Focus on Share Balance, Not $ Balance

Focus on Share Balance, Not $ Balance

When you get your investment statements, what is the first thing you look for?  The balance, right?  Of course, you do.  We have an innate desire to know if the balance went up or down.  If it went up, we are energized and feel like we made good investment decisions.  If it went down, we immediately question ourselves.  You think, “Why do I bother with this, all I ever do is lose money.”

What if, instead, you focused on what you can control?

If you are the accumulation phase of life (meaning not yet retired), I’d encourage you to focus as much as possible on the on your ever increasing share balance rather than the actual dollar value investment balance. That would be a much more useful exercise as it would force two feelings that will help drive you toward investment success.

One – you’d see an ever-increasing share balance, which would, of course, be fun to see.  Remember, every time that you’ve accumulated another share, you added another literal asset to your family balance sheet.

Secondly, it would force you to have the correct view of market corrections and volatility in general.  Let’s look at an example.

Let’s say you’re investing $300 per month into your 401k plan and you own a target date fund.  The share price of this hypothetical fund is $10 per share.  So, prior to the market downturn, you were purchasing 30 shares (300 / 10) each month.  Then there is a 30% market correction, so let’s say that the share price of your hypothetical fund is now $7 per share.  This means that this month, instead of purchasing 30 shares, you purchase 43 shares (300/7 = 42.85 specifically) for the same $300 dollars.  A much better deal, yes?

Most people in the speculator herd (see the article on investors vs. speculators) seem to forget that price and value are inversely related. As the price of anything (whether a pair of jeans or a share of stock) is going down, the inherent value is going up.  As the price is going up, the inherent value is going down.  Stated another way, isn’t a pair of jeans that is regularly priced at $40 a better deal – or value – at $30?  That’s rhetorical of course.

When we connect a physical product that is purchased in a retail store to the idea of buying on sale, literally 100% of people would rather buy the same product for less.  The beautiful thing about a systematic investment plan (or dollar cost averaging as it’s known) is that it is a process that forces you to be greedy when others are fearful and fearful when others are greedy as Warren Buffett likes to say.  You will accumulate fewer shares when the market is overvalued, but most importantly accumulate shares by the truckload when the market is on sale.

At the end of the day, focus on increasing your share balance, not the $ balance.  Your goal is the accumulation of assets, not the dollar balance that you have no control over.  By doing this, in the long run, you can make market volatility your friend and you’ll make much better financial decisions as a result.

 

 

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