Why I Don’t Pay Much Attention to Net Worth

A reader writes in, asking:

“What metric(s) do you track with respect to your portfolio? Net worth I assume? Anything else?”

Yes, my personal finance tracking spreadsheet does calculate our net worth. It also calculates another asset-related number that I find more useful: our funded ratio.

But the number I pay most attention to is not a measure of our assets. The number I pay most attention to is our annual retirement account contributions.

To explain, allow me to share a brief bit of personal history. From age 17-21, I worked in a sales position in which the compensation was purely commission. In that position, some days were good, and others were not so good — and it often had nothing to do with how hard I worked or how smartly I worked. It was just luck.

The first year or two in the job felt like a rollercoaster. Some days were crushingly bad. Other days I was riding high. Eventually, I learned that it all averaged out over time, as long as I did the necessary amount of work. And so I shouldn’t be too sad or worried about a particularly bad day.

Because the short-term results were significantly out of my control, it was helpful to judge my performance based on effort rather than the results. Doing so allowed me to stay sane. In addition, focusing on the effort (i.e., making sure I worked enough) was in fact the best way to improve results.

With regard to investing, the stock market has been shooting upward over the last several years. So of course our stock-heavy, index fund portfolio has been growing rapidly. But that’s not because of anything brilliant we did. Similarly, our portfolio fell by nearly half from late 2008 to early 2009. But that wasn’t because of any mistake we made.

We have no control over how the market performs over any particular period. But we do have control over how much we save each year (for the most part, anyway).

Sometimes the trajectory of your net worth will be good. Sometimes it will be bad. But focusing on such results a) makes you crazy and b) sometimes leads to faulty conclusions. By focusing on what you have control over, it’s easier to stay level-headed and stay motivated.

To be clear, my point here isn’t that the results don’t matter. Results do matter, of course. But improving the inputs that you control is the best way to improve results. And you’ll be mentally healthier along the way.