeaway from this post is that you can learn a lot about your investments by performing a net worth statement and breaking it down by asset allocation.  I suggest you devise a target portfolio allocation for your total assets and another for your securities.  Check-in each year to assess how your actual portfolio matches your target and adjust accordingly.  I’ll check in next year with the progress I’ve made.