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| Pathways Advisory Group, Inc. Dustin J. Smith, CFP® |
Markets can be hectic, noisy and stressful. The financial media sensationalizes everything. Keeping market results in perspective is a constant struggle. We don’t recommend watching on a daily, weekly or monthly basis. It can feel much like a trip to Magic Mountain theme park. Even watching on an annual basis can be unproductive. However, if you insist on watching despite the perils, consider a different focus. Consider, especially during the accumulation years, a focus on “shares” not values.
We typically focus on portfolio value (at a given point). Portfolio value is simply each mutual fund share balance multiplied by the corresponding share price (Net Asset Value (NAV)). The NAV itself represents the collective price of the underlying basket of securities (stocks or bonds). What then is the primary driver of portfolio volatility? Changes in the share price (NAV) - what someone is willing to pay for the underlying basket of securities. The number of shares does not fluctuate with the market. Shares do not fluctuate unless you buy, sell or reinvest dividends.
It’s a fairly simple concept. But a share balance focus can have a profound effect. It helped many of us cope with the 2008 economic crisis. A focus on shares reminded us that fluctuations in price (attached to the shares we own) aren’t realized until shares are sold. This realization is especially powerful connected with the notion that investing is a lifelong commitment – with no specific destination.
There will, of course, come a point when you sell within your portfolio. You do, after all, save money to spend it. But it’s not a destination. Your shares will continue to grow in value. Your shares will continue to generate income. Your portfolio value will fluctuate but your shares won’t. As long as your withdrawals are reasonable (we spend a lot of energy defining a “reasonable” withdrawal rate), the selling is modest and periodic. The shares you accumulate will provide for you. You will survive the downturns.
A strong faith in markets is important. It’s one of the reasons for this blog. But it won’t make you immune to “noise”. If you find yourself caught up in the headlines, remember your shares. Remember Death, Taxes and New Market Highs. You don’t have to watch markets like your neighbor. You might ask your neighbor a riddle instead. “How many shares did you lose during the economic crisis?”
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