December was a great month. We had family visit us from the US over Christmas for the very first time. We traveled some. We ate some great meals and had a lot of laughs.
However, December was also the first time that our net worth was down in every metric that I track. There are four comparisons at the top of my spreadsheet: USD month over month, EUR month over month, USD year over year, and EUR year over year. For the first time, all of these metrics were negative.
Just like the stock market isn't the economy, your net worth isn't your life. But since this is a money blog, let's focus on the money part of things.
Net Worth Changes
Image: chart of our net worth in USD over time
In December, our net worth fell to $125,071/€116,780, which represents the following changes:
| Metric | Percentage |
|---|---|
| Y/Y USD | -14.23% |
| Y/Y EUR | -8.79 |
| M/M USD | -2.53% |
| M/M EUR | -5.71% |
Maybe I can assuage my disappointment by creating a new metric: quarter over quarter. How's that look?
| Metric | Percentage |
|---|---|
| Q/Q USD | 6.83% |
| Q/Q EUR | -2.25% |
So now one metric shows improvement. I'll take the win where I can I guess.
Our liquid net worth stood at $95,876/€89,521.
So what's up?
Inflation Devours All
The obvious big story is this:
- Due to the war, supply chain, stimulus programs, and energy shocks, inflation rose drastically.
- The Federal Reserve and other major central banks raised their benchmark interest rates to counteract this.
- Since the present value of equities is all future cash flows discounted to the present, both the discount rate and the - assumed - poorer quality of those cash flows put downward pressure on the value of stocks.
- Rising interest rates caused bond prices to fall.
We were not spared from this, and I took some serious hits on the large number of growth companies I had in my portfolio. They weren't the worst growth companies to have owned, but they were hit very hard anyway.
I took some steps to protect myself. In my IRAs, I sold in February due to trend following rules being triggered, which protected us there. I decided to reduce my exposure to individual companies and create the Wiseguy Portfolio, which is a kind of "all seasons" portfolio.
Image: Chart of portfolios in 2022: Green is my IRA, teal is my ETF account containing the Wiseguy Portfolio (started in May), red is S&P 500 benchmark, black is all portfolios together, yellow is individual stocks.
Finally, the effect of rising interest rates has caused a reduction in the estimated value of my pension. Since the pension is discounted at the rate of the 10 year treasury, rising rates reduce the future value. In a sense, this value is both real and imaginary; I'll never be able to pull out all this cash one way or the other, but I do have a guaranteed income stream in addition to government social security. It has value.
Spending
I've created a Sankey diagram that documents the flow of our money. For practical reasons, the numbers are slightly different in some cases compared to our actual budget, but overall this represents money received and spent/allocated well.
Image: A Sankey diagram showing the flow of money from income sources to spending categories.
Excluding tax, social security, and health insurance costs, our largest expenses fall into these categories:
- Rent (warm) (€10956.81)
- Groceries (€5984.66)
- My BLOW money (€4605.97)
- Travel costs (€3532.05)
- Her BLOW money (€3532.05)
A reminder: BLOW is anything we buy that is personal and doesn't require discussing with the other partner.
You can see the mark of inflation on our two largest household expenses. Our rent was raised in August, which was a bummer that upset my equilibrium for a while. Our grocery bill for the year rose from €5,158.22 in 2021 to €5984.66, which is a ~16% jump. Some of that could be carelessness on our part, but some is definitely climbing prices.
Our travel costs included a trip to the US for her, a trip to the US for me, a few weeks of fun in Europe in the summer, and a late year trip with the family who visited us over the holidays. As much as I'd like this number to be lower, there's a reality that an expat who has good relationships with his family will also likely have recurring large travel expenses to contend with.
Image: Chart of the EURUSD price in 2022
Unfortunately, my US trip coincided with a weak period for the euro against the dollar. This made the trip much more painful than it otherwise might have been.
Mindset Changes
There were three major changes in how I view our financial goals in 2022.
Cash
At several points, I felt hemmed in and without options. The most acute phase of this happened when we had our rent raised, but it was a recurring theme in the second half of the year. Yes, we had stock assets, but should we ever actually experience and emergency, our stock wealth would have to be sold off to actually give us flexibility. This increasingly felt intolerable to me, since I was sort of mentally double spending that money: it was both meant as a long term savings but also potentially a bail out, emergency, house, career change fund. It was untenable.
So we are now allocating much more towards cash. Savings accounts both in the US and Germany actually pay something now (though it's still crazy low in Germany). This allows us to pursue opportunities the way a big stock allocation can't.
The Implausibility of FIRE
It is unlikely that we will be able to retire early in any significant way. Perhaps that will change, but it won't change in the next few years, and in acknowledging that reality, I have to ask some questions.
For example, are there other career paths that might be more rewarding? If we have to work anyway, then why not do something that is genuinely enjoyable during that time? Perhaps staying put is the best option, but I should create the space where that's a choice rather than mandatory.
So much of the online financial world is fixated on this idea, that to acknowledge it may never be reality for us feels like a failure. However, my desire is to keep working. It always was, and the FIRE idea was mostly a way to give myself permission to pursue avenues that I find more fulfilling.
Stock Picking
Until this year, I'd exclusively been a stock picker. The US extraterritorial taxation regime has made the purchase of mutual funds tricky, and I'd believed I'd be able to handle individual stocks as the container for all our long term wealth.
It's safe to say that I was wrong.
I've grown as an investor, but I still make silly mistakes that should probably make it clear that stock picking ought not be my primary savings strategy. Yes, I've become less trigger happy, but I'm still too damned trigger happy. Just in the past few months, I sold several securities too early and missed out on rebounds. And my analysis is often rudimentary at best.
I've also discovered that focusing on stocks is not the best use of my time from a "quality of life" point of view. It's stressful and distracting. I have better questions to focus on and better uses of my time than worrying about whether such and such company faces an existential threat or is just going through a rough patch.
My returns thus far - while not catastrophic - align with returns I could more easily achieve by buying ETFs, and so that's what I'm mostly doing now. I just hope that the US/Germany thing doesn't bite me in the ass; if Germany adopts a PFIC type punitive taxation regime again for foreign mutual funds, I'm SOL. But best to save those worries for the future.
2023
The four big questions hanging over me now and likely throughout the year are as follows:
- Do I change jobs and potentially enter a riskier line of work in the hopes of greater life satisfaction and potential long term economic benefits? Or do I remain as I am now: basking in the weird safety of my current position, but potentially plagued by long term doubts around what might have been?
- How do I allocate limited savings for a potential risky life change?
- Do we participate in an expensive vacation that my family has planned out? We participated this year in Europe, but in summer 2023, it's further away and likely much more expensive. This is part of a larger question around family expectations and travel. I should probably write about this, but in general, I feel a lot of pressure to travel to see family, even though the prices are often higher for me, and my income is lower than the other people participating in the trip.
- Does the ticking time bomb of my poor Baby Boomer parent finally explode. There have been indications just in the past month that it might.
One change to the blog is that I will switch to quarterly updates rather than monthly. I find that I repeat myself too often month to month in these updates, and the movements within a month are often noisy.
With that, I leave you for now and wish you a happy and healthy 2023 full of great moments that let you forget about any financial stress you may have.
