Investing is a lot like any other “numbers game” — it only makes sense if you’re making progress against a specific goal, and that means you need to track your investment performance.
Many investors fail to do this on a regular basis. Some may not be exactly sure how to, but still others intentionally avoid doing it as a way of avoiding something that may be unpleasant.
And if you can’t stomach the up-and-down nature of investing in the stock market, this kind of make sense.
You invest your money then step back and let it grow, taking a peek only occasionally to monitor the situation from a distance.
But if you are going to be a successful investor, you need to track your investments on a regular basis.
Success Needs a Definition
If you are not tracking your investments, you will have no way to know whether or not your investment plans are succeeding. Even more important, if things aren’t going the way you want, you may have to make changes. And the only way do that is if you have been tracking your investments and can identify problems in your portfolio.
There is an understandable desire — on the part of many investors — for their portfolios to be fully passive investments. They set allocations and continue to fund the portfolio, in hopes that at some point in the future, it will grow to the desired amount.
Unfortunately, investing is never entirely passive — unless you put all of your money into fixed-income investments. But that will never be the case if you are investing in the stock market!
You Can Lose, Even When it Seems Like You’re Winning
Investors are often happy just to know they are ahead of where they were when they started. If their investments have grown in value by 5% since the beginning of the year, they’re overjoyed to have made money.
But if the general market, as defined by the S&P 500, has increased by 10% since the beginning of the year, the 5% return that you earned isn’t so great. In fact, it could indicate that there is a problem with your portfolio.
Your account could be overloaded with too many under-performing stocks and mutual funds. You may be holding — and paying for — a menagerie of investments that when taken collectively are unable to perform as well as a single index fund based on the S&P 500.
If you track your investments on regular basis, you’ll be able to identify this weakness in your portfolio and take immediate steps to correct it.
401(k) Plans Can Hide True Investment Returns
Retirement plans, especially 401(k) plans, can easily hide true investment performance. This happens because your plan is growing by a combination of three inputs:
- Your payroll contributions to the plan,
- Your employer’s contribution match, and
- Investment returns.
While these are all part of the advantage of having a 401(k) plan, it can also obscure your true rate of return.
For example, if your 401(k) plan is $100,000 in January 1st, but has grown to $115,000 by June 30th, you may feel that your portfolio is doing extremely well.
But let’s say that most of the $15,000 in growth since January 1st is from contributions of $8,000 from you, plus another $4,000 from your employer match — that means only $3,000, or 3% — came from investment return. If the S&P 500 has risen by 7% since the beginning of the year, your 3% year-to-date return is trailing well behind the general stock market.
You might never see this because your poor investment performance was buried by generous contributions from you and your employer. 401(k) plans are an investment area that requires very close tracking to see how well you are truly doing.
Know When it’s Time to Rebalance
Still another area where tracking becomes critically important is rebalancing your portfolio. Tracking your investments can let you know when it is time to do this.
If your plan was to maintain a portfolio of 70% stocks and 30% fixed income investments, a rising stock market can distort that mix.
You could find, for example, that your portfolio has shifted to 85% stocks and only 15% fixed income investments because of a strong run-up in stock prices. This can leave you dangerously exposed in a stock market downturn.
Only by tracking your investments on a regular basis will you know that it’s time to rebalance.
Keep Track of Your Investments (but don’t obsess)
Ironically, while tracking your investments is good, too much can have the opposite effect. You want to track your investment performance periodically, at least quarterly and preferably monthly.
That will give you the vantage point that you need in order to determine what’s going on and what steps you need to take in correcting weaknesses and imbalances.
If you find yourself tracking your investments on a day-to-day basis, however, it may be an indication that you’re too deeply involved with your investments on an emotional level.
Successful investing requires a certain amount of detachment. You have to make your investment choices and be prepared to ride with them through the ups and downs of the market. Tracking your investments daily is hovering a little bit too close, and it could force you into making changes that don’t need to be made.
How frequently do you track your investments, and what methods do you use?