If there’s one thing the ups and downs of the financial market in the last few months have taught me, it’s to think differently about investing. Like many, I often think about my small retirement portfolio in terms of money. I know how much money went in, so I feel like I should have $X. But that’s not true, of course.
What I really own is X shares in an index fund.
Unless I’m planning to sell them, it doesn’t matter how much those shares are worth today.
What matters is whether or not what they’re invested in is quality, because I don’t want to take out the same amount of money I put in. If I had, I would have kept it in the bank.
My motivation to invest the money in the first place is the expectation that these shares will eventually increase in value and can be sold for more later on. If they only returned my initial investment, I would be very disappointed.
So next time you see your investment portfolio numbers, remember that it’s the shares you own, not the money. Unless you’re retired and pulling it out, that’s good news.
And this lesson will serve us in good times too. Don’t be like some of the dot com “millionaires” who had millions in stock but who never redeemed it. Then when the stock went bust, they had nothing. But they never really had millions in the first place, just X shares.
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7 responses so far ↓
1 Dawn // Oct 30, 2008 at 11:09 am
This is the same advice I have been reading for people concerned about their home values dropping - really, that number is meaningless unless they are planning on selling their house right now.
2 Rich // Oct 30, 2008 at 3:59 pm
I too have been thinking alot about what it means to “invest.” You’re spot on about the idea that you own a number of shares, not a certain value. I believe this is where the idea of dollar cost averaging came about. When the market was down you could buy more shares for the same investment amount.
3 That One Caveman // Oct 30, 2008 at 4:02 pm
You’re spot on, there. A stock’s reported value is just what you might expect to earn if you sold it at that very moment. Dawn’s right - just like a house, that number’s only important if you’re selling (or buying) right now.
4 Michael // Oct 30, 2008 at 4:35 pm
Go further! You don’t own a “share”, you own so much cash, accounts receivable, real estate, CDOs and everything else on the public company’s books.
5 Funny about Money // Oct 30, 2008 at 7:44 pm
Well said. That’s exactly what I’ve been told about the plummeting value of my two houses: a loss isn’t realized until you sell. So…don’t sell. Eventually (in someone’s lifetime, surely) things will get better.
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