Thursday, March 27, 2008

The market can make you crazy.

Interesting Money posted recently about his nasty habit of obsessively checking his investment balances. I have to admit that I share this tendency to over-track my retirement accounts, whether out of excitement, concern, or morbid curiosity.

In spite of my daily ritual of checking my account balance, I've generally been able to keep a cool head during the market turmoil that started last summer. I haven't done anything drastic like selling off my investments or switching to an all-bond portfolio. In fact, I seem to have been pretty lucky with my timing in diversifying my asset allocation using low-cost index funds. Given my still-negative net investable assets, the single biggest factor in my net worth trend over time is my ongoing debt reduction. As a result, although investment performance does have an impact on my overall financial picture, this effect is often overshadowed by my progress in paying down my debts.

I was looking at my history of monthly snapshots at NetworthIQ, and thought I'd have a look at my retirement account history. Since I started tracking my monthly progress, my retirement balance has gone from $36,087.43 to $46,914.08, an increase of $10,826.65. That's not a bad balance growth, but let's not forget that I've been steadily contributing to my RRSP during this time. In total, I've added $10,487.76 in book value (meaning actual out-of-pocket contribution value) to these accounts, so my actual investment "returns" really amount to $338.89. If I factor in my employer's matching contributions of $1,856.03 over the same timeframe, I'm actually behind by $1,517.14.

To get a (very rough) idea of the rate of return represented by these numbers, I'm adding half my contributions to my April 2007 balance, and using that as my starting amount. Therefore, I get the following 10-month rates of return:
  • Without Match: $338.89 / ($36,087.43 + $5,243.88) = 0.82%

  • With Match: ($1,517.14) / ($36,087.43 + $6,171.90) = -3.59%
This is equivalent to annual rates of return of 0.98% and -4.29%, respectively.

Even the positive 0.98% is not exactly kicking inflation's butt.

As I look at these numbers, I remind myself constantly of the words of encouragement offered to any long-term investor:
  • The real asset at this point is the stock/fund shares themselves, not their dollar value. These investments are generating dividend and interest income, which is in turn being used (through a DRIP) to buy more shares.

  • The 4.29% "loss" I see when I take into account my employer's matching contributions is currently only a loss on paper. Provided I don't get cold feet and sell now with prices at their current lows, there's a very good chance that I'll more than recoup this drop over the next couple of decades.

  • Even though my investment returns over the past 10 months have been poor, I'm still nearly $11,000 ahead of where I was last April. That's nothing to sniff at.

  • I wish, oh how I wish, that I had some extra cash lying around to snatch up some of the investments that are currently "on sale".
I'll say this much: it's certainly shaping up to be an interesting year.

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