Hey hey, and welcome back to lesson 6 of The Minimal Investor!
We’re halfway through the course, and the hardest part is behind us. At this point, you likely know more about investing than 95% of the population – maybe 99%. The absolute most important things to know aren’t world changing:
- Understand what you’re investing in
- Understand who’s getting a cut (fees)
- Figure out the tax reasons for using accounts
- Get a grasp on diversification
- Actually make an investment!
Once I understand this, then I gain a lot of confidence in what I’m investing in. With confidence, I’m less likely to panic sell, doubt my decisions, or be influenced by the news.
Confidence comes with time. Even when I had the information that I’m conveying in this course, I didn’t invest all of my money at once. I put money in a little in at a time. As I gained confidence in the stock market and my own choices, I invested more.
Confidence can take years to build up, but that’s OK! Go at your own pace, and invest when you feel like you know what you’re doing.
Lesson 6: Tracking Your Investments
This lesson and the remaining lessons will help build that confidence by further understanding your investments. The areas that helped me build the most confidence include:
- This Lesson – Tracking Your Investments – Being able to see that your investments are doing alright.
- Lesson 7 – Pay Yourself First Mindset – How do you continue to invest? What impact should the current state of the market have on your decisions (spoiler: none).
- Lesson 8 – Tax Implications of Selling – We’ve briefly talked about taxes, but we’ll focus on
them front and center. - Lesson 9 – Rebalancing Your Portfolio – How do you keep your investment allocation matching your target allocation when prices fluctuate?
- Lesson 10 – Create Your Own Rules for Investing – This entire series elaborates on my rules for investing. In the last lesson, you’ll create your own rules for investing to help focus and guide your investment decisions going forward.
To start, we’ll look at how to track your investments. Now that it’s been a few days since you made an investment, it’s time to learn how to read your account statements and build on that knowledge.
- Understanding Investments tracked through your brokerage
- Tracking your investments manually
- Tracking your investments with Personal Capital
By the end of this lesson, you should be able to look at what’s in your account and understand how it’s doing!
1) Understanding investments tracked through your brokerage
Storytime! When I first started investing, it was with a financial advisor at a major bank. They did an amazing job of helping me understand what I was investing in. This includes some topics covered here (including diversification), but strategically left out others (fees). Some topics (like taxes) weren’t covered at all.
The problem with financial advisors and robo-advisors is that they can’t know everything you know. They usually don’t have access to every account you have, so their plan will be based on limited information.
One area they did do an amazing job on was going over quarterly statements with me to explain how my investments were doing. They did have motivation for these statements to appear positive. If they didn’t I could leave and they’d lose their 1% account management fee.
This always made me feel uneasy. Are my investments really doing OK? Are they just saying what’ll make me happy? When the value of my portfolio declined and they said “you’re still beating the market” how could I verify that?
This led me to dig into my account and track my investments on my own. I wanted the ability to answer these questions myself using only the raw data.
One downside about investing is that you’ll get account statements from each account you have. You’ll get a statement from your 401(k), your IRA, your Roth IRA, your brokerage account – anywhere you have investments.
To understand how your investments are doing, you’ll need to combine all of these into one place. This to me is the number one reason to track your investments manually!
Reading a Statement
Your brokerage, regardless of your account type, will provide some kind of monthly statement. These will usually be digital. When I began investing, I combed through these line by line to understand everything. I believe that’s one of the first things you should do after you receive your first statement.
Depending on your brokerage, the usefulness of these can be night or day. I have a Fidelity 401(k) and the statements it provides are horrendous. If you’re looking for information in your account and don’t find anything notable, it could just be because your brokerage is bad at conveying this information.
Vanguard provides better tools in their monthly statements. Let’s run through one of my Vanguard statements with some annotations to understand what’s going on.
Asset Mix
Your statement may include some kind of an asset mix breakdown. From the lesson about diversification, you’ll remember the 3 major types of investments we talked about:
- US Stocks
- International Stocks
- Bonds
Statements may not be broken up in this way. For example, Vanguard statements are split into 4 categories:
- Stocks – Which includes international and US stocks. This even includes REIT funds.
- Bonds – Which includes international and US bonds.
- Short-term reserves – Cash and cash equivalents.
- Other – Anything else. Some sector funds may be here or in stocks. (I don’t recommend these).
This is a helpful snapshot to understand how much of my investments are in stocks vs bonds. It is limited to a single account, which doesn’t show my overall bond allocation across all accounts. Having it broken down more will require combing multiple accounts in some way (which we’ll do later in this lesson).
Growth Over Time
Tracking investments over time manually is a lot of work. Vanguard has some impressive tools to help understand your portfolio balance.
The chart they provide in the statement is motivating (well, if the trend is up), but not the best source of information. On their website, Vanguard has a “Balances Over Time” page, which is an interactive version of this chart that provides a ton more information.
Activity Statement
The activity statement section is one of the most important parts of the statement to me. It shows a few very important parts:
- Purchases and withdrawals – Total net amount of deposits minus withdrawals. I’ve stopped investing in this account (in favor of a joint account since I got married ?).
- Market appreciation/depreciation – This shows how much the value of your investments have increased or decreased.
- Dividends, interest, and capital gains – This includes amounts that you have earned and cashed out.
- Taxable Income – This one is probably the scariest of all. This is income that you’ll need to pay taxes on at the end of the year. The lower this number the better. You can lower this number by putting dividend heavy stocks in your tax-deferred accounts or holding funds long-term in a taxable accout.
Transactions
One part I found different about investment statements was the transaction ledger. There are a bunch of terms here without any context or definitions. Some of these are self-explanatory, but others require a bit of background:
- Buy – You bought new shares in a fund. This is what we did in lesson 5.
- Sell – You sold a fund! I try to hold funds as long as I can (decades) or sell when they are negative for tax reasons (which we’ll dive into in lesson 8 on taxes).
- Dividend – A distribution of a portion of the funds gains to shareholders. This is money that will be added to your account and either kept as cash or reinvested.
- Reinvestment – If earnings from a dividend are put back into the original fund, that’s called a reinvestment.
- Sweep In – If earnings from a dividend are put into a cash account, those funds are “swept in” to the cash account automatically. Every “sweep in” will have a corresponding transaction of the opposite amount.
- Sweep Out – Similar to “sweep in”, “sweep out” transactions will convert funds in a cash account to another fund. Every “sweep out” will have a corresponding transaction of the opposite amount.
- Withdrawal – Money is transferred out of your account; same as with your checking account.
Takeaways:
- Spend some time and understand your statement.
- Figure out some questions you still have that your statement can’t answer.
- If you don’t understand anything in your statement, Google it — or join the Minafi Slack Channel to chat
2) Tracking your investments manually
I strongly encourage you to track your investments manually. With a few quick tips, you’ll see that it’s easy to do. I find that it’s easier to read and understand a spreadsheet that I’ve created than any statement my brokerage(s) provide. Here are the top reasons I prefer tracking my investments manually:
- Single source for all of your investment accounts.
- A clear snapshot of the value of each account and fund.
- Ability to see what percent of my portfolio is in each fund.
- Breakdown by sector of all investments.
I track all of my investments in a Google Sheet (here’s a link to a sample one I use with formulas). Every month or two I’ll update this with my current holdings. The most important part of this is having a clear place to see which funds you’re overinvested in and underinvested in. This sheet shows how I create this.
- Add all of your funds
- Add an overview of your accounts on the first tab
- Look at the Asset Allocation Tab!
With your investments in here and your goal percentages added, the difference can help you understand where future investments should go. If your balances aren’t completely in line with your goals – that’s OK! We’ll look into how to rebalance your portfolio into your goal amount in lesson 9 on rebalancing, but for now, it’s just good information to know.
Don’t overdo it
The more time it takes to update this sheet, the less you’ll do it.
Takeaways:
- Create a sheet that’ll help answer the questions that are most important to you.
3) Tracking your investments with Personal Capital
Personal Capital* has the best free tool I’ve come across to automatically track and understand my investments. There are features that Personal Capital offers that would be an absolute pain for me to create on my own. I use it in addition to my own custom spreadsheet.
Portfolio Performance Compared to Benchmarks
When we touched on diversification, I mentioned how with a diversified portfolio your returns will always be in the middle of the pack when compared to US Stocks, International, and Bonds funds. Personal Capital offers a good way to understand this at a glance.
For this year so far, you can see that I’m behind the international market, beating the S&P (US Stocks), almost ahead of the Dow (also US Stocks), and way ahead of the bond market. By creating a minimal portfolio I was able to beat 2 indexes – almost 3!
Year over Year Growth
It’s nice to know what your growth was year over year. Knowing the net growth (start value vs ending value) is easy, but in order to calculate market growth successfully, you also need to know when each deposit was made so that you can exclude those when calculating market gains. Instead, I use Personal Capital to see my growth across all accounts.
Asset Allocations
One of the most useful things in my personal spreadsheet is my asset allocation. It allows me to clearly see how far off I am from my target in each asset class. Personal Capitals version shows the current asset allocation, but not your personal goal. I don’t use this for decision making, but it’s a good way to see my asset allocation at a glance.
For instance, in my account today, I am not properly diversified in bonds (due to selling some earlier this year for a loss). (note to self: put more money in bonds asap!).
US Sectors
In the diversification lesson, we talked about how you can invest in a single fund to invest in many different market sectors (technology, financial, etc). The breakdown of this on Personal Capital verifies this. It’s not important for these bars to be the same height to be diversified! You want to invest more money in the largest market sectors and less in the smallest ones. heights should match the overall market value of each sector. By investing in $VTSAX alone our investments look something like this:
Fee Analyzer
One of the coolest features is the fee analyzer. Fees can easily eat up a third of your investment gains (or as much as half in my case when I learned about them). You can calculate your annual fee percentage, but it’s a lot of work. Their fee analyzer makes it simple. Again, the difference between 0.07% and 0.50% can be the difference in 10% of your total investment gains when you retire!
Retirement Planner
Although not an investment tool, Personal Capitals Retirement Planner is the best I’ve seen. It allows you to run tons of different experiments: What if I paid off my house early instead of investing? What if I did get social security? What if I save 20% more a year? It’s a really fun tool to play around with that you should check out.
Takeaways:
- If you want to further explore and understand your investments, give Personal Capital a shot.
*Note: This is the one and only affiliate link in this course. I’ve tried a bunch of tools for tracking my investments, but Personal Capital is the one that’s stood the test of time and become a part of my monthly process. If you give it a try, you’ll get $20 for signing up (I’ll get $20 too! Signing up is the best way to say “Thanks Adam!” for this free course. :)).
Lesson 6 In Review
We spent a lot of time in this lesson understanding how to read statements and create your own spreadsheet. These help further build confidence in your investments.
Tell me: would
Next Lesson
One of the best ways to see growth in your account is to constantly invest in it. In the next lesson, we’re going to look at how to set up automatic investments with a pay-yourself-first mindset.
* – I’m a Personal Capital affiliate, I get a commission when someone signs up. Their product is free, but they may try to upsell you investing services. I prefer to do this side myself and use their self-service tools.