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Is Your Portfolio Keeping Up This Year? Here’s How To Tell.

To avoid FOMO, do an apples-to-apples comparison

Every year, my nominee for most over-used investor question of the year is “how am I doing this year?” The first part of that question makes all the sense in the world. With information so readily available, we can all easily see what our returns are. That’s the simple part.

However, where investors routinely fool themselves into potentially life-changing investment errors is ironically NOT what they invest in. It is how they interpret their interim performance results. There are many reasons for this, but here are a few of the most common ones.

They forget what they are truly investing for

Instead, they shift to what they think they should be making. As you might guess, this only seems to happen when the “headline” stock indexes like the S&P 500 are roaring higher. In a downturn or a severe bear market, there is not much “fear of missing out” (FOMO). There is only fear.

They don’t understand how their portfolio’s makeup differs from that of the broad stock market.

Unlike most of last century, when investing was generally something “rich people” did, the stock market has gone mainstream. That is a great development for many reasons. However, there is still a learning curve.

They misunderstand how to accurately and appropriately judge their investment performance, particularly when it comes to selecting time frames to evaluate

They gravitate toward what they hear on television or social media. You know who decided that year-to-date performance was a good idea? No one that is using the stock market to reach long-term, real-life objectives, like retiring. That said, one excellent and reliable way to screw up your retirement path is to get too caught up in periods that are based on the calendar. The market does not care what day or year it is, and neither should you.

The 2 easiest ways to use performance analysis to make terrible investment decisions

It’s simple and destructive to your wealth, so you get a double-bonus (he said facetiously). Just compare your diversified, not-all-equities portfolio to the S&P 500, and do so based on what’s happened this year. That’s a high-percentage way to completely miss the point of what investing is about. That is, unless you are a young saver who just wants to try letting the “stock market” grow your wealth, because you know you will be investing a lot more money in the years ahead. But if you have already won the financial game of life, doing that is a gamble.

2021: a great test for analyzing your performance

The chart above shows why the current year, right now, is when investors need to get this performance analysis thing right. The S&P 500 is up more than 15% as of this writing, but it is clearly in a challenging spot, given a variety of macro-market issues. But more importantly, bonds have been a detractor this year. That means that if your objectives are something less than “all-in” on the stock market, you need to look more closely at how different investment risk levels are performing. For instance, Moderate Risk portfolios are up about 4% for the year, and Conservative portfolios are up less than 3%. Naturally, there are many ways to allocate assets. But as a snapshot, these iShares ETFs based on target risk levels are a decent way to provide some context.

That said, anything in that chart is of limited value. It covers too short a time period. You would be better off looking at periods of, say 3 years, and looking at every 3 year period, to determine how often your portfolio does what you want it to do. In other words, it is more like a batting average, not a snapshot evaluation. The only value in it is to remind us that over any time period, risk level matters in evaluating how you are doing.

Why not just join the crowd and do the 2 things Rob said not to do?

After 25 years of increasing individual investor participation in the markets, it is still commonly assumed that everyone’s investment portfolio should be compared directly to the broad stock market, S&P 500 Index or similar. For many investors, that’s a terrible, inaccurate, and potentially dangerous assumption.

Unless you are willing to confront the 50% drops that occur from time to time in the stock market averages, your portfolio should not be set up to move as the S&P 500 does. This is particularly true in today’s markets, where a handful of giant company stocks have left international, small cap and value investors in the dust by comparison.

And, with the Fed keeping interest rates near zero, bond returns are essentially toast. That has caused investors to move up the risk curve, so to speak, investing more in stocks than they would have if there were a decent alternative.

Instead, when looking at your investment performance over any time period, recognize that the only question that really matters is this: “is my portfolio on a path toward getting me to my ultimate goals, while taking major risk of missing those goals off the table?” Or as I call it, are you set up to “Avoid Big Loss (ABL),” however you define that.

So, take a good look at how you are doing. But do so with the proper perspective. The cost of being too short-sighted here can be devastating.

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