Why you shouldn’t track 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. [↩]