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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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.
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.
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.
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.
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. 🙂
Two facts, as food for thought:
– Only 202 of the 500 biggest companies in the United States in 1980 were still in existence 20 years later.
– On December 29, 1989, Tokyo’s Nikkei stock average reached its all-time peak of 38,915.87. Twenty years later, the Nikkei has never again reached that level — and, in 2009, reached a new low of 7,054.98.
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