January 2019 Net Worth Update

Since December 26, our net worth rose 17.5% to $43,488. In EUR it rose 17.3% to €38,114. Here's what lead to that result.

In December, I received an elevated payment from my employer due to some extra work I did. This essentially doubled my salary for the month. This money went various places:

• I paid off a medical bill that I'd been paying monthly. I'm hoping to reap a tax deduction from it.
• I bought some stocks.
• We bought a new iPhone when my wife's five and a half year old phone died after a tragic meeting with some water.
• We bought some furniture.
• We bought a coffee maker.

Now, you'll notice not all of this is savings. Sometimes it feels right to spend money. I'm not Early Retirement Extreme. But there's some logic here.

Telephone use is broadly tax deductible in Germany. I'll be able to deduct the cost of this phone over the next three years. Meanwhile, I'm hoping to keep it in our household for at least six or seven. This is one of those areas where we're willing to occasionally spend some money, so we did. The only thing I regret is that I made the purchase using an American credit card when the exchange rate made the euro unusually strong against the dollar, and it's unlikely to reach that rate again before I have to pay the card off.

As for the furniture, this particular upgrade was something we'd contemplated for several years. It wasn't excessively extravagant, but it was unusually expensive for us. I think we're done though with any other major home upgrades for a while, so I don't foresee any other such purchases in our immediate future.

The coffee maker will undoubtedly save us electricity (already shown in my electricity tracking spreadsheet), and it wasn't all that expensive. We'd been making coffee using a pour over method that required water heated on the stovetop. Once poured, the coffee would cool down quickly. The new maker uses less power to heat the water to begin with and then delivers the coffee into a thermally insulated carafe. The coffee is still warm in the late afternoon, meaning less coffee needs to be made in a day, thus saving electricity and grounds.

Note: it's funny what cultures are willing to spend money on. Coffee making in Germany, and likely in Europe as a whole, is an activity where people will spend hundreds of euros on a coffee maker. Some friends of mine have a coffee maker that's just under €1000. Ours was around €55. But the idea of convenient instant coffee is very pervasive here, and if you're not into instant coffee, then that often means a push button machine that takes coffee pods or grinds the beans on demand and coughs up a single cup of coffee.

Stocks did well this month, which boosted our numbers much more than our savings alone did. I don't know what to think of the stock market right now, so it's entirely possible that when I write this update for February, we'll have suffered another major drawdown. The last year has taught me to not get used to up days too much, because they reverse abruptly.

Forecast for the next few months: since I bought everything on credit cards, I'll be paying those off from our cash flows in February and March. That will impact those months' savings rates, but the cards will be fully paid off on time, and since this is a new awards credit card, we should see the bonus hit in February.

There are also some bureaucratic costs that we'll unfortunately have to pay because our tax statement from the government is taking so long to get back to us. It's easy to wander into those when you're a foreigner living abroad and don't entirely understand the system.

Opportunity and Worry

Big market falls like what happened in December feel like great security buying opportunities. And they are. In my backtests, the difference in performance was stark if you bought right before a crash or well into one (buying in 2007 vs. early 2009 for example).

But here's the catch: you have to be able to survive a bear market and hold your positions. I'm not referencing margin calls or panic induced selling.

No, I mean getting fired from your job and selling just to pay the bills. Recessions are high risk for employees. A recession will happen again, and unemployment will shoot upwards. Absent an MMT-style jobs guarantee, unemployment doesn't stay low forever:

I am unlikely to lose my job in the case of a recession, but that doesn't mean it's guaranteed that I won't. Therefore, one set of thoughts I'm balancing is my desire to buy all these cheap securities while questioning whether I have enough cash sitting around to deal with any unexpected surprises. Every working person will have to balance it for themselves and their own situation.

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.

November 2018 Net Worth Update

In November, our net worth rose about 5.25% to $37,962. In euros, it rose 5.7% to €33.417.The big factors that affected this number are as follows.

Stock Market

The stock market continued its volatility, and a number of individual companies I own fell by quite a lot. That's not fun to watch, but I have to content myself that the prices have fallen, and all future purchases are now going to matter more due to the lower purchase price.

I'm sitting on a net unrealized loss. That's mentally taxing, to put it mildly, but in addition to the above-listed consolation, I also spend a lot of time looking at past market corrections and how they affected the names that I'm holding. It feels painful now, but in a few years this will have been a blip in the movement of the stock markets. Even if this lasts a year, it is unlikely to be horrible.

I remember watching the 2015/2016 correction happening, and although it was exciting at the time, it now feels like nothing. When people talk about the long bull market, they rarely mention 2015/16, even though it was incredibly painful for a wide variety of stocks and industries. If you were holding commodity stocks, especially oil, you just got hammered. But that gets lost in the narrative of "the longest bull market in history".

Saving and a Gift

We saved a good amount this month (33.5% of income). Despite the stock market pain and despite my wife working fewer hours last month, our savings rate helped us inch upwards. We did get the electricity bill refund, so that basically eliminated our electricity costs for the month.

The biggest lever when you're talking about modest sums of money isn't the returns from investments but the total amount saved.

For transparency's sake, at the end of last month I received a monetary gift of $1000 out of the blue. I'm still uncertain as to why (other than that person loving me), but that money went straight to savings.

Economic Outpatient Care

The The Millionaire Next Door, Dr. Stanley spent a lot of time discussing "economic out-patient care". His basic idea was this: young people who receive a lot of monetary support from their familial elders often remain dependent on that support and develop bad habits that limit their future financial resourcefulness. He called that "weakening the weak".

Since learning of the concept, I've tried to be much more careful with such gifts. When I was much younger, I did develop bad habits from the knowledge that I had monetary help should I need it, and I'm trying to make up for past sins, so to speak.

Looking Ahead

December is a bit of a wild card. We have estimated taxes to pay, and we will eventually be billed for an extra payment for last year's German taxes. We also have a small trip to enjoy, which will cost some money, but I doubt we'll be extravagant.

Of course, there's always Christmas gifts, but we're modest gift givers, and we encourage modest gifts for ourselves as well. Because we live abroad, nobody expects anything too expensive or complicated, which does reduce expectations.

Unless the market really falls off a cliff, I expect further slow but steady progress.

Electricity Tracking

Unlike the U.S., we report our electricity usage once per year here. We pay a monthly fee that makes up part of a yearly estimated fee based on what's known about us. If we're over that estimated usage, we have to pay yet one more fee, and if we're under, we get a refund.

I find this system absolutely crazy, but there's nothing I can do about it. If you make a mistake one month, you're likely to make it year-round, and you won't have any sense of it until you get your final bill. It's a big delay, and the results can be terrible: you can be hit with an enormous final bill if you aren't careful.

The power company estimates for us much less than what's normal in the U.S. For me and my wife, our 2018 estimate was 2821 kWh for the year. The average in the U.S is 10,399 kWh for a residence.

Despite the difference in usage, we are incentivized to use very little electricity. There's no way around it: electricity is expensive here. For us, we're looking at a price of 0.22€-0.27€ per kWh, while in the U.S. it's 12¢. That's a major difference, and the kind of stuff that I found clever in the U.S. to keep my electricity bill low must now be standard procedure to avoid paying enormous electricity costs.

The first two years, we had to make an extra payment of roughly an extra month of electricity at the end of the billing cycle. That was irritating. For this year, I've kept better track of our usage, and if I understand the system at all, we should be getting a refund (taxes and fees are always a wild-card). Fingers crossed and thumbs pressed.

For our 2018 year, the electricity company estimated we'd use 2821 kWh. We ended up using 2331 kWh instead. I tracked this weekly and monthly in a spreadsheet (spreadsheets are a superpower), and when a weekly number jumped, I tried to look for reasons why.

Adjusting Usage: The Big Levers to Pull

There are a few levers we can pull to change electricity usage. Of course, there are the obvious ones like turning off lights, but we use LEDs for every bulb in the house. Lights aren't what drive our usage.

The big one is warming up water.

Our heating is provided via radiators and a building-wide central heating system. That's a different set of costs, and I won't get into that here other than to say that general home heating isn't included in our electricity costs. Instead, we heat water to:

• Bathe or otherwise wash ourselves.
• To cook or heat water for hot beverages.
• Wash clothes.
• Wash dishes.

The appliances associated with those activities are:

• The bathroom Durchlauferhitzer. A Durchlauferhitzer heats water on-demand as it passes by the heating elements. It's a nifty device, except that it chews through electricity. It's also a trap because you'll never run out of hot water in the shower.
• The kitchen's under-sink hot water resevoir. I just installed this, and despite storing hot water, it's not as big an electricity hog as the Durchlauferhitzer. That said, it supplies much less hot water since it's a small reservoir.
• The stove.
• The clothes washer, which is a front facing washer.
• The dishwasher.

The biggest and easiest lever here is the Durchlauferhitzer in the bathroom, which supplies the shower and the sink. Any period of time in which we deliberately shorten the amount of time the Durchlauferhitzer is heating water is a period where electricity usage will be noticeably lower.

After that, the easiest lever is the clothes washer. This machine allows us to set the temperature of the water very precisely, and if we set it to 0°, then the electricity usage is negligible.

Changing the stove usage is harder. By using the stove, we cut down on eating out, the cost of which easily can dwarf the electricity usage of the stove. However, there are strategic ways of using it to conserve electricity. By preparing a food in bulk (such as boiled potatoes or hard-boiled eggs or a big batch of TVP), you can eat the cooked foods over several days without resorting to the stove. We still use the stove for coffee and tea prep since we don't want to buy more expensive/more complicated preparation devices for those activities. But making food in bulk does have a noticeable effect on our usage numbers.

The dishwasher has a short cycle that does the job well enough if we prep the dishes well. Unfortunately, our sink is very small, so washing dishes by hand is perfectly possible, but it's a pain and often leads to a big countertop mess.

The Medium Levers

We also have a dryer, which we try to limit use of. It's a condenser-dryer rather than the standard American dryer with heating elements, and it's pretty efficient. Since our apartment has good cross breezes, we often use drying racks strategically placed where the air flows and where the sunlight falls. Now that it's getting to be winter, and therefore cold, dark, and damp, we'll probably use the dryer near-exclusively.

Our vacuum cleaner is surprisingly power hungry, and with our apartment's old electricity system, it often trips the fuse. It may be worth retiring this machine at some point, but we received it for free from friends when we first came here, so we'd need a super efficient machine to make the switch worth it.

Lastly, we have a fridge and freezer. The fridge was given to us, so again, we're not itching to get rid of it and buy something more efficient. We just try to keep the temperature down and keep some water in there. As for the freezer, we bought that a few years ago, and it doesn't consume too much power. We keep the freezer packed nearly 100% of the time since we rely on so much frozen food.

Misc. Power Sucks

We also have the following that we try to keep tabs on, but are much more minor electricity sucks:

• Laptops
• Cell phones
• A NAS and some HDs for computer backups (the NAS is admittedly a decadent solution for this challenge)
• Routers for internet access
• LED light bulbs
• Fans
• Electric power drill
• A+ rated range hood with LED light
• A HEPA air filter for the bedroom
• Blow dryer, clothes iron, sewing machine (used often enough to make them worth keeping, but not used often enough to cause a big spike in power usage)
• Electric piano
• Blender
• Electric dental things
• A rarely plugged in bluetooth speaker

These things will definitely suck power if we're not careful, but they're the least important in terms of the big picture of our power usage.

Electricity Eaters We Don't Have

We don't have an air conditioner. I've been tempted to buy one since heat waves in Germany are rough. But their electricity use would force us over our yearly estimate. For almost anyone, if you have and use an air conditioning unit, it's probably the biggest single lever you have to raise or reduce electricity use.

We don't have many small kitchen gadgets. I'll probably write more about our thinking here, but we don't have a microwave or a electric coffee maker or countertop water heater or any other variety of common small kitchen appliance. The exception is the blender.

We have no television nor any of the requisite co-gadgets that come with one. Any type of movie or TV show viewing happens on the laptops or phones. The computer speakers are mostly adequate for that. We wouldn't want to annoy our neighbors with a thumping sound system in any case.

And with that, there's a picture of our electricity usage. Here's hoping for that refund.