We are an addicted society. Constantly checking our smart phones, our Apple Watch or Buzz Feed’s latest list. We have become so hyper-focused on #WhatsTrendingNow that we lose perspective of what is really important
Like checking how your investments are doing throughout the day. Where is the Dow NOW and where will it close tonight? Unless you are a day trader, why would you ever care where the Dow, S&P, or any other index is for that matter? There is not one rational reason to know (unless you are buying naked options). Checking your stocks or mutual funds each day? Ditto. If you are 43 years old and your investment is set for long-term growth, what comfort will you get from checking values daily or even weekly? If the price is up—you feel good. If the price is down—you feel bad. But whether you’re in agony or ecstasy, the number on that page is not YOUR number, unless you sell it.
When it comes to monitoring your assets, you want to set a realistic order of magnitude. And to do that, you need to come to grips with four “buckets” of your money.
- Emergency fund
- Short-term goals
- Mid-range objectives
- Long-term mission
You want to base your emergency fund (independent of the balance in your checking account) on a rational number that fits your circumstances. For example, a single-earner family typically needs a larger emergency fund than a two-earner family. A self-employed person might require a bigger safety net than someone in a stable job. There is no hard and fast rule of thumb.
Determining your number begins with knowing what it takes to run your life (not including vacations and entertainment) every month. Then you’ll take into account any disability income insurance (knowing the waiting period and definition of disability), factor in any other means of support and then consider how long it might take to get the cash spigot opened again. Your emergency fund can be in a money market account, spread into short-term certificates of deposit or a savings account. You can rest assured that you won’t earn much on this money, but that’s OK—this is your reservoir of safety and liquidity—not to risk on growth.
These might include vacations, school tuition, camp costs, home refurbishing or other projects or needs that are going to happen soon. Again, this is not the place to make bets on the market. Short-short-short term bonds (of the highest quality), Certificates of Deposit or other liquid accounts are just fine. After all, you want the money there for the intended purpose. Don’t feel bad that you didn’t bet your daughter’s next semester college tuition on Apple. While it might go up, it might also go down and then where’s the dough coming from?
So maybe you’re planning a family, or a down payment on a home and you’re thinking five to seven years out. Now we’re talking Mid-range objectives. Depending on your ability to bear some market risk, you can probably put some of that money into balanced-type investments between larger stable stocks and short-term bonds. As you move closer to your target, you need to shift away from stocks into more liquid and stable positions. If you cannot stomach the ups and downs, then stick with the options that provide the highest level of comfort. You might not maximize your dollar, but you won’t trash it either. If your Mid-range is closer to seven years, than you can put some of the money in diversified equities, but you cannot be complacent—and wind up a year away from target and still 50% in stocks. Get it?
We’re generally talking retirement here. Depending on when you start, you might have 30-40 or more years until you begin to need the money. Here’s where you get to set the growth trajectory. The greater exposure to stocks the greater your risk AND the greater potential reward. In setting a rational allocation, think big and small, foreign and domestic and understand the costs associated with the cost of investing. The appropriate amount of monitoring is every 3-6 months, no more. If you’re speculating in individual stocks then you might set stop losses or preset sell orders and monitor a little more frequently. But if you have set an allocation that makes sense, there’s no reason to check it every day. It’s a waste of time and your energy is far better spent reading the side of your cereal box or hugging someone you love.
Time is your most precious commodity. So you can waste it on meaningless pursuits—like checking on that stock, that index or that fund. Or you can devote it to what you value most. Surely that would be a whole lot more fun.