Friday, December 05, 1997
Checking the Pencil
Marks
by Patrick Chylinski
([email protected])
Remember when you were a kid and you wanted to keep track of how tall you were and how fast you were growing? You’d stand in the kitchen doorway with your back against the door jamb, and your parents would place a pencil mark above your head to mark how tall you were. You could compare that mark to the previous marks, and see how much you’d grown over time.
If you did it too often, the difference from one mark to the next wasn’t very large, and it was a little disappointing. The fun part was waiting a few months before measuring yourself again. If you were lucky (and by lucky I mean that you happened to have a growth spurt), you’d have grown quite a bit, and the new mark would be a lot higher than the previous one.
What was really amazing was to see the difference from one year to the next. That’s when you could really see how much you’d grown.
Maybe that’s a good analogy for investing. Short-term investors (maybe we’ll call them traders, because they generally tend to trade quite a bit) check their stock and mutual fund values daily. There’s nothing wrong with that, of course, but it tends to narrow your focus to one question: is my portfolio worth more today than it was yesterday? That’s a perfectly valid question, but I believe it lends itself to the quick buy-sell mentality. After all, if your portfolio isn’t worth more today than it was yesterday, maybe that’s an indication that you made some poor investments. And if that’s the case, maybe you should sell what you have and buy something else.
Long-term investors focus on a different, two-part question: are the fundamentals of the companies I’m invested in similar to those that existed when I made my original purchase, and will these portfolio holdings help me reach my investment goals? If the answer to these questions is yes, then daily or even monthly price fluctuations are of little concern.
What really matters is not that your portfolio is worth more today than it was yesterday, but that it performs well in the context of your investment goals, tolerance for risk, and personal investment time-frame.
So instead of checking the balance of your 401k every night, or cursing every time you see one of your stocks drop a point, focus on what is really important in the short-term: like going out for a romantic dinner with your significant other, playing catch in the backyard with your son, or picking up that book you started to read but never got past page 12.
If you’ve made good, solid investments, time is your ally. And a few months down the road, or a year from now, chances are your portfolio will be worth a good deal more than it is today, or tomorrow, or even next week. Be patient and let time take its course.
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