From time to time, this question comes up. If we have a meeting, take in $500, why doesn't the value of a valuation unit go up? What happened to the money?
Following a meeting, we add valuation units, which are purchased by the members of the club in varying amounts. If valuation units are worth $20 apiece this month, then 25 new units are added ($20 * 25 units = $500). So the units are still worth the same amount, but now we have more valuation units.
However, money coming into the club can affect the valuation for the next month.
Let's look at an example where the value of the club's stocks drops from one month to the next. Let's say that we have 500 valuation units and they're worth $20 apiece, so that the total value of the club is $10,000 in February. There's a huge ice storm the night of the meeting, and nobody shows up, so we don't put any money in. When the valuation for March is done, we still have 500 valuation units, since nobody bought units the previous month, but this month's valuation is $16 apiece due to a general stock market malaise. The total value of the club is 16*500=$8,000 if nobody had put in money the previous month.
However, let's say that the day of the February meeting was clear and bright, and that all the members bought many more shares. We take in $4000, and add 200 shares. Following the February meeting, we have $10,000 in stock + $4,000 in cash, divided over 700 valuation units (500 old ones and 200 new ones). At the meeting, we vote to postpone a stock purchase so that we'll have a lot of money for the next meeting.
| February - 500 units @$20.00 | March | ||||
|---|---|---|---|---|---|
| Weather | Assets | New Money | Assets | VUs | Price |
| Ice Storm | $10,000.00 | $0.00 | $8,000.00 | 500 | $16.00 |
| Clear And Dry | $10,000.00 | $4,000.00 | $12,000.00 | 700 | $17.14 |
The overall effect of the cash reserve has been to raise the March valuation a little bit, so things don't look so bad. However, this works both ways, so the next example shows a case where the club's stocks go up, and the effect of having a big wad of cash waiting to buy something. We use the same scenario and same numbers from the previous example, but this time, when we do the March valuation, the value of the stocks has gone up to $12,000.
| February - 500 units @$20.00 | March | ||||
|---|---|---|---|---|---|
| Weather | Assets | New Money | Assets | VUs | Price |
| Ice Storm | $10,000.00 | $0.00 | $12,000.00 | 500 | $24.00 |
| Clear And Dry | $10,000.00 | $4,000.00 | $16,000.00 | 700 | $22.85 |
In this case, the cash reserve has made the valuation a little less the next month.
The main reason for both differences is that a dollar bill one month will still be worth the same dollar next month, whereas the stock price can fluctuate, sometimes radically.
Treasurer General's Warning: These examples both contain numbers that have been artificially inflated to make the differences obvious. We haven't had a meeting since 1992 where enough cash entered the club to increase the club value by 40% in a single month, and we don't often see the portfolio value change by 20% in a single month either.