It’s interesting how much we investors focus on our portfolio balance. As in, “How many dollars is the portfolio worth right now?” or “Wow, the portfolio gained $10,000 in value today!” Or “When will my portfolio reach $2 million?”
Certainly this is understandable and normal. But focusing primarily on one’s portfolio balance can make for a bumpy ride, as the portfolio balance will always change with the daily fluctuations of asset prices. This can be a lot of fun when the market is up. But what about when it’s down? If you are dealing with a volatile market like we are facing in 2022, you are probably looking at a double digit percentage drop in your portfolio. In a situation like this, the swings in one’s portfolio can at times appear scary and dramatic!
Rather than thinking of the current portfolio balance, I have recently been training myself to look at our portfolio a bit differently. I am focusing on the ownership amount. After alll, investing is ultimately about owning assets. When it comes to index fund investing, in practical terms, owning is about owning fund shares. Therefore, to my mind, the real game of investing is growing our number of shares, not trying (consciously or not) to maximize the portfolio balance at all times.
In fact, there are only two times when the portfolio balance actually matters. One is when you start selling your investments, presumably to live off them in retirement. The other time is when you buy more shares, and only because the price of the shares (which affects the total portfolio balance) will determine how many shares you buy based on the money you are putting in.
Let’s look at this matter of price a little further as it relates to our Game of Ownership š Let’s say that we have 25 shares of a current fund which is currently trading at $100 per share. Our numbers look like this:
| Fund | # of shares | Price per share | Total balance |
| ABC Fund (not real) | 25 | $100 | $2500 |
You might say to yourself, “Wow, I’ve got $2500 in my account!” The thing is, unless you are selling your shares today, you actually don’t have $2500. Tomorrow the price will probably change, and with it the balance. What you actually have, though, is 25 shares.
To use another example, if you go to the chair store and buy 25 chairs (rhymes with “shares!”), you can put them out in your living room, and whether you spent $5 on each one or $500, you still have the same 25 chairs! Similarly, if after buying the chairs, those chairs increase or decrease in value, well, there are still 25 of them in your living room, aren’t there? (Man, that’s a lot of chairs!)
Back to share ownership. Over time, your share prices will go up and down as the market changes. You hope that over time those shares will appreciate, so when you do sell them, they will be worth a lot more than they currently are. Also, because you are smart, long-term investor, you continue buying shares regularly. Let’s say you put the same amount in each month, something commonly known as dollar-cost averaging.* Each time you buy, the share price has changed. Sometimes it is higher, sometimes it is lower. Either way, over time, your shares accumulate. This process might look something like this:
| Month | Amount contributed | Price per share | # of shares bought | Total shares owned |
| (Starting balance) | $100 | 25 | 25 | |
| 1 | $250 | $90 | 2.78 | 27.78 |
| 2 | $250 | $80 | 3.13 | 30.91 |
| 3 | $250 | $95 | 2.63 | 33.54 |
| 4 | $250 | $115 | 2.17 | 35.71 |
| 5 | $250 | $105 | 2.38 | 38.09 |
Note: the price swings in this example seem a bit dramatic but I’m using them to make a point. As you can see, over five months, your total shares owned increases from 25 to 38.09. Congratulations!
You might be tempted to figure out what this means for the final portfolio balance. Your new current balance is $3999.45 (the $105 share price multipled by your 38.09 shares). Not bad, you say! Score for a higher balance! Yet I purposely left the portfolio balance out of the table because I want you to focus on the number of shares that are accumulated over time. Notice that, though the share price fluctuated dramatically (varying by $35 over the five months), the total shares owned only goes up. No drama, no fuss! Just the increase of your share total as a result of buying regularly**. In fact, we grew our ownership of this fund by 52%, and in only five months. I’d say that is the real win here.
Investing really is about this game of growing your ownership over time. Notice that this way of looking at it takes away the drama, and frames the entire experience in a positive way! The number of shares you own doesn’t fluctuate day in and day out, except to get bigger when you buy more. In other words, you’re on a steady upward trajectory as your shares increase over time.
*Both William Bernstein in “The Four Pillars of Investing” and Burton Malkiel in “A Random Walk Down Wall Street” use similar examples to explain dollar-cost averaging. Over time, because you are contributing at different times, you buy at different prices. Sometimes you win big by buying when the prices are down. In our example, you can see that in month 2 our $250 contribution bought 3.13 shares, which is almost an entire share more than then same amount of money bought two months later! At a lower price, we buy more shares for the same contribution. Over time, dollar-cost average is thought to help bring down the average cost of shares. It is also an idiot-proof way to invest, since you don’t have to try to figure out when the best time is to buy (otherwise known as market-timing, and thought to be basically impossible for us investing mortals).
**A happy by-product of owning these shares is that you get to collect dividends, which hopefully you re-invest, using them to buy even more shares!