This is a question I get frequently from clients. They want to know when to change their position in an investment, i.e., when to buy more or when to sell. At ProVision, we are not investment advisors, so we don’t give specific investment advice. However, as accountants, we are experts at monitoring and managing finances.
Let me share a few thoughts with you on this matter. First, put the proper reporting in place. Reports should do more than just give you raw data. They should also give you information about the status of your investments as compared to a few different standards. They should compare your results to your target. They should also compare your current results to historical results. And, ideally, they should compare your results to the average results of your industry or your region.
For example, let’s say you are invested in the stock market. It would be nice if your investment report didn’t just give you the current value of your stock. It should also compare your current value compared to your expected value. And your return on investment compared to your target return on investment. Plus, your report should compare your current value to the value a year ago, a month ago and/or a quarter ago. Your report should also compare your return on investment to the average stock portfolio return on investment with your criteria. Your investment advisor or trading house should be able to provide this information to you. If they aren’t, then you should ask them to do this or you should consider finding a new investment partner.
Real estate can be monitored the same way. You should have a report that tells you where you are compared to where you have been historically, both with cash flow and with appreciation. Your report should also compare your current value and return on investment to your expected value and return on investment. And, your report should tell you how you are doing compared to the rest of the market in the areas in which you are investing.
There is one ratio that I rarely find tracked at all in real estate – cap rates. See my blog tomorrow for more on this.
Until then, remember that financial freedom is closer than you think.