Investing Online For Dummies, 8th Edition by Matt Krantz

Author:Matt Krantz
Language: eng
Format: epub
Publisher: Wiley Publishing
Published: 2012-11-26T16:00:00+00:00

Chapter 8

Measuring Your Performance

In This Chapter

Seeing the importance of tracking your performance

Figuring out the best way to calculate investment performance

Using online tools that can measure your risk and returns

Choosing the right benchmark

It’s surprising how many investors keep buying and selling stocks online even when they have no idea whether they’re beating the market. They’ll brag at cocktail parties about the winning stocks they’ve bought. But if you ask them what their rate of return is, they’ll look at you blankly. Most online brokers don’t help either, because many don’t have tools that accurately measure your returns.

To me, investing online without knowing how you’re doing is like driving with your eyes closed. As an online investor, it’s pretty much up to you to calculate your own returns. To help you get back in control, this chapter first shows you how to manually calculate your returns and how much risk you’ve taken to get those returns. In case you want more handholding, I then discuss online sites and software that do all the calculations for you. Either way you choose, you’ll be miles ahead of other investors who keep investing without knowing whether they’re successful.

The Importance of Tracking Your Performance

You learn from an early age to monitor your progress with most things. As babies, your height and weight were plotted on charts to illustrate how quickly you were growing and how your size ranked with other infants. In school, your progress was constantly monitored using letter grades and tests. And at work, annual reviews and pay often reflect the job you’re doing and show what’s working and what’s not.

That’s why it’s so strange that many people don’t monitor their investment performance. Investors often look through their portfolios, see a few stocks that are up since they bought them, and assume that they’re beating the stock market.

Psychology plays a big part in investing. Many online investors tend to get overly confident if they’ve recently picked a few lucky stocks. That prompts them to take more uncalculated risks in the future, which might cost them dearly. Investors also tend to wipe out painful losses from their memories. They remember only the winners. And other investors beat themselves up for losing money on a stock, blaming something that had nothing to do with the loss. By measuring your performance, you can try to remove some of the emotion from investing. (Morningstar, the independent investment research outfit, has a great little lesson on how human nature can affect your success investing online; check out http://news.morningstar.com/classroom2/printlesson.asp?docId=145104&CN=com).

I suspect most folks don’t bother monitoring their investment performance because it requires some math and a few scary-looking formulas that most investors don’t understand. This chapter, though, demystifies how to track your portfolio’s risk and return. I start by showing you how to do the calculations yourself.

It’s important for you to understand how all the calculations are done so that you don’t blindly rely on websites to do it for you, but I also know that not everyone has the time or the willingness to crunch performance stats.

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