(This is an extract from a Dec 2014 post)
To many people, two big questions they like to ask themselves when managing a portfolio are: Did I beat the market? What are my overall returns for (insert time period)?
To answer these questions for myself honestly: I don't know.
Could I find that out for myself? Certainly. Does knowing that answer change anything for me? Not likely, and I'd like to share why.
Some may wonder, why do I not post buy prices, or average cost of each share, and unrealized (paper) gains or losses. Of course, this information is readily available to me from all the SGX contract and confirmation notes of each purchase, which I still keep. However when I look at my portfolio on Google Finance (yes, I use that to keep track of my stuff), this is what I see.
As you can see, I did not input my cost price, nor will I track how much I sold each stock for.
Different people have different reasons for buying and selling stocks. For myself, it is to partake in economic activity and growth by small ownership of companies/trusts, in order to generate a sustainable income stream, for objectives stated in my 'about' page :)
With these objectives, the key performance indicators (ugh, not the biggest fan of that phrase) would naturally be steadily rising cash flow from my holdings, and I do keep track of that as shown on this blog. Also, portfolio valuation is another thing I keep track of, reason being, in the event that I choose to liquidate my holdings, this would be the amount of cash which I am able to exchange these businesses for, for personal use.
As mentioned previously in a post about asset allocation, I am conservative on the amount I use to purchase stocks, so that I will (hopefully) never be in a position where I need to sell any stocks in order to fund my living expenses. Of course, I would be always ready to sell my stocks in the event that anything fundamentally deteriorates in the company/trust which I hold to the point where the continued holding of the stock does not meet the aforementioned objectives.
By not keeping track of my purchase prices, I try to reduce anchoring bias. Of course this is not entirely possible, as I tend to remember how much I bought each stock for, especially the more recent buys. I am also not a big fan of the terms averaging up or averaging down (although I still am guilty of using it at times). Reason being, the market does not care how much you bought or sold a stock for, and for a long-term investor, neither should we. When I own a stock, I try not to look at it as I own for example, $16680 worth of SIA Engineering Company shares. I look at it as I own 4000 shares, or 0.00036% of SIA Engineering Company, which can be sold on the open market for $16680 if need be.
Simply put, when I buy for example, $5000 worth of stocks, I would see it as if I have spent $5000, and I do not have that cash anymore. This way, I would not be tempted to sell the stock on the basis that its price fell, because I don't see it as losing money. Ultimately, I still own the same amount of stock (and hopefully the same amount, or at least a similar degree of cash flow generation). The same goes for buying a stock on the same basis that the price fell, and wanting to "average-down" on the position. Instead of that, I like to see each new purchase of stock independently, and the new buy price may be higher or lower than the previous (if I already held some of the same stock), solely for the reason that new information (about the company, or your own asset allocation) being factored into the buy price.
Whether I beat the market or not? The only reason why this should matter, is to see whether you should bother with individual stock picking, or just go with an index ETF. Personally, dollar for dollar, an index ETF does not provide as much cash flow as my portfolio does, purely on the basis that every stock I have, at the point of purchase, has a trailing yield greater than the trailing yield on the STI ETF. This alone causes index investing to meet the cash flow objective to a lesser extent. Of course, an index ETF does give instant diversification and can be said to have a (questionably) lower risk, but it is a risk I am taking on for greater cash flow.
With all this, I hope it gives a clearer picture why I decide to track a lot less statistics than most equity investors. Also, by tracking less things in your portfolio, it reduces information clutter, giving me more time to actually analyse the companies, the general market conditions, and of course, time to do other way more important things in life :)
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