Pretend you had two conversations with people about their net worth.
Person 1 reveals:
“My net worth went down by $200,000 last month.”
Person 2 tells you:
“My net worth went up by 50% last month.”
Chances are, upon first reading that you would think that Person 2 is making all the right moves and that Friend 1 is in trouble. Big trouble, most likely, considering that most people would see most or all of their net worth disappear with that kind of loss.
And, if you had to ask someone for financial advice, you might even choose Person 2.
That might be the wrong move. It could even devastate you.
What if you found out a little more detail, such as:
Person 1 had a net worth of $5,000,000 going into last month.
Person 2 had a net worth of $1,000 going into last month.
That would change things a little bit.
Person 1 would have lost 4% of their overall net worth. This is bad under any circumstance, but look at May, when the stock market went down around 7%. It’s very conceivable that a high net worth individual with a lot of stocks could have had such a month.
Person 2 did a great job from the percentage standpoint, but in reality, a $500 net worth increase doesn’t mean a whole lot, certainly not from the standpoint of asking advice or looking at one as a potential inspiration.
Chances are, if I were looking for financial advice, I’d probably choose the person that had just ‘lost’ $200,000 over the person that had just gained $500. If you think about it, the person that lost the $200,000 also happened to get up to the $5,000,000 along the way. More likely than not, the person who just ‘grew’ their net worth by $500 doesn’t have nearly the answers, experience, or knowledge to be looked upon as someone you want to follow.
Now, don’t get me wrong. The person who just lost $200,000 could be a complete mess. Maybe they inherited $20,000,000, in which case the fact that they’re now left with $4,800,000 is actually a pretty terrible circumstance.
Or, maybe the person who just increased by $500 started off with a net worth of negative $100,000 due to student loans and just got into positive territory after just a few years outof school. In these cases, then yeah, the person who increased by only $500 might in fact be the person you want to look for in terms of advice.
My point is simple: Don’t focus on just one number. Or even two numbers.
Look at the bigger picture. In just about any finance related decision, there’s going to be a whole slew of numbers that you can look at. You might not need or have the capability to understand or digest all of them, but the worst mistake you could make is focusing on just one.
Because, I’ll tell you, when you focus on just one number, for some reason it usually turns out to be the wrong one.
So, whatever decision you’re making, make the promise to yourself that you’ll look at the bigger picture.
You’ll thank yourself for it later.
Have you ever focused on one number that turned out to tell only a portion of the story? How did it affect you?