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When
you are 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. 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. If they don't
like this measurement, they may well
take hasty, ill-advised actions, such as
investing in less-stable stocks or bonds
or selling blue-chip securities.
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 will 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.
If using 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 is 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 is 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
have 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 are
making on your financial journey and
what steps you might need to take to
make the rest of the trip even smoother.
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