The secret to investing when stock markets are falling

Catching up with some of my favourite financial blogs (no, Monevator.com is not an island!), I’ve noticed a sour note on many of the personal finance blogs that follow the net worth of the author (e.g. My 1st Million at 33 and Accumulating Money).

Let me say firstly that I really admire these writers for putting their cojones on the line so publicly. My concerns certainly shouldn’t be construed as a criticism of their efforts.

However, there’s a reason why I don’t track my personal net worth on Monevator.com, and it’s being demonstrated by the depressed tone that many personal finance blogs are taking right now.

The trouble with tracking your net worth

When things are going well, as they have for the past few years, blogs tracking personal net worth seem heroic. Booming stock markets and rising property prices see an ambitious target drawing nearer month by month. £500,000 no longer seems a distant dream, and even £1million looks feasible.

However when markets or property prices fall, the goal suddenly falls back too. All things worth achieving suffer setbacks, but there’s a crucial problem when your goal is a net worth figure:

• You cannot control the price the market puts on your stocks or your home

This is crucial. The writers of these blogs are doing just what they did last month or last year – saving hard, earning well, and giving us a ringside seat – but suddenly the results don’t look so good.

My advice: focus on goals and targets you can control

Goals are crucial, but they have to be attainable for you to keep working towards them. Attainable means controllable. Have a target of a million in the back of your mind if you want (I do ocassionally add up the value of all my investments), but in the meantime focus on stuff that you can achieve.

Good controllable goals might include:

• Saving 15% of your salary
• Reducing your monthly shopping bill by 20%
• Doubling your income over the next five years

These are all financial goals you have some ability to control on a month to month basis. The price of groceries may rise or fall, or you may find it hard to squeeze your boss for a raise, but they’re nothing compared to the uncontrollable fluctuations of stock markets.

Good longer-term targets might be:

• Focus on achieving a monthly income figure from your investments. (I recently wrote on how replacing your salary with investment income was a perfect long-term goal). Income from blue chip shares is much steadier than the same share’s capital value
• Focus on maxing out your tax-saving investment plans each year. (For instance, in the UK anyone with sufficient earnings should be focusing on using their £7,000 ISA limit every year.)

Create your own targets that suit your own position in life, but concentrate on things you can do, not things that will be done to you. The benefits are that you focus on what’s doable now, not on how generous the stock market may be feeling from month to month.

Ironically, now is a much better time to buy shares for income than a year ago. Anyone wanting to retire early should be pretty happy they can get 10%-25% more dividend income from leading shares than at the peak of summer 2007. In the long-term, markets (shares and property) will always bounce back, and this bear market will be seen as a great buying opportunity rather than a time for hand-ringing.