Recently I wrote about how investing is really a game of growing share ownership. Whether that is owning stocks & bonds, or any other asset (such as real estate, individual businesses, intellectual property), ownership is the path to wealth. When it comes to index fund investing, the regular purchase of shares over time becomes a powerful wealth-creating force. The daily gyrations of one’s portfolio balance are not nearly as important, though they can be plenty distracting from the true purpose of investing.
One benefit of focusing on ownership rather than portfolio balance is that it de-emphasizes these daily fluctuations. Except when performing transactions (buying or selling shares, or reinvest dividends), your share ownership is not changing on a daily basis (in the case of buying shares or reinvesting dividends, it is growing). On the other hand, your balance is constantly changing. The fluctuations in stock & bond prices can grab headlines, but the real game is acquiring more shares.
Consider the following situation: You own 800 shares of “XYZ Fund” (not real!). Yesterday’s share price was $147.51 (we’ll call yesterday “Day 1”). Your 800 shares were worth $118,005 yesterday. Today (“Day 2”) the share price falls to $146.11, so your balance drops to $116,889.
If you are only focused on the balance, this is clearly a loss. Do you feel frustration? Regret? Worried about suffering further losses?
When focused on the short-term balance changes, the daily gyrations of price seem important, maybe all important. But what if we focus on ownership instead? The share price fell from $147.51 on Day 1 to $146.11 on Day 2, which is a drop of $1.40 per share. . $1.40 is a decline of slightly less than 1% (about 0.96%). But did your share ownership change at all? No. Even if the price had dropped by 5%, 10%, or 20% your share ownership isn’t affected.*
In fact, let’s take this scenario a little further and say that over the next few days, the price drama intensifies to the point that by Day 5, the price of XYZ Fund has fallen to $132.76, for a whopping 11% loss (this is just for illustrative purposes!). The balance has fallen from $118,008 to $106,683. That’s pretty dramatic!
Despite the price drama, the number of shares do not decrease! In fact, let’s say that on Day 5 you make an automatic monthly investment of $500. Your contribution is used to buy shares that are 11% cheaper than they had been only a few days before 🙂 From the point of view of buying more shares, is it a bad thing that the price went down? No! From the point of view of increasing your ownership, drops in price allow you to buy even more shares!
I detail these changes on the table below. Notice that the number of shares never change, except when we buy more of them (and on a discount!):
| # Shares bought | # Shares Owned | Ending Share Price | Total Balance | |
| Day 1 | 0 | 800 | $147.51 | $118,008 |
| Day 2 | 0 | 800 | $146.11 | $116,889 |
| Day 3 | 0 | 800 | $142.70 | $114,160 |
| Day 4 | 0 | 800 | $137.12 | $109,696 |
| Day 5 | 3.77 (or $500/$132.76) | 803.77 | $132.76 | $106,683 |
If you had made your $500 contribution five days earlier, when the share price was $147.51, your contribution would have bought only 3.39 shares instead of 3.77. While that may not seem like a big difference, acquiring 11% more ownership for the same amount of money seems pretty sweet to me. Such deals can really add up over time.
Lastly, notice how if you pay attention to the “# Shares Owned” column, there is no drama over those 5 days. Just the acquisition of 3.77 shares on Day 5. Yet if you focus on the “Total Balance” column, there is indeed drama, as your balance drops by over $11k. Focusing on ownership, there’s an enduring stability, and steady growth over time. Whereas, focusing on the balance, there’s constant flux and uncertainty. It is a tale of two cities! Which one feels better for your investing peace of mind?
*Unless you panic and sell. Then all bets are off.