Tomorrow is April Fools’ Day, that special day when blogs that don’t try to be funny for the other 364 days do their best to crowd in and get some laughs. NICE TRY BASTARDS THOSE CHUCKLES ARE MINE. I don’t do research and you don’t do jokes. THOSE WERE THE RULES.
Tomorrow is also the day thousands of personal finance bloggers, general money nerds, overachievers, and people who love arbitrary endpoints meticulously enter all their financial information into a spreadsheet, eager to find out if they’re slightly richer this month than last.
Unfortunately, I am now one of those people. Marrying a fellow personal finance blogger isn’t all lollipops, blowjobs, and 75% savings rates. I now have to subject myself to a thorough examination of my accounts once every month as we do what the wife refers to as “the spreadies.” It’s pretty much the financial equivalent of a colonoscopy.
Vanessa keeps incredibly detailed spreadsheets of all our assets. Each month we look at our cash on hand, our brokerage statements, the value of my private mortgage portfolio, and so on. With cash in approximately a dozen accounts, I’m reminded constantly each month how I need to simplify my accounts. I usually just go and play Playstation baseball until said feeling goes away, but still. Thinking about things is hard, guys.
There are some advantages to tracking our net worth each month. It forces me to stay on top of my books, ensuring I have accurate numbers. During months where we spend a lot it can serve as a stark reminder that we should probably get the cash flow under control. And when it pops higher, it’s a good feeling. I like being richer than I was last month.
The issue is when the net worth starts going down.
The majority of our investments are in Canada. At its trough in January, Canada’s benchmark stock index was down some 20% from highs last set in the latter part of 2014. It has since recovered quite a bit, but it was still the cause of stress for a while there.
When you have a few bucks in stocks, falling prices aren’t a big deal. Your savings rate can make up for it, which ensures the ol’ net worth goes up each month. It might not go up as fast as you’d like, but it’s still heading in the right direction.
But what about if you have more? Say you have $200,000 in the stock market and it falls 12% over the course of a year. At the end of the year you’d have $176,000. You’d have to save $24,000 during that time just to break even on the amount you were losing, less any dividends received.
I’d be willing to bet saving $24,000 annually per year would put you in the top 1% of Canadians. It is not a small feat.
Or what happens if stocks fall 5% in a month? Your $200,000 is now worth $190,000. If you didn’t save up $10,000 that month, you went backwards. Good luck doing that, even if you are a superstar saver.
Going backwards shouldn’t be a big deal. I think we all realize that our net worth isn’t going to go up and to the right every month. But it still stings when it happens.
I’ve gone through stock market corrections before. I had money invested in 2008-09 when it looked like everything was going to zero. I think I navigated this correction pretty well too, buying what I consider to be good companies at cheap prices. And yet I still cringed each day when the market was really tanking, knowing I had sometimes lost a thousand dollars plus in a day.
I’ve made good investments and I’ve put money to work into things where I’ve lost everything. I commentate on the stock market for a living for goodness sake. And I still get that terrible feeling in the pit of my stomach when we have a big down day.
What chance does a less experienced person have?
Tracking your net worth monthly takes what should be a marathon and divides it into 100 meter sections. It encourages short-term thinking for what should be a long-term goal. And most importantly, it helps create a sense of urgency where there should be none.
How many months in a row could you stand to see your net worth plunge before you decided to pull your money out of stocks? That answer depends on a number of different factors, obviously, but I know people who seriously think of selling everything after a 5% downturn. What chance would they have during a 25% drop?
Besides, everyone who figures out their net worth to the penny on a monthly basis cannot believably say they don’t care about it. Why go to the trouble of figuring it out if you’re going to ignore the results? The reason why people figure it out is because they care, and they care deeply.
Okay, Nelson, how often do you think I should calculate my net worth?
I think a maximum should be each quarter. You’re still probably catching a lot of short-term moves in there, but at least a quarterly net worth statement avoids the real ups and downs you can see each month.
Annually is the choice I’d make, but keep in mind that isn’t foolproof either. The market might have peaked at the end of year one and then dove at the end of year two. There’s a problem with choosing arbitrary endpoints no matter what they are.
When looking at your net worth, don’t focus so much on the final number. Instead, take a look at what’s happening behind the scenes. If the market is going down, there isn’t much you can do to stop that. If you have a bad month because of having to pay taxes or a big bill, factor that in too.
Your net worth should be a big picture thing. Sometimes there will be bumps in the road, but hey. Shit happens. Don’t reduce something that takes a lifetime into one month intervals. As long as you’re pointed in the right direction, stressing out about changes in asset values you can’t control will only hamper your progress, not help it.