How are you doing with this stock market lately? Have you looked at it? Most experts recommend not paying attention if you hear bad news about the markets. I look at the markets a few times almost every day. It doesn’t matter if things are going well or very poorly. It’s a combination of a habit and a hobby.
If you are like me and look at your portfolio often maybe this trick I use will help you.
One of the numbers I keep track of is what I call Portfolio Potenial.
What is Portfolio Potential?
Portfolio Potential is not about what your portfolio value is today, but what it could potentially be… if the Vanguard Total Market Index matches its all-time high. I picked Vanguard’s VTI ETF as my market benchmark. I suppose you could choose something different if you like – I simply wanted a broad index that is well-accepted as a sound investment benchmark.
Let me give an example to illustrate.
Let’s pretend that I have a $10,000 portfolio of stocks, bonds, mutual funds, ETFs, REITs – whatever is in your brokerage account. If that portfolio drops 15% it is only worth $8,500. However, instead of looking at that $8,500 number, I take that number and divide it by how much VTI is off of its all-time high. As I’m writing this on the morning of May 12, 2022, VTI is down 20% from its all-time high… or it has retained 80% of its value. The Portfolio Potential number I look at is $8,500 divided by 0.8… or $10,625.
Essentially, I’m celebrating that my portfolio has “beat” VTI by not losing as much. How did I do that? I had bought more bonds than I would normally have and removed some tech risk from my portfolio a couple of years back. I might have given up some potential gains then, but I slept well and I was still fully invested in the market. In fact, my high-dividend ETF (HDV) is only down 6% from its all-time highs. Since it has been paying me dividends during the last couple of years, it has held its ground in the latest sell-off.
Over the last few days, I’ve seen my Portfolio Potential go up about 5%. Diversification is paying off. Psychologically it’s very calming. It also helps that this money is in a retirement account that I don’t plan on touching for quite a while. If I needed to draw down from this account, I would be more concerned about the portfolio’s actual value than its potential.
I keep track of this in my Google Spreadsheet. It automates all the math, so I just have to know which cell to look at for the Portfolio Potential.
I know I promised one trick, but here’s a bonus one. This is a good time to focus on accumulating shares of stock.
Over the last couple of days, I’ve been selling off very small amounts of bond allocation and my high-dividend ETF (HDV). I’ve been able to buy shares of QQQ (Nasdaq Cubes) at an average of $300 a share. At the start of the year, a share of QQQ would have cost me $400. If I have $4000 to invest back then I would have been able to buy 10 shares. Now, I’m getting 13 shares with an extra $100 to spare.
I’m not trying to call a bottom of the market. I have no idea where that is. I will just dollar-cost average as it goes lower. I have a lot of confidence in companies like Apple, Microsoft, Amazon, and Google. I know that they’ve gotten very expensive over the last decade. That’s one of the reasons why I removed some tech risk from my portfolio a couple of years ago. Now is a chance to buy tech at a discount.
Minor spelling mistake – Protenial.
I track our net worth against VFINX. Yes, we’re down a lot, but the market is down even more. That helps me feel a bit bitter. Also, I know it’ll come back. Now is the time to buy. I plan to move some money from bonds to stock soon. A bit at a time is a good idea.