Wednesday, May 2, 2012

Ego Protection for Investors

The majority of do-it-yourself investors that I know are stock-pickers. Among techies, the big debates are whether Apple stock will go much higher or just higher, whether Google has run out of steam, and where Facebook is headed. While they disagree on many points, one thing unites most of these stock-pickers: they protect their egos by never figuring out their investing returns.

There are many ways to compare your returns to an index. I used to work out my returns on different subsets of my investments and over various non-standard lengths of time, and only recently I calculated my yearly returns on my complete portfolio and compared them to an appropriate benchmark. Another approach was suggested in a comment by reader Gene: “every time I make a purchase, I simulate an equivalent purchase in the S&P500 index.” Then he can just compare his real portfolio value to the simulated index portfolio value. The majority of stock-pickers carefully avoid all such methods of determining if they are any good at picking stocks.

These ego-protecting investors can stand proudly with lottery players, many of whom are sure that they’ve made money on lottery tickets over the years. I’m thinking of just closing my eyes the next time I’m driving on the highway because I’ll be able to imagine that I’m staying in the middle of my lane. Wish me luck.


  1. This is key that I've been preaching for a while now. I like to take the total sum of money I invested in the market, divide it by the number of months I've been investing and then dollar cost average that amount into my benchmark. Alternatively I predetermine the amount first and do the same calculation. Then I treat the difference as either buying on margin or sitting in cash with a return of whatever savings accounts yield at the time,

  2. @Opensourceportfolio: I'm glad that someone commented on this one because I'm guessing that I hit a little too close to home for many readers. I didn't completely follow your method of comparing tour returns to the benchmark, but the important thing is that you do it to make sure you have an idea of how your stock picking is working. As long as your method isn't similar to the one used by the Beardstown Ladies, you should be fine.

  3. Mike, this is the step in the investment process that is most often missed. Investors spend tons of time on methodogy and research, but none of measuring whether it's working.

    As a starting point for those who haven't assessed their performance before, I recommend a report we do every year entitled, 'How is my portfio doing'.

    Here's the link:

  4. @Tom: I've read your report and recommend it to others. Steadyhand does an excellent job of comparing fund returns to relevant indexes. I wish more DIY stock pickers checked their results. I'm guessing that many of them know deep down that they are losing to indexes.

  5. I just got into the market about 6 months ago (after putting the final nail in my student debts) and i'll admit to being a stock picker. I dumped my initial investment into a couple of depressed sectors (uranium & life insurance) with the intent of getting my portfolio value up, then switching over to an indexed portfolio. I can tell you i'm not cut out for being a stock picker as i'm checking my stocks everyday. My time horizon for conversion to indexiing is about 2 years (after the russian uranium supply from their nukes finishes up in late 2013). Until then I plan to keep track of my performance on an annual basis.

  6. @Chris: The important thing is to measure your results to keep yourself honest. I wish you good luck with your active investing before you get fully into index investing.