Thinking About Your Portfolio

Do you check the value of your portfolio? If so, how? Most of us get regular updates … monthly, quarterly, whatever, and with an online broker can even check in at any time to get a snapshot.

These updates have one thing in common … they tell you how many dollars your portfolio is worth. Obviously this can fluctuate wildly, especially in recent months. But as popular as it is, it’s  not the only way, and far from the wisest.

If you own your home and possibly other realty directly, do you check its value like that? Not likely, if even possible. You can’t just turn on CNBC or Bloomberg and get an instantaneous quote. It’s not in the daily paper. It needs to be understood that the mere availability of real time quotes doesn’t make any asset fundamentally different than another, but may subtly influence how you think about your investments and even how you manage them.

We’ve also been on ad nauseum about the unreliability of the dollar or any currency as a measure of value. Currencies are securities too, and fluctuate in value just like any other. This further calls into question the wisdom of translating everything into dollar values when thinking about your investments.

There is an alternative. Instead of looking at your statement or quote screen and thinking “my portfolio is worth $X today”, you can think “my portfolio contains W dollars, X shares of ABC stock, Y shares of DEF bond ETF, and Z ounces of gold”. The actual cash in your account is the only dollar value that’s hard fact. The rest is an ephemeral estimate of how much you could get for those other assets if you were to trade them all for dollars right now. But just how relevant is that? Are you really about to trade everything in your portfolio for dollars this instant?

This can affect your behavior. If you have so-and-so many shares of say, a broad stock index fund like VT, and look at it today in terms of dollars, your immediate reaction may be to think “wow, this is really going down, maybe I better dump it”. But first ask yourself … is it really justified to say it’s “down” when I don’t even have a reliable yardstick of value? Your 100 shares of VT might be traded for fewer dollars than six months ago, but either way you still have 100 shares of VT. That hasn’t changed a bit.

You might rationally determine that you’d rather have more actual dollars, maybe because you think they’ll outperform shares of VT for long enough to make a trade worthwhile. And that’s perfectly reasonable. But reducing every asset to dollar value instead of thinking about each in its own right can impart a subtle emotional bias to your portfolio management that can work against your longer term success.

Don’t let brokerage statements and quote screens box you around. Thinking about your investments independently of dollar value can help you avoid mistakes and keep your investing behavior rational.

16 thoughts on “Thinking About Your Portfolio

  1. Jk says:

    it would be interesting to see the performance of various assets adjusted by the fdi. this assumes the fdi is calculated more often and more easily than ss,s, and sss

    1. Bill Terrell says:

      Yes. The FDI is quickly calculated and every week, in a separate framework. SS has its own version of the FDI built in. The main difference is the FDI itself draws on all prices – goods and services, assets, labor, capital – to estimate the value of the dollar in terms of human time. The SS Bills plot does this as well, except it’s restricted to an asset price base. (As well as being total return rather than price only.) Since consumer goods and services, labor, etcetera aren’t on the investment menu and SS deals with things that are, it seemed appropriate to limit consideration to the latter. The time lags associated with changes in the value of the dollar filtering through into consumer prices and wages could mess with the forecasts in unpredictable ways.

      So when you look at each of the SS plots, they’re already in real terms as far as the world of assets is concerned. This is most obvious in the Bills plot. If it weren’t for this the Bills plot would be a smooth uninteresting line. You can see exactly what that looks like by going to the Annual Charts section of SS and looking at the charts for the two oldest years – 2018 & 2019 – where this was not done … for a couple years SS was in nominal dollar terms. As it turned out plotting in real terms not only made it more “real”istic but also made it more accurate.

      This feature has also been a standout this year. Most of the Stocks decline earlier this year was viewed by SS as dollar appreciation, as seen best in Synthetic Systems Comparison. The forecast part, however, sees this changing and stocks entering a new phase where the declines morph from merely nominal to real.

      Compare the recently rising Bills line in the latest SS with the recently rising FDI.

  2. kbird says:

    The rise of Treasury bonds in your chart is very interesting. In 2020, bonds went straight up after the Fed announced a massive QE program. In 2022-2024, the rise is much more gradual. Given the expected large incoming supply of Treasury issuance, how would you account for the gradual rise in bond prices that SS forecasts?

    My best guess would be that the economy is in such poor shape and deflation becomes so prevalent that Treasury bonds are once again perceived as a safe haven by investors.

    1. Bill Terrell says:

      Yes … we’ll talk more about the forecast when the next SS update is due this weekend. But I think you’re on the right track.

      In terms of mechanism, when rates are artificially low, a lot of borrowing takes place and a lot of debt piles up. This acts like a pile of dry tinder … it’s a big short position in dollars. When the supply of dollars starts to tighten, the short begins to become less profitable. People and institutions begin to cover. They need dollars to cover their short positions. This demand drives the value of dollars upward … reflected in the rising blue line in SS and the rising FDI plot.

      But the lagged effects of the previous declines are still being reflected in consumer prices and wages. Rates rise, and because it’s overdue they have to rise further than financial equilibrium would warrant. This produces a deflationary impulse. Yields are now too high and must fall, and that means rising bond prices.

      To be clear I’m not making a case for bonds as a great long term investment. But they’re a lot less bad than they were mere months ago, and for the medium term could outshine most everything else on the investment menu. As always, we will see, but speaking for myself for the time being I’m comfortable with holding more than my usual allocation of Treasuries, mostly at the expense of a smaller than usual allocation to stocks.

  3. cb says:

    Bill said: “The actual cash in your account is the only dollar value that’s hard fact.”
    Agreed! and I would sure like to know how many dollars were in existence, who owns them and where they are, on updated basis, so i could have some sense of relative positioning.

        1. Bill Terrell says:

          Well, CB, let’s put it this way. It’s as close as anything I know of.

          1. cb says:

            I believe the FED’s balance sheet is at approximately 9 Trillion dollars. Do you think that is any approximation of the number of dollars in existence? Would you venture it to be within 1 trillion, 3 trillion, 10 trillion? any speculation at all?

            I am curious to know what the other readers and commenters here think.

            1. Bill Terrell says:

              No. The Fed’s balance sheet corresponds to the amount of base money in existence. Remember the multiplier … dollars deposited in a bank can get re-lent out while the depositor still has a claim on them (hence the term “demand deposits”. So the total number of dollars in existence would be the base money plus the money created within the rest of the banking system. And this is why, even though the Fed’s balance sheet is known, total money supply is separately reckoned.

              1. cb says:

                and, I am thinking, not only the money that has been re-lent out, but the massive amounts of money that have been created to be lent and thereafter defaulted upon, leaving those dollars in the system.

  4. cb says:

    Bill said: “Thinking about your investments independently of dollar value can help you avoid mistakes and keep your investing behavior rational.”
    Rational investing? in a world of FED manipulation …………………. there’s a trick.

    another trick is the attempt to trade based on receipt of FUTURE cash flows.

    and a 3rd trick; investing in ETF’s like VT in the face of the passive investing craze and the everything bubbles, created by all the GOV regulations and subsidies, the Wall Street cabal and of course FED manipulations with their continuous money debasement goals, and the ongoing FED/Banker goal of creating a debt society.

    1. Bill Terrell says:

      All investing ultimately boils down to future cash flows. You own an investment based on your assessment of getting cash back at some point in the future, so it’s practically a tautology. Of course the sticky part is you often don’t know what those future cash flows will be.

      The trick in using ETFs like VT is in what you’re using them for. I have for instance a set of stocks and stock ETFs that I keep as relatively permanent positions. If I want to tactically increase my stock exposure though, say, because of a bullish outlook, that means several trades. Or I can just increase my position in VT.

      The key is always in answering the question: What fits the purpose?

    2. cb says:

      and, I am thinking, not only the money that has been re-lent out, but the massive amounts of money that have been created to be lent and thereafter defaulted upon, leaving those dollars in the system.