What Should You Measure to Help You Get Started Investing?

I think most peo­ple mea­sure the wrong things about their long term invest­ing plans. Everyone says “start ear­ly, let time do the work,” but then suc­cess met­rics don’t fac­tor in time! Measurements also don’t fac­tor in the invest­ment objec­tive as well as they could.

What’s hap­pen­ing is that peo­ple con­fuse invest­ing with trad­ing. With trad­ing, you have a pile of mon­ey that you want to turn into a big­ger pile, and do so now.

With invest­ing, you con­sid­er your time hori­zon. Investing for div­i­dends, the way I talk about here, you are also invest­ing for income. So we should mea­sure income and asso­ci­at­ed met­rics.

Metrics

When you think of income, what do you think of? How much you earn. Well, if you’re invest­ing for income why then mea­sure how much you have?

Let’s mea­sure your div­i­dend pay­check.

Then, as soon as you get your first pay­check you real­ize that you care deeply about get­ting a raise. If we mea­sure pay­check, it also makes sense to mea­sure your raise. You might mea­sure that raise either back­ward-look­ing or for­ward-look­ing. Of course, the future is hard to pre­dict exact­ly, so a for­ward-look­ing raise is real­ly meant to be a rea­son­able esti­mate based on past behav­ior with some con­ser­vatism built in (in the hope that any sur­pris­es are pos­i­tive sur­pris­es rather than neg­a­tive ones).

The oth­er mea­sure­ment I like is tech­ni­cal­ly called ‘yield on cost’ though I like to think of it as your ‘actu­al yield.’ I like this met­ric because it gives some indi­ca­tion of how time is work­ing in your favor.

Here’s an exam­ple of how that works. Let’s say that 10 years ago, I invest­ed $100 and earned a 1% div­i­dend. I’d earn $1 a year. Over those 10 years, the div­i­dend aris­to­crats raise their div­i­dends, and now I’m earn­ing $2 on that orig­i­nal invest­ment of $100. Let’s also assume that just like the div­i­dend, the val­ue of my invest­ment has dou­bled to $200.

Most peo­ple would look at that invest­ment and say it’s worth $200 and you earn $2 so I’m get­ting a 1% yield. However, that only reflects today’s point of view sta­t­i­cal­ly. In my opin­ion, I saved $100 (10 years ago) and today it’s earn­ing $2 a year, or 2%.

Why does this mat­ter? What if I said to you that you could earn 6% every year plus cap­i­tal gains. You’d prob­a­bly jump on it. Well, if you pur­chased Apple today, with a div­i­dend yield of about 1.6% and if they increased their div­i­dend 10% a year for the next 15 years (a stu­pid­ly aggres­sive assump­tion, but work with me), at that point you’d have about 4x the div­i­dend, but your cost does­n’t change. Put the mon­ey away today for the future, so that in the future you have a great return.

There’s a lot I’m skip­ping over. Inflation. The fact that 10% increas­es for a decade and a half is a crazy aggres­sive assump­tion (though the same works if you assume low­er growth and longer time… and 15 years is ‘noth­ing’ if you’re invest­ing in your 20’s). The key point is that you put your mon­ey to work today, con­ser­v­a­tive­ly, so that in the future you yield is high on the mon­ey you put away today. It’s a way of help­ing you under­stand the impact that time can have on your long term sav­ings plan.

Another key point is that some of this is math, but some of it is the sto­ry we tell our­selves about what we’re doing. When it comes to invest­ing, we don’t do a good job at the sto­ry part of things.

These Metrics Keep You Sane

One final point. The gen­e­sis of my book had to do with me help­ing my wife stay calm dur­ing some crazy mar­ket volatil­i­ty (a lot of up-and-down).

When you track your pay­check, your raise, and your yield on cost these met­rics insu­late you from the (total­ly nor­mal) mar­ket volatil­i­ty. If the mar­ket were to drop 1,000 points, it would­n’t affect your div­i­dend pay­outs (your pay­check). It does­n’t affect your cost-basis, so won’t affect your actu­al yield (yield on cost).

In fact, if the mar­ket drops, your rais­es get big­ger! It gets to the point where you almost wish it goes down to juice those rais­es.

This lack of volatil­i­ty in what you track will help you stick to your plan because it’s less “crazy mak­ing” in your head — wor­ry­ing if you should sell, or buy more, or what if it drops more, or less, or “holy cow, look at the news…” None of that mat­ters.

The indus­try says “don’t look” if you’re invest­ing for the long term so that you don’t get affect­ed by the emo­tion stirred up by (the total­ly expect­ed) volatil­i­ty. I pre­fer you to look, and learn, but look at things that align with your invest­ing strat­e­gy and keep your eyes on the prize.

The prize being the pay­check your wealth brings home even when you’re not work­ing.