Imagine you are driving a car but it has no speedometer or accelerometer.
And you were told to drive on a road at speeds between 60km/h and 80km/h.
Psst, hey...looking to become a profitable investor even without knowing anything about finance?: Grab this free guide to Value Investing that has step by step strategies, real life case studies to help you make more money and build a passive income through the stock market
How do you drive with confidence that you are within the speed limits? It is going to be tough.
The speedometer and accelerometer provide important feedback about your driving which you use the information to moderate your gas pedal.
We need some form of feedback for the actions we have done. Feedback tells us if our intentions were achieved with our actions, or our actions are bringing us away from our intentions.
In school, we get a feedback on our academic abilities. We have scores to know where we stand. The subjects we are good and poor at. We could also delve deeper into the specific questions to check where our mistakes lie.
Key Performance Indicators (KPIs) is one of the most dreaded terms we encounter in work but a necessary evil. You can see it as a way for management to assess the achievements of the employees. It is also useful for an employee to know the focus areas of his job. Nonetheless it creates stress and most employees hate them, especially when the KPIs seem unattainable.
In society, we have GDP, happiness index and other measurements to tell us how our country is doing. Policy makers would use these metrics to adjust their strategies and plans accordingly.
Bottomline, feedback is crucial if we want to do well.
What are we missing if we don’t track our performance
Most investors do not track their investment performance. We typically do not get a clear cut answer from investors when asked about their performance. I was guilty of it when I first started. Looking back, the reason that I didn’t track was that I overlooked its importance. I merely felt that as long as I make money for each security means I am doing it right.
I couldn’t be more wrong and I learned these mistakes over time.
Common Mistake #1 – Missing the forest for the trees
Most investors are only concerned about individual securities that they invest in. For example, stock A made 10% while stock B lost 20%. This caused them to get excited about stock A and ignore stock B because the stocks gave pleasure and pain respectively. This is not useful and reinforces our loss aversion bias – taking quick gains and avoiding losses. The performance of each stock is less important than the performance of the entire portfolio of stocks. For all we know we have made 20% gain on one stock but the portfolio value had lost 30%. When I first started I had zero idea how my entire portfolio was doing. I had investments in various instruments in myriad accounts. It was a mess.
Don’t win the battle but lose the war – you’ve made money in a few stocks but your net worth drops!
Common Mistake #2 – No benchmarking
Knowing our overall portfolio performance is not meaningful if we do not compare it to a relevant benchmark. For example, you should compare it to the Straits Times Index (STI) performance if you are picking Singapore stocks. It could be a case while you gloat about a 5% gain in your portfolio but the STI returned 8%. You could have been better off investing in the STI ETF than wasting your time picking stocks. It is also important to note that you would need several years to tell the true performance of your investment strategy and skills. One or two years of out- or under-performance is not statistically significant.
Once you have decided to track your investment performance, you would likely encounter these two problems.
Common Problem #1 – Do not know how to track
For some investors who want to track their performance may be clueless how to go about it. Searching the internet would give you multiple answers. Generally there are two main ways – money-weighted returns and time-weighted returns. Breaking down further, we can have CAGR, IRR, NAV, Dietz, Geometric Mean and other methods. It can be confusing and difficult for someone without finance or mathematical background to use a suitable way to measure. But it is not impossible to learn.
Common Problem #2 – Tedious to track
We have been tracking our investment returns with a spreadsheet. We know how tedious it could be when we have 31 securities in our portfolio. Moreover we only update it monthly and not daily. It gets more work as the number of securities and transactions increases. Some investors may start to track but would often forget to update after a period of time. Without proper recording, the investment track record got lost and they have to start from scratch again.
You need to be diligent.
Give me a break?
Maybe it is sounds a lot like work and since you are doing it part time, why put yourself through an investment KPI? Wouldn’t it be too stressful?
The answer to this is that investment is a serious activity. Don’t treat it as a hobby. Hobby costs money. It is this attitude that investors need to change when approaching investments. The stock market is not your lottery ticket where you buy and hope.
The purpose of tracking investment performance is to know if your investment strategy is bringing you closer to your goals.
For example, we often encounter investors who like dividends. They love ‘passive’ income and aim to invest in dividend yielding stocks. Their common goal is to rely on dividends to cover their living expenses one day.
However, we realised they usually do not have a clear defined amount of dividends they want to achieve and they also do not know the amount of dividends they have collected in a typical year.
No goals. No plan. No tracking.
Most investors are risking their money in the stock market without having a grip on the situation. On the contrary, they worry about the things they cannot control, such as predicting the next market crash or the interest rate hike. Goal setting and tracking which they could control were ironically neglected.
So it is of no surprise that most investors do not do well with their investments.
Feedback plays an important role in life. Tracking your investment performance is a form of feedback loop about your investment strategy and actions. It will tell you if it is working out for you or not. However, most investors do not pay enough attention on tracking performance. Even if they do, they are too micro, focusing on the individual securities and missed out on the portfolio returns which matters a lot more. Else, they could be measuring wrongly or have given up at some point in time because it was too tedious.
What gets measured, gets improved.
If you want to really make money in your investments, it is time to track it and have an honest review of your performance. It’s time to get serious.
No more excuses.