Wednesday, December 3, 2014

Stop the obsession on the Networth!!!

We live in a society where most people are obsessed with their value of Networth.
 
Look at the people around you. Flip across your favourite magazine or articles. You will see that Networth is the first thing being compared across the same breadth and depth.
 
 
 
 
As financial bloggers, we are guilty of such obsessions at times, myself included. We track and report our Networth value at the end of every month and whilst I can attest on behalf of other bloggers that the purpose for doing so is not to show off, some of us may be focusing too much on the holy grail figure to see the trend moving up every month. For those who knows what I am talking about, it feels incredibly great to see this figure going into the right direction every month. However, while they are moving in the right direction, we may be putting our cash to work for much lesser value than what they could have been if we had waited for the right moment. In other words, we want to be aggressive and putting cash right into action straight away, when such timing could have provided you with more value if it was delayed. Again, history has shown that timing the market is not feasible in the long run but we also want to have a balance strategy in place on the other hand.
 
There are too many debates going on regarding the amount of cash allocation that should be the optimal which I wanted to avoid in this post. This post is about mind boggling between our psychological behaviour and action and how we think we can do better.
 
I used to be pretty obsessed with my Equity Networth value in the past. I went into some aggressive mode for years and has somehow managed to outpace my planned target and reach my first $250k milestone ahead of schedule. I was ecstatic and celebrated the success with a bottle of champaigne. I am over exaggerating a little bit of course. However, as I interacted with other fellow bloggers over time, I began to start focusing on other things in investment that goes beyond just on the Networth value. I can be clueless about investing and just pump my money consistently into dividend paying stocks and still do fine but understanding a whole range of strategies, analysing downside risks and understanding returns will shape me into a better investor over time.
 
For those who feels like you are sometimes guilty of being in the same position as myself, here are some of the things you can try doing what I did.
 
1.) Include Cash Equivalent and Other Assets in your Networth value
 
Many financial bloggers include only their Equity holdings in their Networth updates when they report every month.
 
This can be misleading as other form of assets such as Cash, Social Security or Property do make up your actual networth value. By tracking and reporting a more transparent value of your networth, you are inclined to think about the overall picture rather than simply your Equity holdings.
 
2.) Think Cashflow, not Networth
 
This is something I have been focusing a bit more lately.
 
Readers would know that I am personally a big fan of cashflow. Having sufficient turnover of cashflow at an appropriate timing would allow me to dictate my own life at the lifestyle I want at my own territory terms. As long as I am able to live off my passive income to pay my daily expenses, I declare myself financially independent. I might give myself a little room for error so realistically there should be a margin of safety between my passive income and expenses estimated. But the focus should still be on cashflow.
 
3.) Focus on Return on Assets
 
This may sound a little Accounting-ish to you, but the concept is relatively simple.
 
By focusing on the Return on Assets, you would step back to think on how much you would get in return for every dollar of assets you owned. This would enable you to try and maximize your returns by thinking strategically rather than simply pumping cash into stock returns to boost your networth figure.
 
At the end of the day, it is your decision that would impact how things worked out for you. Rather than focusing on the outcome which we can’t generally control, why not focus on improving the process which can be gradually improved over time that might lead to a better outcome. So the next time you see other bloggers posting their networth value, don’t envy. See their process derivative thinking behind the main story.
 
Are you obsessed with your networth? Are there better suggestions to avoid focusing only on the outcome?
 

22 comments:

  1. Hi B,

    I think your 3 points are super valid and I can relate to them very well.

    I personally have a friend in such a tricky financial situation. His family has quite a sizable networth, but their assets are illiquid and not generating enough cashflows to cover their living expenses. Some of his "assets" are also not appreciating (very low returns) and he would rather invest in something better, but due to the illiquidity, he cannot extract a fair value and utilize the value locked up within.

    Correct me if I am wrong, but I think the quick summary is, "not much use being asset-rich, if you are cash-poor!"

    ReplyDelete
    Replies
    1. Hi GMGH

      Maybe your friend invested in some collections of assets such as watches or jewellery that does not really produce cashflow and are only awaiting for capital appreciation over time. It is generally fine to do so but he probably needs to think over his decision behind the move.

      If that is the money in excess of his living expenses, then that should be okay but he certainly doesn't want all his money to be locked up in illiquid not cashflow generating assets over time.

      Delete
  2. Hi B,

    Haha, I tracked it monthly too, but I'll probably never post it up.. I don't see a reason why readers would want to know. It's not a very useful thing for them. Therefore, I like the way u phrase it about thinking more deeply about the process rather than the actual numbers.

    However, it's very useful for me! I look at it whenever I can, which is about 2 times or more per week. It gives me something to work hard on. It's silly, but I'll be the first to admit that staring at one's networth won't work for everyone, but it really works for me. Looking at it go up every month is motivating, and on the rare occasions that it went flat or negative, I'll stem my losses.

    ReplyDelete
    Replies
    1. Hi LP

      I think you tracked them for the purpose of being transparent to yourself and getting to know where you stand.

      The same thing applies to financial bloggers like myself who posted them out every month. However, there are at times a part of us that want to be anxious in getting this figure up faster so we might act more than what the brain tells us. Not a good thing in that case.

      Delete
  3. B : Can't agree more with you... A person's worth is not all about networth only! Do pay equal if not more attention to the softer side of thing... ;-)

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    1. Hi Richard

      A person networth is still something but there are bigger scene behind the story :)

      Delete
  4. B,

    Are there better suggestions to avoid focusing only on the outcome?

    Entry process

    Exit process


    Reviewing our investing diary or trading journal is one such tool - provided we recorded the reasons WHY we entered and exited in WORDS, and not only numbers just to derive the XIRR ;)


    It's like girls checking out their boyfriends to determine who are more "marriage" material:

    Some girls are more interested in numbers - how much you earn, networth, etc.

    Some girls are more drawn to words - what kind of person you are ;)

    You the man!

    ReplyDelete
    Replies
    1. Hi SMOL

      That's a good suggestion there.

      Keeping a diary for the reasons why you buy and sell will ensure you take in the learning process even if your investment does not turn out well.

      There's a scene recently where some readers blame AK for the bad investment and I think it's just total nonsense. That readers must have not learnt anything and just awaiting to be spoon fed all his life.

      Ahh, the girls, the bars and the wine - when is our drinking session :D??

      Delete
  5. It is like crossing the financial road.

    We look right (cash flow) and look left (net worth) and then look right (cash flow) again before crossing the road.

    Look right (net worth) only then cross the road? Can but just hope that we get knock down while crossing.

    LOL!


    :-)

    ReplyDelete
    Replies
    1. Hi Uncle CW

      LOL. That's an interesting analogy. You must be referring to the jaywalk scenario.

      Some people wait for the traffic light and don't even look left or right, just cross. Sure safe in Singapore.

      Delete
  6. B,

    You're actually right that we shouldn't focus too much on net worth. It's one of the main reasons why I switched from index funds to DGI.

    Tracking my progress using index funds is futile due to the volatily, whereas dividend income (cash flow) is much easier to comprehend when comparing it to my monthly expenses.

    Great post!
    NMW

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    Replies
    1. Hi NMW

      Thanks for stopping by.

      Cashflow probably works for most of us especially since we are dependent on our working capital, receivable and payable every month. There are many different routes to Rome but I guess we have to find the best method for ourselves :)

      Just curious how much is dividend and capital gain taxed there in Belgium?

      Delete
  7. I think net worth is a good way to keep score. Because the higher your net worth, the more cash it can potentially generate. But then again, it depends on how the net worth is computed to begin with.

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    1. Hi Henry

      Ahh yes, cashflow does need sufficient assets to generate. In fact, networth and cashflow can be highly correlated, so it is a good way to keep score. I keep track because I want to ensure I am going in the right direction, but I try to focus less these days on the outcome.

      Delete
  8. Hi B,

    A lot of people calculate net worth wrongly. Most don't even take into account of their liabilities. Example: stock portfolio is 250k, cash on hand 50k, car loan left 80k, property loan left 700k (property price 1mio). => net worth is negative.

    For cashflow, its more tricky. For companies, it comes from different products and/or different customers. For individuals, most come from their employment income which is not very safe. To get more cashflow, the base has to get bigger and the more (non correlated) sources you must have.

    MS

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    1. Hi MS

      Good to see your input as always.

      In your example above, how did you ended up with a negative networth above? Shouldnt you include the current price less loans you currently own? Unless the leasehold expires at the end of.99 years and they depreciate to zero somehow.

      Cashflow is very tricky like you said and even the best company out there can have issues with managing their working capital. For employees whose cashflow is dependent upon only on salaries, its a big risk out there they dont yet realize.

      Delete
    2. Hi B,

      You are right. The above example is not a good example to highlight a negative net worth. Actually in HNWI term, primary residence is not counted as an asset in the net worth calculation, and so is the liability that come with it unless the home value is lesser than the mortgage.

      In the event, if you sell your primary residence, you still have to buy (sell high, buy high, or sell low, buy low), or rent another house to stay in. There will be transaction and renovation costs involved. There will be also be housing related expenses when you stay on the house, which is taking monies out from your pockets.

      MS

      Delete
  9. I really like the points you made here B. My focus has always been much more on the process - on becoming a better investor. Returns have always been an important measure for me. You can just keep pumping money into your portfolio without much thought and watch the value increase, but knowing if you're making good decisions is much more important. That's why I think a checklist is so important, for being transparent with your reasons why you bought, what you expect from the investment, and when you plan to sell.

    I must admit I focus much less on income vs assets, as I'm invested in many more 'growth' companies to try and grow my portfolio aggressively to a point when I can then convert my holding to dividend paying stocks to live off one day :)

    I am also just planning to start tracking my portfolio on my blog, solely to keep me accountable and give me extra motivation :)

    Cheers,

    Jason

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    Replies
    1. Hi Jason

      I think you pretty much sums up what I was trying to get into. And even better :)

      By keeping a track of the reasons of why we buy and sell I guess we give justification to ourselves.

      DGI is something I hv been allocating a part of it myself. I think we need to look.beyond simply dividend yield stocks and give ourselves a chance to analyze other stocks out there.

      Thanks for visiting.

      Delete
  10. For oldies:

    First to Bata then to school!

    For financial independence goal:

    First to debt free then to net worth

    LOL!

    ReplyDelete

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