Track your Performance

The other day I was talking with a few friends of mine when we started to discuss how our portfolios have faired in the recent bear market. To my surprise all 3 of them indicated that they had lost some money but in general did well. The conversation continued and eventually it moved into long term performance. I know how well I have done as I am a numbers freak. My friends on the other hand said they did well but couldn’t recall the actual numbers. Upon further investigation I found out that they have never calculated their actual returns.

We decided to calculate their performance over the past few years. In order to do this I used old tax returns and simply created an excel spread sheet. I prefer using excel over software such as Quicken as I can create a spreadsheet anyway I wish. Upon completion I was horrified and had a hard time hiding it. These guys had made some money but had completely underperformed the S&P 500. In other words their investment performance was absolutely terrible.

This little episode highlights what is known as mental accounting. Mental accounting is a process by which many investors tend to calculate returns completely in their head. They remember the successful investments while their not so successful investments simply disappear. This is extremely dangerous as it distracts your view from your overall portfolio. If you don’t know that your strategy is failing you will continue failing well into the future. In the end your long term performance could be absolutely miserable and you will never know.

So please, if you are an investor take the time to keep track of your investment performance. Doing so will let you know if your investments are on the right track or not. Otherwise you could easily fall prey to the failings of the human mind.