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The unseen assets on your balance sheet

Oranges are not the only alternative asset

A friend of mine sometimes speculates about the size of the ‘Monevator Hoard’, as he almost calls it.

Over the years he’s noted I like to save a lot, and also my interest in the stock market. Putting two and two together, he gets millions.

I avoid talking about money and my portfolio in everyday life. Partly it’s because I’m a very private person, blogging notwithstanding.

It’s also because I live in London, one of the most moneyed cities in the world, where there’s thousands of wealthy folk who make any normal person’s savings look like loose change. (£500,000 bonus, anyone?)

But my friend does the same sort of work as me, and is roughly the same age – he wouldn’t expect me to have £5 million and my own man at Coutts.

I’m certain from what he’s implied though that he’d think the cash value of my investments very large, were I to tell him. He’d likely see me (maybe he already does see me) as a wealthy miser who should spend his mundanely-gotten gains on wine, women, and song – or at least the next round.

That assessment of our relative wealth would differ markedly from mine.

Firstly, my friend doesn’t appreciate how I want to use my portfolio to replace my income from work. Only if I achieve this will I consider myself financially free. This is a personal goal, and I’m nowhere near achieving it, but it does mean the Chardonnay quaffing chorus girls are on hold.

More pertinently, my friend has a nice house in the Home Counties that he bought in the 1980s for about the price of a mid-range sports car today.

It’s now worth at least five sports cars. In contrast, I rent.

My friend suffers from the common delusion that his house is not a financial asset, and therefore its value does not represent ‘real money’, only ‘paper money’.

One day I’ll do a whole post on how wrong this is; suffice to say he could sell his house tomorrow (tax free), rent, and have a large lump sum to invest for himself.

It got me thinking about what other assets people have that they might not appreciate, but which could factor into their personal net worth?

Hard assets

Property

If you have a property that is bigger than the outstanding mortgage, the difference is an asset. Period, as our US cousins say. Yes you’d have to rent if you sold. So what? That doesn’t negate the house’s value. I find it almost impossible to articulate how ludicrous I find any other position.

Pension

A different friend of mine (I’m a popular guy!) has less than three month’s emergency savings, but he has been putting money into a public sector pension scheme for 15 years. He’d think I’m much wealthier than him, but I have no formal pension. He has a valuable financial asset, albeit an unattractively restrictive one.

Endowment or life insurance policies

I don’t have any of these, but older people often do. Endowment policies are frequently derided due to their poor performance, but whatever they’re worth it’s more than something – and that’s an asset. Ask your provider what the surrender value is and use that as the worst case value. Life insurance (whether part of an endowment policy or separate) is a bit of a mixed blessing. It’s more helpful if someone else has it in your name! If you have no dependents, spend your money on sweets instead.

Genuinely valuable stuff

Most of what most people buy is approximately worthless in the medium term. Some things are worth owning though, such as works of art, classic jewellery, and antique furniture. If you’ve a collection of stamps or old teddy bears, you’ll already have an idea of what it’s worth. Your collection is an asset, even if you have no plans to sell.

Your clutter

What about your gadgets? Your new kitchen? What about cars (unless vintage), clothes, watches, paperbacks, furniture (unless antique or iconic) and so on? At best they’re rapidly depreciating assets, and at worst they’re consumables. They’re also hugely illiquid – selling something on eBay is a time sink. Add a value to your balance sheet if you like, but at a realistic re-sale price, and a 20% markdown. Avoid buying costly tat where possible – either eat your dinner off a table that will hold its value, or buy a cheap one at IKEA.

Soft or intangible assets

An expected inheritance

Difficult, this one, even leaving aside the morality of getting or hoping for a large inheritance. I think it’s an asset in the same way that an oil explorer is allowed to book oil it believes it owns and expects to pump but that is still in the ground. If I was 90% likely to inherit a large sum of money, it would definitely alter what I do with my money now. It’s true the inheritance might be smaller or later than expected, but we always have to work to probabilities.

A solvent husband

As blogger Fabulously Broke pointed out yesterday, it seems fantastical that a woman who got divorced 25 years ago and signed a paper waiving all rights could go back to her former husband to win a $1,600 a month. But it just happened. (One day I may need to modify this to include ‘/wife’. Not yet, however – it’s still overwhelmingly men who payout).

A happy marriage

If you and your betrothed do stay together, the marriage may make you richer – if you’re a man. Married men earn 20% more than single men in similar professions. Interestingly, married women earn 4% less than their single sisters, even accounting for kids. Bisexuals do best – but that’s a bit of an extreme lifestyle change, even for me.

Adult offspring

Children can enrich your life in many ways, but since slavery was abolished their cash value has been curtailed – economically-speaking, they’re cost centres. As adults, they’re worth having though, albeit a bit of a lottery. You’ll never get more than fraction of your investment back but your sunk cost will deliver some (inconsistent) returns – occasional labour and transport, instruction in the ways of the modern world, updates on how your generation ruined the planet, and maybe even grandchildren.

Health

This is literally priceless. I’ve had flu for the past week or so (hence the lack of updates) and it derailed my work regime and cost me in earnings. But that’s as nothing compared to a serious physical impairment, irrespective of whether it requires expensive treatment. If you’re healthy and free of debt, you can’t call yourself poor in my book.

What have I forgotten? Let me know in the comments below.

Image by FR Antunes

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{ 15 comments… add one }
  • 1 The Investor November 5, 2009, 10:07 pm

    Readers! Just to reinforce what an odd financial blogger you’ve stumbled upon here – and because it would be ridiculous to expect anyone to notice – I’d like to reveal that the title of this post was inspired by Pavement’s 1993 track “The Unseen Power of the Picket Fence”

    You can hear Pavement’s masterpiece time-distorting homage to REM on YouTube.

  • 2 FB @ FabulouslyBroke.com November 5, 2009, 10:31 pm

    You are so English, I love it.

    That dry wit is exactly what makes me love coming back to The Monevator over any of the other dare I say, less interesting investing blogs.

    Some of my favourite sentences:

    ” Period, as our US cousins say.”

    and

    “Children can enrich your life in many ways, but since slavery was abolished their cash value has been curtailed – economically-speaking, they’re cost centres.

    As adults, they’re worth having though, albeit a bit of a lottery. You’ll never get more than fraction of your investment back but your sunk cost will deliver some (inconsistent) returns – occasional labour and transport, instruction in the ways of the modern world, updates on how your generation ruined the planet, and maybe even grandchildren.”

    Thanks for the mention & the link back to the blog 🙂 Much appreciated.

    As for other assets, I cannot think of any others. You seem to have covered them all.

    Except .. perhaps, our minds!

    I know we can’t really put a price on it, but we do have earning potential, and our own best interests at heart to find ways to make and invest money, all in the hope of hoarding more.

    Curious — are you going to retire in England or flee to the south of Spain with your earned riches like many of your compatriots? 🙂

    See, I am starting to get a new perspective on retirement ever since trotting back from Europe.

    If I could save enough money (a million or two may be all I need), I could retire in Spain or Portugal quite comfortably and live off that money until I croak.

    It doesn’t cost much to live, and I could certainly do as they do, and grow my own food to cut down on costs.

    However, if I were to think about retiring in Canada or the U.S., I would need triple the amount saved, just because of the high cost of living and so on.

  • 3 Meg November 5, 2009, 11:42 pm

    I don’t see the point of listing my house as an asset when I run my numbers. I have no plans to sell it any time soon. I don’t know what I’d realistically get for it if I did — or how much it would then cost me to move and live elsewhere. There are just too many unknowns. And as they say, “Don’t count your chickens before they’ve hatched.” I’ve seen enough for sale signs in the neighborhood with ever-reducing prices to realize that a lot of people thought their homes were worth A LOT more than on paper than what they actually are in the market.

    What IS known is that I have agreed to pay off the loan. And I do want to pay it off. That’s one of my big financial goals, so I do list the debt to track my progress. And I don’t feel bad because that shows my net worth as a negative. I’m in DEBT. OF COURSE it is negative! I feel that it is still worth it to stay in my house, but that is a conscious decision I’ve made that has trade-offs.

    This doesn’t mean that one shouldn’t take into account your home at all. Someone who is $100k in debt with a home is probably better off than someone who is $100k in debt and is renting. So sure, keep that in mind somewhere when you look at your numbers.

    However, I think relying too much on guestimated “home value” numbers is dangerous. Consider those who suddenly felt “rich” when home values were going through the roof, and then suddenly felt “poor” when they tanked — even though for some NOTHING really changed with their situation because they weren’t trying to sell their homes (unless they were using their home as a loan machine and couldn’t anymore, but that’s just another reason why it’s dumb).

    And don’t get me started on people who are walking away from mortgages they agreed to pay — and can still afford to pay — just because they’re underwater on the loans.

  • 4 Dan Gravell November 6, 2009, 11:36 am

    This made me check the value of my cellar compared to my portfolio. Currently it’s about 10% which is way more than I’d allow in my portfolio, say, for commodities! My total purchases of wine over the past five years amount to about 33% of my current portfolio value. You’re right, sometimes there are assets hidden in unexpected places!

    About the property thing – objectively you are correct. However, in reality there are a lot more constraints on house trading. It’s not just a case of it being an illiquid asset, it’s also the fact that property tends to be controlled by, and have an interest of, all people living therein, whereas the trading of liquid securities tends to be governed by one individual in a family/household unit. They aren’t tradeable on anything like the same level.

    Oh and finally:

    “Children can enrich your life in many ways, but since slavery was abolished their cash value has been curtailed – economically-speaking, they’re cost centres.”

    Great sentence.

  • 5 The Investor November 6, 2009, 1:19 pm

    Thanks for all the comments guys!

    On the property issue, I agree property isn’t the same as very liquid assets (I don’t mean wine here, Dan 😉 ) but that doesn’t make it less of an asset, it just makes it a less liquid one. I don’t know what my shares will be worth tomorrow – the market could crash – but I know what they are worth right now. Yes, there’s also the opacity of pricing of housing, but this is largely a short-term thing. if I had an envelope with £10 or £20 in it that you could buy for £5 and you had every reason to trust me, I’m sure you’d agree the envelope would be worth owning.

    In the US, where you can walk away from negative equity, a house seems to me an incredible thing to own – an option on the house market, with no downside risk except the cost of holding.

    I’ll do a post on this at some point. I’m not being obstinate for the sake of it, and I appreciate some people like to think of it as separate from their assets for psychological reasons, but as Dan says, objectively it’s undeniable. (Send me the deeds to your home if you disagree. You can keep staying there until you pay the mortgage off! 🙂 )

    FB, I’m not trying to be dryly witty, that’s me writing straight-up heartfelt, soulful prose. Now I know why the kids all laugh at me. 😉

    Anyway, on the retirement issue my current feeling is I won’t retire. I may well wind down to doing something that only takes a day a week spread over three and earns diddly-squat, but I think it’s better to feel you’re doing something. When I sold out of my start-up (for no profit) a couple of years ago, I allowed myself the freedom to do nothing if I wanted. That’s what I ended up doing. There are also stats on how people die soon after retiring etc.

    Keeping in mind I haven’t had a regular salaried job for over ten years (discounting the start-up years, which were decidedly irregular), I don’t think as things stand they’ll be a big change. Still quite a long way off though, I hope!

  • 6 Financial Samurai November 6, 2009, 3:02 pm

    I’ll have to disagree 100% with you old chap! As the downturn has so handily demonstrated, property and stocks are an Illusion! The only think that counts towards your net worth is CASH, and that even could be subject to risk due to inflation (which I think none exists).

    I think you’ll agree with me after you read “You’re Net Worth Is an Illusion – Sorry To Spoil Your Delusion!”.

    Zillow told me I’m $400,000 wealthier last month. If that really were the case, I’d be popping up some Crystal and getting me one of them new Audi R8 V10’s! 🙂

    Best,

    FS

  • 7 The Investor November 6, 2009, 3:13 pm

    Fair enough! Send me your illusionary stock certificates and worthless property deeds, and I’ll wire you £50 to cover postage and your time! 😉

  • 8 Financial Samurai November 6, 2009, 3:19 pm

    Done! Can’t wait to get rid of these assets and be free! What’s your address? 😉

  • 9 Financial Samurai November 6, 2009, 3:23 pm

    BTW, is London rocking and rolling again given the stock markets and huge bonuses which are going to be paid out to thousands of employees this year?

    Do you sense the excitement?

  • 10 The Investor November 6, 2009, 5:14 pm

    Re: London, house prices at the top end are rising again, but that’s partly because the Pound (sterling) has plunged. Combined with price drops, the super-rich and rootless who love living here were getting say a 60% discount in non-sterling terms compared to mid-2007 for their Kensington flats, until prices recovered a bit.

    Friends in the City (yes, despite best efforts I have a couple 😉 ) are definitely feeling chipper. I wouldn’t say anyone else is excited as such though. Not yet.

  • 11 Rob Bennett November 6, 2009, 10:14 pm

    I very much agree with the point being made here.

    One I think you might be leaving out is the dollar value of learning and experience, especially if you are the sort of person who has the skills needed to transform learning and experience into an income-generating business at some point. Person A who is putting in time at a job is not as wealthy as Person B who is being paid less and who has less in the way of hard assets but who is sharpening his skills for the day when he will cash in through participation in an entrepreneurial venture.

    Rob

  • 12 FB @ FabulouslyBroke.com November 6, 2009, 11:44 pm

    I see.. 🙂 So it’s a bit like what I’m doing right now.

    I get contracts here and there (not a full-time job), and a couple of months is enough to pay for a whole year of expenses and savings

    But in between contracts (like now), I have a lot of downtime to do whatever I like without stressing out.

    The great thing, is I can also pick and choose my contracts, which was not allowed when I was a consultant for a corporation.

    Such a great bonus.

    I don’t think I could actually retire completely, but I wouldn’t be doing the same job as I am doing now.

    I’ll probably end up in something else. Maybe blogging more seriously as “Grandma in a Stone House” or something.
    @Samurai: No, wire ME the stuff. 😛 He’s in England, it’ll be cheaper to send it to Canada, no?

  • 13 Financial Samurai November 7, 2009, 1:04 am

    FB – Canada is still a foreign country, so the cost of shipping is the same!

    Monevator – I’m so pumped, I can’t stand it! We’re back to 2007 peak level earnings, with 10-20% less people to pay in my industry.

    Hiring will be ROBUST next year for sure.

    FS

  • 14 OldPro November 7, 2009, 11:50 am

    Financial Samurai, don’t overblow your point (I perused your article). Cash is the only hard asset, though if you’re an American (or a subject of PM Bungling Brown) your cash is cheaper now. It’s not all about inflation, on a global scale.

    Where then? Gold? I’m old enough to remember the last time. And there are times when property holds it value when cash does not.

    We are quickly reinventing asset allocation, as you see. And that is why all financial advisors, except sword-toting bunny rabbits, would consider all assets on a balance sheet.

  • 15 Financial Samurai November 7, 2009, 3:28 pm

    Ah, OldPro – Actually, “A Weak US Dollar Doesn’t Matter Folks!” is an article written this past week as a response to your comment. I don’t want to keep linking articles out of respect to the host, so you can have a read over at my site.

    It’s all pretty simple. Especially since the good times are back.

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