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Made to Measure

Jonathan Clements

“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.

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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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macropundit
macropundit
3 months ago

— “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.

Humble Reader
Humble Reader
3 months ago

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.

David Powell
David Powell
3 months ago

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.

M Plate
M Plate
3 months ago

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.

Mike Wyant
Mike Wyant
3 months ago

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

mytimetotravel
mytimetotravel
3 months ago

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.

Ormode
Ormode
3 months ago

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!

Last edited 3 months ago by Ormode
Chazooo
Chazooo
3 months ago

My investing philosophy is similar to your current cycling philosophy in that the knowledge of being in the comfort zone is sufficient to attain the goal. Also the reason I don’t have a Fitbit or a Kardia Mobile, but that’s just me trying to peacefully experience however much life is left for me.

Nate Allen
Nate Allen
3 months ago

Good advice to always look longer term. One thing I do is when I log into my investment account and am inevitably shown the default “1-day” view for my index fund(s) of choice, I change the view to the longest possible timeframe. Over the course of 20-30 years or more, the dips/spikes are washed away and the index fund direction looks much less scary.

Stacey Miller
Stacey Miller
3 months ago

I’ve never had the knowledge of my biking speed until my current bike–an ebike I treated myself to this year. I try not to cheat too much, but I no longer dread going up hills!

Now to $…I’m not sure I’m able to stop tracking what we spend via Quicken. Character flaw? Or vindication choosing to become an accountant was the correct path as it’s hard-wired into my being?! I may stop being as fastidious. I have lost a lot of time LIVING by carrying the Family CFO mantle and we’ve hit our goals (although I still pine for a lakeside place!) It’s time to discover other hobbies!

R Quinn
R Quinn
3 months ago
Reply to  Stacey Miller

If you have read some of my HD posts, you may know I’m anti detailed budgeting and tracking spending, but I understand that many people see both as necessary, though I don’t understand why.

If a person saves first to meet short and long term goals and doesn’t live above means carrying credit card debt over to the next month, does it really matter what is spent?

Do you find that your tracking sometimes makes you feel guilty about spending or stressed? If the criteria I mentioned are met, in reality what more can a person do?

On the other hand, if lack of saving or credit card debt are issues, then a detailed look at spending is necessary, but if automatically saving first is used, half the problem is solved.

tshort
tshort
3 months ago
Reply to  R Quinn

Except when one does finally get off the paycheck gravy train and moves into decumulation mode. Then what happens if you don’t have a clear handle on your spending? And just because you have no credit card debt doesn’t mean you’re not overspending. My cc is set up to autopay the entire balance each month, regardless of how much that balance is. As long as I don’t hit the rev limiter on the CC, I’m none the wiser – and it all comes out of savings anyways, so there’s no immediate danger of exhausting the bank account.

I do like having a clear view of our spending, though. I used to wear a heart rate monitor at the gym during spin class, and also when I went out for an actual bike ride. After awhile I no longer needed to wear the fitbit on my bike rides because I knew what aerobic vs anaerobic heart rate felt like.

The same thing is now true of spending. By keeping track of spending in some detail I gained an intuitive sense of how much we’re spending during any given month.

So tracking spending and coming up with some sort of budget are a good way of preparing for retirement if one must decumulate to meet annual spending needs.

R Quinn
R Quinn
3 months ago
Reply to  tshort

If you pay your bills each month, including discretionary spending, that’s including paying all credit cards in full, what do you use the info you track for? Do you really care how much you are spending if it remains within the guidelines of living within one’s means?

I don’t track anything, but I know what I spend. It’s always within several dollars of our net pension and SS deposits each month. When I have a non-routine expense it comes from an account where each month I put money designated (saved) for a special purpose – save in reality.

If I didn’t have a pension I would do the same thing based on a fixed withdrawal each month from retirement investments.

Same for those planning for retirement. You save first which then determines working lifestyle and spending. Now, if there is a major reduction in spending upon retirement (unlikely over time) you are ahead of the game but never behind. I also assume some level of saving continues after retirement.

As I said many times, all saving and planning for retirement should have a goal of replacing 100% of base pay ( not total compensation) pre-retirement because while how you spend will change, the total, including new discretionary spending and ongoing emergency fund saving will not or maybe better, should not.

tshort
tshort
3 months ago
Reply to  R Quinn

R Quinn wrote:

If you pay your bills each month, including discretionary spending, that’s including paying all credit cards in full, what do you use the info you track for? Do you really care how much you are spending if it remains within the guidelines of living within one’s means?

Which ‘means’ would those be??? I can see how that might work for someone who has retired from earning a paycheck and has a pension check rolling in each month that, along with perhaps other sources of passive income, more than covers their monthly spending.

But what if someone retires without any passive income at all? Or only social security, which will only cover less than half of their monthly living expenses?

Now, by definition, that person would be living above their ‘means’ and would need to withdraw money every month from their savings and/or investments.

Welcome to the world of retiree decumulation. It’s a 30-40 year game of roulette, where you have to invest wisely, have nerves of steel, and be willing to bet on the long-term viability of your decision to step off the work bus and live only on your portfolio. If you don’t fully understand your burn rate you risk running out of money before you die. If you don’t spend enough money doing the things you always dreamed of doing, you risk having wasted part of your life working and saving, rather than starting earlier to enjoy the fruits of your labor.

And the first day after you retire, you know for sure one of those two scenarios is going to be true.

Last edited 3 months ago by tshort
parkslope
parkslope
3 months ago
Reply to  R Quinn

Doesn’t assuming some level of saving continues after retirement implies no decumulation is necessary?

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