Don’t Get Trapped in the Numbers

by | May 7, 2004 | Archives

Most investors get trapped in the numbers. This can be a huge error. Money is more than mathematics. When we are caught in counting we fail to see the big picture. Yesterday’s message looked at my portfolio and changes recently made. This portfolio has done very well….for me, but only because I have stuck to principles that work… for me. First I invest in what I know. Second, I invest in my beliefs and third I accept what I did not know.

I am not trying to sell you on this portfolio. The agenda of this message is “Have a portfolio that is you…and love it!”

Hopefully sharing my portfolio thinking will better define your own unique system.

My decision making process is based on many factors including #1: ownership, #2: principle, #3: logic #4: intuition #5: trends #6: action and #7: diversification.

This message looks at ownership.

I consider my portfolio uniquely intimate to my knowledge, standard of living, lifestyle, wants, needs and desires. I do not separate the results of my portfolio from my life. Most investors don’t factor their lifestyle into their portfolios at all. They use artificial bellwethers instead.

For example if the Dow Jones Industrial Average is used as the standard and it has risen 25% over a period when their portfolio gained 30% they feel good for outperforming the standard. If their portfolio only rises 20%, they feel bad.

Yet they do not look at how their profits relate to their lifestyle. I care less about the Dow or any artificial standard. My goal is to have more money than I had before after expenditures.

Here is a really important rule. Make expenditures part of your portfolio decisions. You have more control over you spending than almost any other financial factor. If the stock market is down, there is little you can do about it. If the economy is lousy, you alone cannot improve it. If your currency is crashing, you can’t really change the momentum. But what we all can do is to change the way we spend!

One friend of mine is one of the largest portfolio managers in Canada and he once told me about an unhappy client. This lady had inherited three million dollars. He said he was about to earn 10% ($300,000) for her and she spent it all. This year he felt he would be lucky to earn 4% for her ($120,000) yet she wants to spend $300,000 again. His comment is “I cannot convince her that she must reduce her spending if she does not want to erode her capital.”

Next message looks at how to adjust for lifestyle.

Until then, good investing,