Updated on: December 15, 2020 ; Behaviour
What do you expect from your investments?
Normally investors have two broad expectations, and both of these are tied to each other. The first one is the growth of their investments, and the second is the protection of their capital from undesirable erosion. I had already written a primer on investments, which you can read here.
You will have some goals and dreams in your life. Some of them would need money, and so you would plan for them by earning and investing in the ‘right’ places. You would need to organize, diversify, and time your investments accordingly. Already a lot has been written on analyzing the performance of many strategies and asset-allocation across different articles here. I urge you to read them to get a better hang of things.
So, you would expect your investments to fulfill some of your goals when the time is ripe. It is also important for you to keep a track of your investment’s performance. Maybe a quarterly or yearly cadence will be useful to keep yourself aware of where your investments’ health.
But how to measure the performance of investment?
Calculation of the growth of your investments is very simple. In fact, you no more have to compute these numbers yourself. The platform you use for your investments would have readily available dashboards and reports. They will provide you with all the important information related to your investments and their performance.
But the real question is – How do you know if your portfolio has performed well enough?
Well, the first obvious check is to see that your initial capital is preserved. That is the minimum threshold.
Next is to test if your investments have outperformed the benchmark set by you. This is where we get into the subjective territory of – What is the correct benchmark?
Let me state upfront. There is no one standard benchmark. You have to decide on the benchmark based on your goals and risk appetite. And this has to be done well before you start your investments. That is because it is these benchmarks that will decide your investment strategy and not the other way around.
Now, the benchmark could be a broad market index like the Sensex or Nifty 50. It could also be inflation and some premium on top of it. Some might prefer it to be govt bond yields plus premium. It could be any number – fixed or variable based on your choice, but it has to be well-defined.
Looks fairly straight forward. Doesn’t it? But in reality, it is not so.
Why is it that even if your investments achieve your benchmarks, you don’t feel happy or satisfied enough? You feel that it should have done even better, especially in a bull market, when you see everyone around you making huge profits and bragging about it.
It is quite normal to feel envious during such situations. All of us would have felt the same some time or other. But you, as a rational investor should be able to overcome such emotions.
The reason why you feel not so great is that when you see people around you – your friends, distant family members, people on social media, news channels, and other places harping about their stupendous performance of investments, you unconsciously move your benchmark.
Looking at other’s investments perform well, you expect your portfolio also to do the same, irrespective of the benchmarks you had set earlier. One point to note here is that this is specifically in the case of bull markets. The story is very different when the markets are not performing that well. So, in this article, we will be looking at the bull market scenario only.
Before we proceed further, you need to answer this question.
Does your peer’s better investment performance, make your investment strategy inferior?
If you are still wondering, let me give you the answer. If you have carefully studied and crafted your investment strategy, then the answer is No.
You don’t know the philosophy, risk-appetite, past track record of the other investors. You don’t know their goals, the effort they spent on research, the hard work they put in building their portfolio. Then how can you compare your portfolio’s performance with that of others? Your portfolio and your peer’s portfolio are completely different entities. So, focus on your investments and stop bothering about others’.
In short, it is absolutely not relevant what others have achieved.
What matters really?
Remember, your investments are only yours. Your plans and dreams will be fulfilled by your investments. Does it really matter if your friend or your friend’s neighbor pulled a multi-bagger? How would someone else’s investment performance impact your goal in any which way?
Let me put it this way. Suppose no one told you about the ‘successful’ investor’s performance, then would it have changed your attitude towards or expectation from your portfolio? My guess is No.
So, what really matters are your goals and your investment’s performance towards achieving those goals. Because none of your goals will be impacted by some other’s investment performance. You are responsible and accountable for your investments and your goals. Others are accountable for theirs’. There is no overlap between them.
Always remember, there will always be someone whose portfolio will perform much better than yours and the other way around as well.
It is not a race where you are competing with others, and the winner takes home the prize. Your win will be the achievement of your investment goals. Here everyone can be a winner in the end. There is no need for someone to lose so that someone can win.
Keep the focus on yourself!!!