So, I do a monthly balance sheet to calculate my net worth to keep me on the right track. Now I’ve ran into an accounting problem: how to value my long-term, long-only, passive, index-tracking equity portfolio. I think it doesn’t make sense to value the portfolio on its market value because the volatility of equities renders the net worth calculation nonsensical. (F.ex, If the portfolio decreases in value by 5k during the month, while I save 3k of my after-tax pay, my net worth would decrease by 2k just because of stock market volatility, even though I managed to save 3k…)
My net worth has declined over the past few months as well, that’s how it is… Did you have the same thoughts as the market was rising? Gotta take the good times with the bad.
Yes I did. I’ve been trying to figure out this problem for quite some time now. The issue here isn’t a rising/declining market, it’s the volatility. The bigger the portfolio is compared to your monthly savings/ other non-volatile assets, the less the net worth calculation actually reflects your actual net worth, if you value the portfolio on its market value.
What are you trying to measure? If you want to measure how much you are saving, which is correlated but not actually your networth, then measure the cost basis of investments. That will tell you what you’ve saved, but your networth can be meaningfully higher or lower.
I disagree. If you bought your house in 2004 for 200k and in 2007 some real-estate agent came by and assessed your house to be worth 500k, would you really think that your net worth has increased by 300k? You plan on living in that house for the next 20yrs, its short term price volatility has nothing to do with your net worth.
Maybe you can do it based off some type of intrinsic or target value using an assumed rate of return, like pensions do to calc their funding status but regardless, you are using questionable methods to value level 1 assets. Maybe a psychological problem but definitively not an “accounting problem”.
Yes your net worth increased. You can sell it and rent something out while investing the money. You don’t even need to sell, you can finance the property and rent it out. Always mark to market.
If it’s on a long term basis, do not mark to market on a daily basis. Use annual basis instead. Doing so you might solve for a short term volatility what is exactly not your concern.
It is much more of concern how to value your human capital than a financial one.
Yes your net worth increased. You either need to decide you aren’t measuring net worth or understand net worth is not subject to what you bought it for, but what it’s worth.
House example and stock example are both are part of your net worth. If house price went up, you obviously benefit. However, you sabotaged the example using the real estate agent, since that is not substantiated by market action. If someone came and offered you $200k more for the same house, are you going to say you didn’t make $200k?
“I think it doesn’t make sense to value the portfolio on its market value because the volatility of equities renders the net worth calculation nonsensical.”
Sorry, this statement doesn’t make sense at all. You can choose to ignore volatility for practical purposes, but that’s the price of the stocks. They are established through real price action of identical units of securities, not some theoretical BS like you made up for the house. In other words, price action “proves” the price of a stock at the moment, even though it can change a lot in the future. It’s not the price appraised by some stock broker or your cousin Boris.
The point I was trying to make with the house example was to show that if your holding period for an asset (be it your equity portfolio or your house) is long (20-30years), the effects of the month-to-month volatility of your assets on your net worth lessens the informational value of your personal balance sheet.
Say my goal is to accumulate 500k of assets in 5 years. I buy an asset (equity/house/bonds, whatever), and all of the sudden the asset’s value spikes to 500k. Did I reach my goal ? From an accounting perspective, people would probably say yes. But from a personal balance sheet perspective, I’m not so sure.
“Say my goal is to accumulate 500k of assets in 5 years. I buy an asset (equity/house/bonds, whatever), and all of the sudden the asset’s value spikes to 500k. Did I reach my goal ? From an accounting perspective, people would probably say yes. But from a personal balance sheet perspective, I’m not so sure.”
Yes, you did make your goal. Now you can just put your $500k into US Treasuries and guarantee your financial goal. Personal “balance sheet” != accounting?
Volatility over a long period makes your future net worth uncertain, but it’s still range based - either $500k +/- 30%, or $1 million +/- 30%. The second one is still twice as good as the first one.
