What’s Your Reference Point?

“Avoid the twin impostors of short term out- and under-performance. It is important for us to remember what really matters is the long-term.” – Howard Marks

At what point in the past are you judging your stock performance?

The first few weeks of April?

april

Didn’t look so great.

The last year?

1 yr

Much better.

2008?

2008

Not so much fun.

Since March of 2009?

2009

That’s more like it.

The Flash Crash?

flash

Who me? Freak out?  No way (OK maybe a little).

Market tops?

Tops

Looks very scary (after the fact).

Market bottoms?

bottoms

Looks pretty great (after the fact).

Knowing your time horizon before you make any investment is extremely important. This should allow you to keep market moves in perspective so you can align your risk tolerance with your actual portfolio needs.

If you’re a day trader you have to get used to the fact that you could be hanging onto to every single tick of the market, no matter how painful. Long-term investors shouldn’t have to do this but it’s nearly impossible for people to remember how far they’ve come with their portfolio.  The most recent gains or losses from a single event or period of time are the only ones we seem to care about.

Remember life’s a journey and all that.

Be careful staking yourself to any one point of reference when measuring the performance of your portfolio. The daily close, end of the quarter or calendar year are just arbitrary time frames. They don’t really mean anything. Focusing exclusively on these endpoints is an easy way to allow anchoring and framing to affect your future decisions.

There will always be a level in the market that makes you feel great (or terrible) because you didn’t buy or sell at that exact price.  Avoid this hindsight-biased line of thinking at all costs.  It will do you no good to play the ‘what if?’ game over and over again in your head.

Performance measurement and benchmarking are important to make sure you aren’t getting ripped off by an overpriced advisor, a serially underperforming fund or bad choices on your own part.  But an understanding of where your portfolio sits in comparison to your goals should be the ultimate measuring stick.

 

 
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  1. Which Side of the Argument Are You On? | A Wealth of Common SenseA Wealth of Common Sense commented on May 17

    […] And remember that there will always be asterisks, caveats, ifs, buts, footnotes, grains of salt, howevers and having-said-thats when dealing with the complexities of the financial markets. Intelligent arguments can always be made in both directions depending on your time horizon, perspective, portfolio positioning, experience in the markets and your reference point. […]