Avoid Comparison of Your Investments Performance to the Market

Monday, September 14, 2009 |

Do you check how your investments performance and compared it to the market? How about comparing it to your peers? Do you take solace when your investments losses is less than what S&P 500 losses last year?

I know personally I compare my investments against how S&P 500 does. But when I sit down to think about it, it really DOES NOT matter what our investments relative performance is.
The goal of investing should not to beat the market. We invest to reach a certain goal, such as for retirement, college educations, etc. If doesn't matter whether we trail the market or beat the market, as long as the investments bring you closer to reaching your goal, that is what matters. If your investment beat the market last year, but overall portfolio values is still down, it is only a small consolation the fact that your losses was less than S&P 500. The fact would still be that you are further away from your goal.

In fact, there are potential perils in comparing your performance against the market.
  • Temptation to tinker with your investments.  If your investments trail the market performance, you may be tempted to start making changes to your investments. You may start questioning whether you need to take more risks and may be taking additional risks.  You may start questioning your ability and stop trusting yourself.
  • Unrealistic optimism and overconfident about your abilities. Being confident is fine, but being overconfident could lead you to underestimate the risks involved with investing. You may start putting extra money to your best performing funds or stocks.
  • Focus on short term performance and let your investment strategy effected by your emotion due to current environment. Whether you are ahead or trail the market, you may start looking short term and forget about that the goal for investment should be long term.  If you are ahead of the market, you may start to think the conditions will continue for foreseeable future.  This may lead to the first peril I mentioned above, the temptation to start making unnecessary changes to your strategy.
How often do you compare your performance against the market?  Do you see any other potential dangers of relative performance?

* Photo by Mike Johnson - TheBusyBrain.com


Post a Comment

Blog Widget by LinkWithin