Valuing your Investments like you Value your Home

Imagine trying to put a price tag on your home at 4:00 pm EST daily or even every minute all day long. The process, and oftentimes the result, would drive you crazy! Think of the countless small things that could affect the price of your house.  

stock-market-pricing-rationale

If a neighbor forgets to bring in their trash can, your home value decreases by 1% due to curb appeal. You finish a kitchen remodel, increase of 15%! Your son is home from college for the summer and parks his beat-up sedan covered in stickers in front of your house, 5% lost. If you take an extra day or two to mow your lawn or wait an extra summer to stain your deck, your home value would decrease significantly if you are analyzing it by way of the stock-market-pricing-rationale. 

In reality, your house likely did not change in value because of the things your neighbors or you did or didn’t do on a given day. When it comes to your house, you get an appraisal from the county or city once a year and then an independent appraisal every few years if you refinance or get a HELOC. These results may be higher or lower than the actual market value.  

realistic home valuing

It has never been easier to get an approximate value using Zillow, Trulia, or Redfin. We all look at those estimates and think our house is worth it because of the endowment effect (the emotional bias that causes individuals to value an owned object higher than its market value). The real value of your house isn’t determined until you actually put it on the market and someone buys it. You probably don’t change your lifestyle because of a jump in your home price according to Zillow or the going price for the neighborhood. Larger factors ultimately determine the value of your home; location, schools, and how the house compares to others in the neighborhood. 

valuing your investments

Now let’s flip the scenario around. What if you think about your retirement and investment accounts with the same long-term price approach as your home? You would probably adopt a different perspective. Small movements in the market on a daily basis would likely not cause you any stress. You also would not feel as euphoric during strong years in the market, or as anxious during bear markets.  

Let’s add real returns to this perspective. Between 1980 and 2021, the S&P 500 closed with a positive return only 54% of the time. The likelihood that stocks will be up or down on any given day almost has the odds of a coin toss. If we zoom out and look at this on an annual basis instead of daily basis, we see that the S&P 500 ended the year with a positive return more than 75% of the time. While the average intra-year decline was 14%, 32 out of 42 years had positive annual returns. 

bottom line

Your strategy for paying your mortgage remains the same no matter what the current condition is for the real estate market. You either write the check or have auto-pay set up for the same amount on the same day of each month. You don’t pay less during bad real estate markets or more during good markets, right? Take the same approach to investing for your retirement or your other goals.

Be consistent with your contributions and don’t change strategy simply because the financial markets have an up or down day, week, or month. What might feel like a devastating swing today will often be difficult to find on a market chart five, ten, or 20 years from now.