Why a focus on net worth can be a distraction

December 28, 2012 By 3 Comments
I’ve been guilty of it, I’m sure you’ve been guilty of it, but obsessively tracking net worth is a mistake. I can recall checking into my stock accounts periodically and seeing that I was up one day and down the next. It’s fun, possibly an ego boost, until you see that number diving down on consecutive days and you start questioning your investment strategy. 

At its most basic level, net worth is simply the value of your assets less your liabilities. You take the value of things like your house, stocks portfolios and cash in the bank and subtract from this any debt that you have like mortgage debt or investment debt and credit card debt.

When to check net worth?

Don’t get me wrong, tracking asset value can possibly give you early warning signs into the health of specific companies or investment that you hold, if there are fundamental reasons for why something is up or down. Expectations of a poor sales performance from a company that you are invested in perhaps, or a product not performing well. There are other ways and means to validate and understand this rather than looking at stock prices. Investments in equities or property are investments in things that you expect to be around from many years.

Nobody thinks to revalue their house on a daily basis, but its interesting that we take this approach to our investments and net worth and attempt to track this daily, weekly, monthly.  Too great an obsession on net worth leads to a distraction that takes you away from achieving an end goal and sticking to an investment strategy to get there.

A net worth update may make sense where you have made major repayments of debt and you want to see what your new financial position looks like, particularly if you are looking at financing a big purchase or need to document your net worth position to a lender. Apart from these instances, obsessing too much about how your financial position has changed from day to day may actually distract you from the end game.

Goals take time and dedication and persistence to achieve, and you need to follow a plan to get there. This is true if you are saving for a house or car or trying to get into college. A net worth obsession, and periods of falling net worth in particular, cause you to question something when there may be no reason to do so. And it’s almost certain that you will have periods where things trend down, even if the health of your underlying investments is perfectly sound.

Other measures

I much prefer tracking things that are less subjective than how they are valued on any given month, day or hour. Things that aren’t influenced by what some senator has said or rumors of who is going to war. Measurable things like How much I am contributing towards my saving?  How much income am I getting from my investments? These are things that are more in my control and less subject to hourly or daily valuations.
Net worth when looked at over the long run, becomes an output of these things. Its a function of how much you have saved and what income your investments derive. Unless your are looking to sell it all, net worth isn’t something that you can use to buy you what you need. The income that you get from the assets that make up your net worth provides you real disposable income that you can use to finance your life.

Look at the Dow now!

One last thought. March 9th 2009, the Dow Jones Index  was tracking 6500. People fled stocks into bonds and otherwise abandoned stocks because their net worth was being crushed. Fast forward to December 2012, the Dow Jones is hovering at 13,000. Markets will rise and fall, and net worth will fluctuate over periods of time. Over the longer term, a consistent, sound investment strategy should lead to an increase in net worth based on actions that you would have taken to get there.
Have any of you course corrected because of a down period in your investments and come to regret it?

 

Filed Under: Favorites, Investing

Comments

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  2. Integrator says:
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Trackbacks

  1. Are you “wealthy” ? says:
    April 8, 2013 at 11:12 am

    [...] However In 2009 Mr Market his mood darkened and he wanted me to sell these same things to him at fire sale prices.  You can see that there is a problem with this approach if I am focussed on this definition of wealth as my goal. At times I may be a millionaire depending on the markets mood,  at other times I am not. In my view, setting goals based on these type of measures can make goal setting confusing and tough. Its why I believe a focus on net worth can be a distraction. [...]

    Reply

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