New Year's Resolution: Financial Re-Centering

Dec 31, 2008 by Adam C. Powell, Ph.D.

2008 is coming to a close, and many of us (myself included) have lost a lot of money in the stock market. Although our shares remain, that money is gone. Gone.

The Problem

Unfortunately, most online stock tracking applications remind us of our losses every day. Rather than just reporting how much we have, they tend to report our gains or losses. That is, they report the difference between the present price and the purchase price of our investments. Going forward, the purchase price of an investment is irrelevant.  All that matters is where a stock is going, not where it has been. But, we see that XYZ was once worth $50/share, so we wait, hoping that it will some day return to $50/share, as if $50/share is somehow related to the true value of XYZ. The problem is that it isn’t. XYZ might have been over-valued then, and it might be under-valued now. Who knows. But, simply knowing that XYZ was worth $50/share at some point in 2006 is not a piece of information that can be used to make a sensible investment decision.

Going Forward

What I would like to suggest that people do is to create a second portfolio in their online stock trackers. In this portfolio, enter every share you own as if you purchased it today. (However, keep your original portfolio handy so that you will know how old stocks truly are when it comes to figuring out whether you will be subject to short-term capital gains tax.) Looking at your new portfolio, you can ask yourself, “How much do I have now?” and “What do I think about these stocks going forward?” Ideally, you would perform this exercise on a regular basis. After all, all you own is the stocks at their present value, and not their history. By eliminating the history of your stocks, you may be better able to de-anchor yourself from their historical performance, and instead assess them for their present merits.