Author Topic: Perspective: looking at shares instead of worth  (Read 4582 times)

Grog

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Perspective: looking at shares instead of worth
« on: April 30, 2014, 02:14:17 AM »
Does anybody else do that?
Instead of looking at my actuale portfolio worth, I calculated the average price of my total-stock market index fund in 15 years (my retirement goal), assuming an yearly average growth of 5% to remain prudent.
Then I've taken my financial goal (30,000*25), divided by the stock price and the result is of around 5000 shares. So in order to retire I need that amount of shares by 2029.

And now my (first page) portfolio spreadsheet never shows total worth, only number of shares, how much I miss to reach that goal, the average price I^'ve paid and the current price.  So I'm very happy every time the market crashes and not so happy when increase, and this has helped me a lot with fear "management"

Of course deep in the spreadsheets I still calculate the total worth and I keep an eye on it, but having this goal of reach a certain number of shares instead of money makes it easier.

Does anybody else do this? Or is it common practice in the accumulation phase? I0ve just never read about this tip and myself I found it a small adjustement that helped a lot.

Khan

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Re: Perspective: looking at shares instead of worth
« Reply #1 on: April 30, 2014, 03:45:57 AM »
Nope, but that's an interesting perspective.

clifp

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Re: Perspective: looking at shares instead of worth
« Reply #2 on: April 30, 2014, 04:10:37 AM »
I quite like the concept. I fairly often considered what percentage of a company I own and then I consider things like how much the CEO is cost me. So for example Warren Buffett's $100,000 salary is costing me $.10 and even with jet and such he is costing $.50 which considering my pretty large position is an amazing bargain.  In contrast the CEO of Countrywide had one of this $50-100 million while bankrupting the company. The $15 a year I was paying him to manage my small position in Countrywide was criminal.

matchewed

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Re: Perspective: looking at shares instead of worth
« Reply #3 on: April 30, 2014, 05:16:08 AM »
As the value of each share changes so does this metric. As the value if each share changes the amount of money you need doesn't. What does this metric do for you?

Grog

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Re: Perspective: looking at shares instead of worth
« Reply #4 on: April 30, 2014, 06:08:45 AM »
It's just a way to better cope with investing in bear markets: if you continue investing with the goal of reaching the projected 800,000 $ in 10 years, but you are in a bear market, you will have the impression that the goal is going further away, if the total worth is shrinking of 3% every month. You invest, and you stash instead is lower and lower! And you start (maybe) panicking

If instead you start thinking about number of shares, and thus your goal is to have in 10 years 4500 shares at the projected 10y away price of 180$, then during bear markets you are actually crying of joy because you want to buy all of them and the price is getting lower, so the goal of 4500 shares is coming nearer and nearer and faster!

Both are identical situation (projected 800,00$ in 10 years VS 4500 shares @ projected 180$/shares), only the perspective changes, but I found it very powerful.

And during bull markets you can always switch back to total stocks worth and you see the actual money increasing, so in the end you are psicologically always happy :D

matchewed

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Re: Perspective: looking at shares instead of worth
« Reply #5 on: April 30, 2014, 06:16:55 AM »
It's just a way to better cope with investing in bear markets: if you continue investing with the goal of reaching the projected 800,000 $ in 10 years, but you are in a bear market, you will have the impression that the goal is going further away, if the total worth is shrinking of 3% every month. You invest, and you stash instead is lower and lower! And you start (maybe) panicking

If instead you start thinking about number of shares, and thus your goal is to have in 10 years 4500 shares at the projected 10y away price of 180$, then during bear markets you are actually crying of joy because you want to buy all of them and the price is getting lower, so the goal of 4500 shares is coming nearer and nearer and faster!

Both are identical situation (projected 800,00$ in 10 years VS 4500 shares @ projected 180$/shares), only the perspective changes, but I found it very powerful.

And during bull markets you can always switch back to total stocks worth and you see the actual money increasing, so in the end you are psicologically always happy :D

But during those markets the share price isn't a static thing and at the end when you have those 4500 shares is it 4500 shares at 200/share or 2/share those are very very different numbers. As that share price goes lower you need more and more shares to FIRE. As that share price rises you need less and less. It suffers from the same exact issue you just outlined without having the hard dollar value in front of you in order for you to run other calculations.

But hey if it works for you cool.

Grog

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Re: Perspective: looking at shares instead of worth
« Reply #6 on: April 30, 2014, 06:30:41 AM »
I see what you mean. The trick is to never recalculate your total number of shares needed instantaneously as a goal, because 4500 is the number with the average growth over 10 years, and this is what matters.

Of course this only counts/helps in the early years of the accumulation phase, as a psycological crutch, to keep in mind that you are going for the long run and for the average value and enjoying shooping for many shares at bottom value.

A couple of years before retirement I would probably stop doing this and only looking at total worth and just wait and hope for a bull market that accelerate the timeplan and allows me to have enough capital to transform in fixed income.

matchewed

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Re: Perspective: looking at shares instead of worth
« Reply #7 on: April 30, 2014, 06:38:36 AM »
I see what you mean. The trick is to never recalculate your total number of shares needed instantaneously as a goal, because 4500 is the number with the average growth over 10 years, and this is what matters.

Of course this only counts/helps in the early years of the accumulation phase, as a psycological crutch, to keep in mind that you are going for the long run and for the average value and enjoying shooping for many shares at bottom value.

A couple of years before retirement I would probably stop doing this and only looking at total worth and just wait and hope for a bull market that accelerate the timeplan and allows me to have enough capital to transform in fixed income.

I'm not sure you do. What if you have 4500 shares and the shares are only 10/share. You haven't hit your goal.

warfreak2

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Re: Perspective: looking at shares instead of worth
« Reply #8 on: April 30, 2014, 06:40:23 AM »
I see what you mean. The trick is to never recalculate your total number of shares needed instantaneously as a goal, because 4500 is the number with the average growth over 10 years, and this is what matters.
I can see this as a psychological benefit, but statistically it doesn't work like this. The share price at the time you did the calculation is a worse predictor than the current share price, at any instant in time. While every little future movement averages out in the long run, the same can't be said of movements which already happened in the recent past.

NewStachian

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Re: Perspective: looking at shares instead of worth
« Reply #9 on: April 30, 2014, 06:45:43 AM »
It's just a way to better cope with investing in bear markets

For this reason, I think it's a neat way of looking at it. But, psychologically, it seems similar to dollar cost averaging your new money each month. I'll sometimes wait a few day for a dip to get an extra share of an ETF. it makes almost no difference in the long run, but it gives me warm fuzzies about my pro investing skills. Who knows... maybe it subconsciously makes me like investing even more and makes me invest more in the long run.

Cool? Yes. Should people also track dollar amounts? Definitely.

Grog

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Re: Perspective: looking at shares instead of worth
« Reply #10 on: April 30, 2014, 07:11:42 AM »
I'm not sure you do. What if you have 4500 shares and the shares are only 10/share. You haven't hit your goal.

Lets make an example: if you are at the beginning, and you can save 10,000$ per year and your share costs 30$, you can buy around 300 shares.
Even if the total international stock market collapses and goes to 10$ a share (-60%), and you can buy 1000 shares per year, it would still take 4 years to reach 4500 shares. And I don't think that such dramatic, lasting bear markets are so common.

That's why this perspective could be useful AT THE BEGINNING of the accumulation phase, where you probably have no way to reach your goal of shares number.

Afterwards, when you are more navigated and you are wating to RE, you will have less problem in digesting fluctuations and you will adjust everything accordingly.

skyrefuge

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Re: Perspective: looking at shares instead of worth
« Reply #11 on: April 30, 2014, 08:49:26 AM »
I'm not sure you do. What if you have 4500 shares and the shares are only 10/share. You haven't hit your goal.

All retirement-saving plans that involve stock investments (including "The Shockingly Simple Math") rely on projected/assumed long-term average rates of return of the stock market. Grog's method is simply a way to incorporate those assumptions more directly into his goal-tracking. A way to smooth-out/ignore the noise, since the noise, by definition, provides no value. You appear to be saying "no, you totally can't rely on any of those projections, market prices are completely random and unpredictable". That contradicts the basic foundations of retirement planning.

And yes, while it's certainly important to also keep track of your net worth in dollars, especially as you near a retirement decision (which Grog is totally on-board with), I'd say that having a share-target could be useful at that end-point too. I often say that it's quite meaningless to narrow your declaration of "FI" to a particular day, month, or even year, given how greatly your net worth can vary in a day, month, or year with a large exposure to the volatile stock market. But if you could come up with some number of shares and an "expected fair price" for each share, that might be a better way of deciding whether or not you've hit your target than trying to pin down the bucking bronco of price.

matchewed

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Re: Perspective: looking at shares instead of worth
« Reply #12 on: April 30, 2014, 09:33:29 AM »
That's why I left in the "Hey if it works for you cool" point. I'm not saying the market is completely unpredictable I'm saying this metric is more complex as it relies on not only the value of the shares but the quantity of the shares. Looking at your net worth only has one step, looking at your net worth. As a metric it is more simple and does the same exact thing. Sure I'll agree that trying to break it down into quantity of shares may disconnect the concept of money from it to some obscure unit and that may give a psychological edge but so does educating yourself on financial matters to begin with. If it's some demystification process that someone uses fine whatever. I just don't personally see the value in making something fairly straightforward more abstract.