You’re Buying Shares, Not Dollars

Miranda‘s comment on last Thursday’s post reminded me of a conversation I had about a few weeks ago with my friend Shannon.

Shannon is just getting started investing, and she already has a great system in place: Automatic deposits from her checking account into diversified mutual funds in a Roth IRA. Perfect.

As happens so frequently these days, the conversation turned toward the current economic turmoil and the accompanying market meltdown. When I asked Shannon how she felt about all this (primarily downward) volatility, she gave the perfect Oblivious Investor reply:

“Well, I just keep putting money in, and–while watching the value isn’t fun–every month I’m buying more shares than I bought the month before. Once things finally pick back up, I think things will work out pretty well for me!”

What a wonderful distinction. When we invest, we’re buying shares of companies. However, given that most of us have the bulk of our money in mutual funds rather than individual stocks, it’s easy to miss the fact that we own real shares of real companies that earn real profits.

When we look at our account statements (or check our accounts online), we see that we have X dollars in funds A,B, C, and D. It doesn’t say anywhere that we own shares of Google, Proctor & Gamble, Pepsico, Merck, and so on.

The lower the better (for most of us, anyway).

When looking at our statements, it’s easy to focus exclusively on that one bold number: Current Account Value. Unfortunately, when all we focus on is current value, we completely miss the fact that we’re picking up more shares every month. In fact, as Shannon pointed out, we’re currently picking up more shares each month than we did the month before. That’s a good thing.

For anybody still in the accumulation stage (that is, anybody who isn’t yet retired and selling their investments for money to pay the bills), a lower market is just an opportunity for IRA/401k contributions to buy more shares per dollar.