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TO MEASURE IS TO improve. Businesses, investors, athletes and others embrace this notion, and it undoubtedly has value. Still, earlier this year, when my bicycle’s decade-old computer—which measured speed, distance and cadence—finally quit on me, I didn’t replace it.
These days, when I go out for my morning 20-mile bike ride, I like to think I’m going reasonably fast and I’m not happy if another cyclist passes me. But I also know that, when I occasionally use the Strava app on my phone to clock my average speed, I push myself that much harder. Nonetheless, all in all, I think not knowing is a plus. I enjoy my rides more and I tend to be a little more cautious.
What’s all this got to do with managing money? The financial world is made to measure. There are all kinds of numbers we can track, including how we spend our money, our savings rate, our retirement withdrawal rate, our net worth, our portfolio’s split between stocks and more conservative investments, the performance of each investment we own, and also the return of our overall portfolio.
Some of these numbers undoubtedly have value. For instance, I think every investor should know his or her portfolio’s basic split between stocks, bonds, cash investments and alternative investments. If folks are more aggressive—dabbling in individual stocks or perhaps overweighting certain industry sectors—they should also have a good handle on the size of those bets.
In addition, I think it’s worth tracking how much we’re saving if we’re still in the workforce and how much we pull each year from our portfolio if we’re retired. Are you saving at least 12% of income each year, including any employer matching contribution to your 401(k) or 403(b) plan? If you’re retired, are your annual withdrawals from savings no more than 5% of your portfolio’s beginning-of-year value? If we’re being prudent savers and spenders, I don’t see any great virtue in tracking our monthly expenses in detail, but I know others disagree and I see no great harm in doing so.
Where I do see the potential for harm: closely tracking the performance of each investment we own and, to a lesser degree, our overall portfolio. That’s especially true in a year like 2022, when both stocks and bonds have taken us for a wild ride.
As behavioral economists have discovered, we get far more pain from losses than pleasure from gains. Like me with my cycling speed, it may be more relaxing not to know. But closely tracking our investment results doesn’t just have the potential to cause us sleepless nights. There’s also the risk that our losses will prompt us to make panicky decisions.
To this general advice, I’d offer one exception. If you’re invested in individual stocks or bonds, closely tracking their performance probably does make sense. If one of your stocks nosedives, it’s almost certainly a sign that something is seriously amiss, and you’ll want to decide quickly whether to cut your losses or hang tough.
But if—like me—you stick with well-diversified funds, I don’t see much to be gained by following their performance closely, especially during broad market declines. What if you can’t help but look? My advice: Try to ease the financial pain by taking a broader view of your financial life. When you calculate your financial worth, include the equity in your home. Put a value on your Social Security benefit and any pension you’re entitled to. You might also put a value on your human capital—your income-earning ability.
To be sure, the math involved can be tricky. Still, a rough-and-ready calculation will likely provide some measure of comfort during turbulent financial markets. Indeed, even if you’re an aggressive investor, you’ll likely find that your stock holdings are no more than half of your overall wealth.
If you’re still in the workforce, you might also think about how much you’ll likely save between now and when you retire. Say you’re age 45, expect to retire at 65 and save $10,000 a year. You’re looking at $200,000 in future savings, which you might view as $200,000 in cash sitting on your household balance sheet. There’s a good chance this future cash will rival the amount you currently have invested in stocks—and thus, in the context of this bigger financial picture, any short-term market losses probably aren’t all that significant.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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There appear to be exceptions to every rule. One stock I really liked nosedived to around $50,000 in 2000. It’s now $532,803. (It recovered a bit.) A lot of internet stocks went bust in the 2000 timeframe. My exception was not an internet stock. In fact, the company received a lot of criticism because the weren’t “going internet.” It’s fun to review history like this and see if there is a lesson to be learned. My best individual stock investments were based on learning as much as I could about the management team. If I couldn’t figure the people out, I just went with index funds. The stock I mentioned was Berkshire Hathaway.
— “If one of your stocks nosedives, it’s almost certainly a sign that something is seriously amiss, and you’ll want to decide quickly whether to cut your losses or hang tough.”
Something is almost certainly seriously amiss? I dunno about that. I don’t think there have been any individual stocks no matter how worthy as investment choices that didn’t have nosedives. The best have been extremely volatile, and this should be known as the price of admission. It’s what makes great returns possible. Focusing on the stock price short-term moves is a mistake. But it’s also certainly true IMO that the vast majority of people should be in index funds.
The measurement I use which has the most significant and immediate impact is quite simple. Once a week I check the balance in the bank account that receives all of our deposits and from which all payments are made. This account is our ready cash reserve. We hold enough cash to cover a minimum of 6-months expenses in this account. This is a self-imposed threshold but one we are comfortable with. So when I am at my favorite online shopping site, hovering at the “Buy now” button, and my index finger is starting to tense up over the left mouse button, all I need do is think about how close the most recent account balance was to our minimum threshold to give me a nudge in the correct direction. No complex budgeting required.
I also unplugged from Strava, sucked the joy out of the ride for me. I still capture the ride data with a Garmin but for exercise/health reasons.
For investing, I mainly track things that determine progress against goals or drive future actions or decisions. Typically do a light weekly look and a quarterly update. Excel does most of the work.
Keeping track is mostly incidental to me. The first, 15th, and last day of the month are the biggest dividend days. Other dividends trickle in throughout the month. I absolutely love checking in most days to bask in this passive income. $10 dollars or $500, its good for my spirits.
Most of my expenses are paid via my cash-back credit card. It is so easy to see my monthly expenditure total this way. It’s auto paid in full every month, but they send me an email with the total.
Yup. Strava can kill you! I used to track my cycling obsessively. Now, at 68, I just enjoy the ride.https://www.mtbr.com/threads/strava-sued-over-death-of-william-flint-in-berkeley-hills.1168060/#post-15136925
When it comes to investments I am a big believer in benign neglect. If you save religiously, carefully set your asset allocation, and invest in index mutual funds, there should be little need for more than occasional rebalancing. The magic of compounding happens without needing oversight. I do use Quicken, which came in handy last year when I had a fee-for-service financial planner run the numbers for me to confirm I could afford the CCRC I was considering, but normally it just provides me a monthly check that I am not exceeding income. With all the recent noise about the market I have checked my asset allocation a couple of times, but since both bonds and stocks are down I haven’t needed to rebalance.
Looking at my fellow retirees, I find that many of them aren’t average. Either you have nearly no money and you’re really struggling, or you’ve got so much money you can’t spend it all.
When I was in my fifties, I saved 60% of my income, over $100K a year – who is crazy enough to do that? Other guys spent it all, and they still have to work. There’s naught so queer as folk!