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Why you shouldn’t track your investment returns

A scientist tracks the stars via a telescope, but similar close monitoring can be detrimental to your investment returns.

Are you listening for the sound of lost marbles clattering across the Internet?

Why on Earth wouldn’t you track your investment returns?

Well, I believe there’s a good case against regularly monitoring your portfolio’s performance – especially if you’re a passive investor.

As for active investors, we hardly need another handicap to doing well.

Obsessing over short-term returns could be just such a handicap, for passive and active investors alike.

Don’t just do something

To passive investors, I say don’t worry be happy.

Why not get the most out of hassle-free index investing by setting up a diversified portfolio, rebalancing occasionally, and getting on with your life?

Your asset allocation – and fate – will determine your returns.

Index funds should deliver whatever the market does, minus the smallest fees you can find.

What is tracking your performance supposed to achieve, exactly?

Oh no, bonds are down! Or up!

The danger of closely monitoring passive investing returns is that doubts can creep in about your strategy.

This might happen when you notice some asset class is in the doldrums, for example (as one usually will be in any truly diversified portfolio).

Wouldn’t you be better off without it? Or maybe you should buy more of it?

That’s not passive investing.

Alternatively, maybe some hunch strikes you over breakfast. You see the consequences play out, and notice how your portfolio failed to benefit, or even suffered.

Who sits by and lets bad things happen to their portfolio? George Soros wouldn’t stand for that!

So next time you fiddle, and you begin to do worse by chopping and changing and market timing – because it turns out you’re not the next George Soros, after all.

Maybe you wrack up costs or pay taxes, too.

Why start down this road? If you believe in your passive investing strategy, then leave it be.

A diversified passive portfolio will succeed or fail regardless of whether you’re watching every short-term shimmy.

And such shimmies don’t tell you much about whether your strategy is on-track to deliver over 20 to 30 years, anyway.

Actively ignorant

More controversially, I think active investors also need to beware of obsessive portfolio tracking.

There are several good reasons to stay in the dark for much of the time – at least about your overall performance – and one dubious reason.

The best reason not to track your returns is, again, that excessive monitoring can cause you to abandon your strategy, to chase performance, or to churn your holdings (that’s my vice).

All will increase your costs as an active investor.

It is also likely reduce your returns. Studies show increased trading activity is correlated with poorer returns.

I suspect the best chance most of us have of beating the market is through a longer-term focus1.

And fretting because your portfolio is down 2% while the market is up 1% is the enemy of the sort of strategic detachment that long-term investors need to cultivate. It’s too easy to be scared into selling a good investment that’s wobbling – or to pile into assets showing some positive momentum – when returns are front and centre.

Another danger is that if you see your whole portfolio is down – whether in absolute terms or versus your benchmark – then you might add riskier holdings2 to try to close the gap.

This can mean investing in companies you’d normally avoid, with predictably dire results.

Or you might sell your winners too soon, and reduce your returns that way.

I’ve done – and still do – all of this in my weaker moments.

And I’m more prone to it now that I closely track my returns, compared to earlier years, when I wasn’t bothered (and in fact didn’t know) where I stood.

Interlude: The Uncertainty Principle of Investment Returns

I’ve previously offended physicists everywhere by drawing an analogy with the First Law of Thermodynamics and investing risk.

Now I’ll ensure I’m blacklisted from attending the Scientists’ Ball by mooting an equivalent to Heisenberg’s Uncertainty Principle from quantum mechanics.

In investing, we might say:

You can know the direction of your investment returns and you can know the value of your strategy, but you cannot know both at the same time.

In other words, the very act of tracking your returns can change the direction of those returns, by causing you to take action and change strategy.

Very often that will be detrimental to your performance.

End of interlude!

Today doesn’t matter

I said obsessively checking your portfolio’s performance is bad if it stops you from thinking long-term. This matters because longer-term thinking may be your edge.

Most investing professionals face losing their jobs if they lag the market for too long.

As a result there’s an institutional obsession with short-term returns and benchmarks, to the extent that many allegedly active funds have become ‘closet trackers’.

In contrast, nobody can fire you from managing your investments but you.

If you want to beat the market, it’s a good idea to do something different. Not being driven by short-term performance is one way to do so.

You don’t have to take my word for it. Warren Buffett urges private investors to choose companies as if the stock market might close for five or ten years.

If that (hypothetically) happened, most of the companies you invest in would continue to operate. You just wouldn’t get a daily/hourly/by-the-second quote on their valuation.

Buffett claims such long-term thinking is the key to his success – and let’s face it, he’s done better than you or I so far.

I also think this long-term, price-oblivious thinking is one reason why so many people enjoy better results from property than shares.

Sure the media speculates about house prices. But if your telephone rang every 20 minutes to give you the latest quote on the value of your home, you’d soon get much more jittery about it.

Because few homeowners buy with a view to selling anytime soon, they ignore the house price noise – and they certainly don’t trade their home because of it.

The case for ignoring the market

From Buffett’s closed-market mindset it’s only a small step to not bothering to track returns at all.

Heretical? Well, as with passive investors, I’d ask what regularly checking your returns is meant to achieve?

You’re not being paid a salary like a fund manager. Your returns are your returns. The money you make will stem from your investing choices, not from high fees paid by hapless suckers your investing clients.

Your portfolio rising by 1.73% this month doesn’t give you much useful information about how you should invest in the future, or about which of your investments will prosper.

Nor does knowing your returns enable you to go back in time to make different decisions. The past is done with.

It’s often said active investors should track their returns to see if they’re able to beat the market. If they can’t, they should go passive.

But some academics have calculated it would take hundreds of years to be sure that even Buffett didn’t achieve his success through luck.

So what does a few years really tell you?

By the same token, even successful stock-pickers have lean spells. Maybe your poor returns are being tracked in a period that happens to be hostile to your methods?

If so, then knowing you’re lagging the market could be misleading.

Known knowns

All the evidence suggests you are very unlikely to beat the market. You probably have no edge.

Tracking your performance might confirm that, or it might not.

Who knows?

But one thing is for sure. If performance anxiety leads you into bad investing behaviors such as over-trading or selling low and buying high, then any edge you have will soon be obliterated, either way.

Incompetent investors beware

This brings me to the final reason for active investors to avoid performance tracking, which is that if you’re investing partly for fun – because it’s your hobby – then you might not like what you find.

Studies have shown many amateur stock pickers have no idea how they’re performing versus the market or other funds, which is one reason why they’re so proud of their record.

They delude themselves by selling losers to get the red off their screens, for example. Or they concentrate on the absolute return from a particular share or fund, ignoring how the market has gone up by as much or more – and perhaps delivered that return with less risk, too.

Also, I’ve noticed many people do not account for new money going into their portfolios.

They say: “I’m up 30% over the past three years” and neglect to mention that 20% of that was due to extra savings!

It all means many active investors believe they’re doing well when actually they are doing badly, relatively speaking.

Obviously most would be better off as passive investors.

But we knew that already.

However what if investing is their passion? Maybe they enjoy following companies and reading reports? Maybe they’re more excited by the hunt for a needle in a haystack – the next Apple – than by making as much money as possible?

This may sound like a flimsy justification for not tracking your returns. But consider your other hobbies, and how you’d feel if you were constantly compared to every other practitioner in the world.

I think I’m a good cook, and I like it when my friends say so, too. I don’t want to know that my paella is statistically subpar.

Or imagine you’re playing golf, you hit a hole-in-one, and your moment of glory is extinguished when a man hurries over to tell you that actually, since you took up golf, you have hit 23% fewer holes-in-one than the average player.

What a downer!

If you want to enjoy being a bad investor, don’t track your returns.

Trust, but verify

Now the truth is I track my returns very carefully these days. And of course I take into account money added and withdrawn, too.

I’ll explain how to do this – by unitizing your portfolio – in a future post.

However the previous 1,800 words wasn’t entirely irrelevant.

You see, I track my performance for various reasons, but it’s with an awareness of all of the downsides of doing so.

And I try to negate those downsides.

The main countermeasure is to track your returns, but to avoid checking in on them too often.

It’s like the old Cold War catchphrase: Trust, but verify.

If you’re a passive investor, trust your method. But, if you like, verify you’re on track by checking in now and then. Maybe just once per year, when you can also rebalance your portfolio.

Active investors will probably want to follow their investments more closely – particularly if invested in individual shares as opposed to funds.

But that doesn’t mean dwelling every day on whether you’re beating the market or not.

Again, you need to trust the returns will come, and focus on the work demanded by your investing method (whether it be value investing or small cap growth shares or dividend investing or what have you).

Even if you trade ultra short-term (I wouldn’t!) then the direction and quality of your individual positions day-to-day is of far greater importance than how you’ve done year-to-date.

Verify that overall your active investing is headed in the right direction by occasionally seeing how you’re doing versus your benchmarks.

But don’t check every day, and perhaps not every month.

Easier said than done – it’s a fight I often have with myself – but remember it’s the operations of the companies you own that will make you money in the long-term, not the gyrations of their value on a spreadsheet or in your dealing account.

  1. Note: I think most people will fail to beat the market, but that a long-term focus is the least bad way of trying to do better. []
  2. i.e. High beta shares. []

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{ 24 comments… add one }
  • 1 sendaiben July 17, 2014, 12:13 pm

    Don’t think I agree 🙂

    I can see your reasoning, but I find tracking my dividends each month extremely motivating -making me want to continue contributing as much as possible to my account.

    I am planning to continue saving for the next thirty years or so, which means I don’t really care about the value of my portfolio in the short-term. Not comparing myself to anyone, just my portfolio to what it did last month or last year.

  • 2 Ric July 17, 2014, 12:39 pm

    Great advice & a good article.
    Another technique to control over trading is a firm set of rules. I’m a bad-boy when it comes to tracking performance, can’t help myself. However I only trade about six times a year on a portfolio of over thirty shares, and even then most of those trades are adding new money. The method I use to control the desire to trade more often is a strict set of buy & sell criteria. Unless a holding goes bad against this check list, I can’t sell.

  • 3 PC July 17, 2014, 12:57 pm

    Very good advice and I’d add stop reading the financial market news, except maybe the very long term strategic stuff.

    In a former life I used to trade for a living and once built a realtime P&L spreadsheet – after a few days, I had to stop looking at it, it was far too distracting. The temptation to do something is far too great as it is, and doesn’t need any encouragement.

  • 4 The Rhino July 17, 2014, 1:00 pm

    I think this is excellent advice

    I have reduced my trading to once a year now

    I have 2 spreadsheets

    One for income and expenditure, so I can track how much I’m earning and how much I’m spending on, say, groceries on a monthly basis

    The other is for investments, I currently update this monthly (at the same time as the income/expenses) but this article has made me think I ought to reduce this to once a year too – less is more and all that..

  • 5 SemiPassive July 17, 2014, 1:01 pm

    Whats annoying at the moment is I switched some funds to their ETF equivalents at the FTSE high for 2014 earlier this year, due to H-L’s fee changes, and some are still showing a (screen portfolio) loss as my (screen) gains over the previous 2 years have effectively been reset.
    Daft I know. So in fact I’d rather not look again until a year has passed and the effect of accumulated dividends counters the loss, even if the FTSE stays pretty flat.
    On the positive side, I am now confident I could leave my SIPP of tracker ETFs untouched for 20 years if I didn’t contribute further. I wouldn’t even bother rebalancing it.
    And this is coming from a terrible tinkerer in years gone by, you learn things the hard way.

  • 6 Arizona Trader (@ArizonaTrader) July 17, 2014, 1:02 pm

    This is the same generic advice that financial planners use when dealing with their clients. The problem is it’s basically “kicking the can down the road”. The market is a dynamic environment and to assume that you will have enough money by the time you need it is foolish. Savers and investors are being told that there was nothing that could have been done to protect their savings during the 2008 – 2009 collapse. Then investors were told that they are going to have to postpone retirement, invest more and not be able to accomplish the retirement goals. Passive investing is equates to being careless with your money.

  • 7 MJ July 17, 2014, 1:03 pm

    In my portfolio I am up overall a few percent this year but this is with some losses and some big increases – should I look to take profit where I have some big increases? I’m considering but trying to not look and keep on going slow and steady. Any thoughts?

  • 8 weenie July 17, 2014, 1:18 pm

    I used to check every day, now I check most days. I’m getting better!

    “If you want to beat the market, it’s a good idea to do something different.”

    If you’re a passive investor just investing in trackers, then when will you ever beat the market?

  • 9 Robert July 17, 2014, 2:19 pm

    That’s the first time I’ve actually seen it spelled out, your investment returns are entirely out of your hands, fate will provide you with a comfortable retirement, or not.

    I can understand why most people can’t accept this, hence as my neighbour says, “£250 goes out of my bank every month, spend the rest and live for today.”

  • 10 The Investor July 17, 2014, 2:21 pm

    Thanks for the comments all!

    @Weenie — Indeed! That section is for the active investors amongst us, who probably won’t beat the market but want to try!

    @ArizonaTrader — Your retort would have a lot of weight if there was plenty (/any) evidence that most people, including professional fund managers, could sidestep market crashes or indeed profit from stock picking at all.

    Unfortunately the evidence is they overwhelmingly cannot.

    So, sensible sounding though your suggestion is, I think my apparently generic advice (which to be honest is not exactly the message I hear from CNBC etc) has the weight of proof on its side.

    Don’t get me wrong, I think some few people can be active and beat the market. More power to you if you’re one of them! But most clearly cannot.

    Also the sort of passive investing we advocate here involves regular rebalancing across diversified asset classes, which reduces the risks of the impacts you describe. 🙂

  • 11 Jon July 17, 2014, 2:37 pm

    As an income investor I check I’ve received each one of my dividends from 40+ individual stocks and a few ETFs. Receiving real money hitting your account every few days and dividend growth is a real motivator. However I don’t look at the capital performance, only income performance of my portfolio, hoping to reach that magical £2K of passive income per month one day.

  • 12 Arizona Trader July 17, 2014, 3:02 pm

    The Investor,

    All anyone has to do is to watch the charts of the major indices. When stocks dropped 10%, investors should have begun thinking about taking defensive action (i.e. move to cash). When we dropped 20%, those defensive actions should have been implemented. Then we dropped 30%, savers/investors should have been in cash. 40% breathe a sigh of relief that you saved some of your hard earned money. 50% have a drink and wait for the rebound. The charts don’t lie, the “financial experts” do.

    There’s much I can say about the myth of diversification and professional fund managers. In fact, you’ve given me some blog ideas. Thanks.

  • 13 Arizona Trader July 17, 2014, 3:22 pm

    Jon,

    Good luck on your 2k/month goal. I’m seeing a lot of savers leaning towards dividend growth investing . One blog, I read is dividendmantra.com. Jason is the owner and his results are impressive. It beats passive or index investing anytime and the results are almost immediate . You don’t have to wait 30 years and hope your portfolio has returned an 8% annualized return, like financial planners will preach.

  • 14 Under The Money Tree July 17, 2014, 4:10 pm

    “Your portfolio rising by 1.73% this month doesn’t give you much useful information about how you should invest in the future”

    True, but it gives me hope that I’m a little closer to never having to come to this office ever again!

  • 15 The Investor July 17, 2014, 4:18 pm

    Well, there you have it readers. This is why nobody needs to worry about passive index investing taking over the world. 🙂

    As countless studies have proven, the majority of active investors fail to beat the market in the long term. For example:

    Research by Brad Barber of UC Davis and Terrance Odean of UC Berkeley found that only about 1% of active traders outperformed the market. The more frequently people trade, the worse they do.

    Most of the the professionals don’t do any better, either. Another study cited in the same article found:

    Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero”.

    It’s the same story in the UK, as we recently reported:

    Over 10 years, over 70% of funds lagged the market return in all 11 categories.

    But ArizonaTrader is here to tell us — and all these highly-skilled and highly-paid fund managers, who are ultra incentivised to deliver alpha and yet who fail to beat the market — that all they need to do is watch the major indices and sell when they go down!

    The charts don’t lie, apparently. (Correct. Nothing lies in hindsight).

    Perhaps it works for him/her, and I suggest if you’re interested you check out his/her blog. I feel that we’ve each had our say, and I’ll be deleting further comments on the subject as I can’t be bothered with the debate. You can follow the studies above and see who seems more convincing.

    One thing I know for sure is that nobody credible who beats the market says it’s easy.

    Make your own mind up.

  • 16 ermine July 17, 2014, 5:14 pm

    Unitising seems to do most of the work for active investors. Typically done every year it works okay for me, and deals with the Beardstown Ladies error of not accounting for added cash and other issues like dividend income. What’s not to like? Roll on that article!

  • 17 SemiPassive July 17, 2014, 5:17 pm

    Wait for stocks to drop 20%, then sell them, wait for stocks to go up 20% then buy them again. This is guaranteed to work if bull and bear markets exceed 50% swings 🙂

  • 18 David July 17, 2014, 10:44 pm

    Our 2nd child in January 2008 worked wonders. Everything in terms of tracking investments went out of the window, but the direct debits kept on chugging away. Resurfaced in 2012/13 and started looking again.

    Far less worrying when you aren’t looking, and the temptation to fiddle goes away.

    I know that I shouldn’t care about falls, in fact as someone with years to go as a net investor I should welcome them. It never feels good though!

  • 19 Ric July 17, 2014, 11:32 pm

    To follow up on my earlier comment, I’ve two more potentially useful portfolio anti-fiddling tips:
    – don’t read the discussion boards that follow individual shares. Most of the posters don’t know their current ratio from their current bun. They will often just spook you into actions you’ll regret later. Reading more balanced blogs, and things about general investment strategy is okay of course.
    – don’t worry about Mr Market’s valuation of the day, it the underlying fundamentals that count. As one example, I’d be far more worried about weakness in the numbers that gave rise to the potential for a dividend cut than I would be bothered about transient price volatility.

  • 20 Simon July 18, 2014, 9:13 am

    Luckily being a churner is not one of my problems, I don’t think its any coincidence that most of my best performing shares are those which I’ve held for the longest period. My vices include being a daily portfolio watcher and market timer, I just can’t help myself, if anyone knows of any support groups available please send me the details.

  • 21 Malcolm Beaton July 18, 2014, 4:15 pm

    Hi all-agree with all above opinions but I have learnt such a lot about how shares and bonds behave by tracking my portfolio. Been an Active Investor in the distant past but Passive for last 10 years- am retired.
    The dynamism and ups and downs of the Stockmarket are so interesting. It behaves like a living person as it must as it is a human creation. Down at the beginning of a Trading week rising to the big finish on Friday ,mirroring and reacting to world events immediately as people do etc etc.
    Following portfolio performance as a “lurker” teaches one a lot – you get a sense of perspective -useful in the volatile moments. Always something new to learn-Dark Pools,Abenomics – all mostly froth and bubble but “diamonds” can be found like Vanguard Trackers,Asset Allocation rules and sensible withdrawal rates. There is always something new to learn- money men’s ingenuity knows no bounds. It’s my money and how it behaves is of extreme interest to me .Mostly very little action is required -investing dividends but following this almost living and breathing “thing” is a constant learning experience!

  • 22 Willem de Leeuw July 19, 2014, 8:14 am

    From part of the Investor’s comments, July 17, 2014 at 2:21 pm “I think some few people can be active and beat the market”

    I think this is the thing: the assumption almost always seems to be that being active means that you are trying to beat the market: what about the people who are active but are looking to earn reasonable, risk weighted returns with, say, a 0.5 beta? Speaking for myself, I don’t want to track the market, especially markets overladen with banks (black boxes) and commodities (too volatile) e.g., the FTSE 100 and All Share or too geared to cyclicals e.g., the Dax. You can try to do this with some ETFs but the way they are created is really dumb e.g., iShares UK Dividend (IUKD) just rebalances to the highest dividend payers, often before a cut.

    I have a balanced portfolio anyway, so there’s no way I’m going to capture all the upside of the S&P500, say, but that’s okay. I think you’ve mentioned it before; why not have an element of active and passive? All or nothing makes better copy, I guess. Middle of the road and too many caveats is boring.

    The danger at the moment is that we’ve had a good five year run where passive investing has worked well and uncritical extrapolation begins to rear its ugly head. Does it work in every market? E.g., Japan? The bottom line for me is to know thyself, to know what you are willing to put with, to listen to what other people say but then do what you feel is right for you.

  • 23 The Investor July 20, 2014, 8:03 am

    @Willem — Thanks for your comment. I hold a mix of active stock picks and ITs and passive funds myself (much more weighted towards stocks currently!) and I think the article does allude to other kinds of investors (hobby/passion etc) so do what you feel comfortable with I agree.

    That said it usually does boil down to trying to beat the market or doing it for ‘fun’. If you don’t want to hold banks etc presumably it’s because you believe they are vulnerable to extra large losses — I.e. That your bank-light portfolio can do better.

    Similarly, you can arguably get less volatility and risk if you’re satisfied with lower returns by holding, say, a lower allocation of equities via index trackers, and more of your chosen low risk assets (bonds/cash) — which could be cheaper and less risky than own stock picks.

    But as we agree, many ways to skin a poor old cat…

  • 24 Geo July 22, 2014, 8:43 am

    Bit late but just wanted to say one of the best articles in ages and certainly not ‘generic advice from a financial planner’.

    Excellent work TI!

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