Pin It
Use "Odometer" - Not "Ruler" - To Track Financial Journey

When you're on a long driving trip, how do you check your progress? Do you stop every few feet, pull out a ruler and measure your progress from Point A to Point B? Of course not. You drive for miles and miles and then, every so often, you look at your odometer. And this same method of evaluating how far you have come is valid for another type of trip - your financial journey through life.

Unfortunately, too many people, when evaluating how well their investments are doing, choose the "ruler" over the "odometer." And the "ruler" they choose is their monthly investment statement. Too often, they get nervous, upset - and even panicky - if this month's statement shows a drop in value from last month's statement. And if they don't like this "measurement," they may well take hasty, ill-advised actions, such as purchasing investments they shouldn't buy and selling investments they shouldn't sell.

This type of rushed decision-making points out the dangers of gauging your financial progress over very limited periods of time. Quite often, if you look behind the figures on a monthly statement, you'll find the cause for a short-term price drop is not reason enough to sell an investment. For example, if you see that a stock has lost money over a couple of months, you might do some research, possibly with the help of an investment professional, and discover that the company has experienced some temporary problems with its products and services. But you might also find that the company itself still has solid fundamentals and good prospects for the future. Therefore, the stock may well be worth holding.

So, if using a "ruler" in the form of monthly investment statements is not a good idea, what type of "odometer" can you use to check your progress? Actually, you can still use those same monthly statements - just look at the longer-term information that should be contained there. (If this data is not shown, you may have to do a little digging - but it's worth the effort.)

For starters, how have your individual investments done over the last five or ten years? By looking at how a specific investment has fared over a period of several years, you can get a sense of what's really going on, although an investment's history is not always a guide to its future results. Ask yourself these questions: Does an investment have an overall strong track record, with the occasional "blip" caused by external factors, such as an industry downturn or a bear market? Or is it truly a chronic underperformer?

Another "odometer"-type measurement is the difference in your portfolio's total value from one year to the next. Some of this difference will be due to additional contributions you've made, but beyond that amount, you should be able to determine how much your portfolio has gained - or lost - during this time period.

By looking at the long-term returns of individual investments and the year-to-year difference in your portfolio's total value, you can gain a clear sense of the progress you're making on your financial journey - and what steps you might need to take to make the rest of the trip even smoother.

----
v2i22


Pin It