Paper Gains Are the Plan
A lot of investing concepts can mean different things depending on the person and the strategy. For my style of long-term, broadly diversified investing, trying to frame āpaper gainsā as some kind of weakness just doesnāt really apply.
By the end of my accumulation phase, if things go reasonably well, the massive majority of my portfolio will probably consist of unrealized gains.
And thatās the goal.
Over a long investment horizon, nobody knows the exact trajectory of a portfolio. But as it grows, its value increasingly consists of both your original contributions and the gains accumulated on top of them.
Those gains may still be unrealized, but they remain invested. Future returns are earned not only on the money you contributed, but also on gains generated in previous years. That growing base is what creates the accelerating effect we associate with compounding.
None of this is commentary on how easy or difficult it will eventually be to extract value from the portfolio and turn it into cash flow. That is a separate question involving withdrawal strategy, taxes, sequence of returns and plenty of other considerations.
Some people find comfort in an investing strategy that feels more predictable or tangible, and thatās completely reasonable. Someone might say, for example, that unrealized gains are ājust theoretical.ā
To me, that mostly highlights a difference in how we think about uncertainty.
Future dividends are theoretical too. Future yields are theoretical. The persistence of a distribution is theoretical. The ability to continually reinvest those distributions at attractive prices is theoretical. Future total returns are theoretical. Even our assumptions about which risks will continue to be rewarded are ultimately expectations about an unknowable future.
That doesnāt make any of these concepts useless. It just means investing involves uncertainty.
In one sense, investing is easy because we can choose a strategy that makes sense to us and that we can actually stick with.
In another sense, itās incredibly difficult because none of us can precisely identify future expected returns.
And that uncertainty is part of why a risk premium exists in the first place.
So rather than trying to make investing feel certain by pigeonholing value into things that appear more stable or predictable, Iām comfortable accepting the uncertainty.
For my strategy, unrealized gains arenāt an inconvenience I eventually have to solve.
Accumulating a very large amount of them is quite literally the plan.
