Like most of us, I have emotions about my investments. We all know that emotions get us into trouble, so I try to be aware of them. I’ve come to realize that one of the biggest drivers of my emotional state with regard to my portfolio is how I’m performing over some arbitrary timeframe relative to the S&P 500. And in the grand scheme of things, that’s kind of crazy.
From a big picture perspective, I couldn’t really care less what the S&P 500 is doing so long as I’m comfortably beating it over the long term. And I only care about it that much because tossing my capital into an index fund is the default strategy, so if I can’t beat it then I should just join it. But my performance today or next quarter or this calendar year or even this decade vs. the S&P 500 is completely irrelevant.
It’s so ingrained in us that it’s “hard” to beat the market (some would even say impossible over the long run, despite all the evidence to the contrary), that I’m constantly measuring myself against it, even on a daily basis sometimes. Which is silly to the point of being ridiculous, and even harmful, as that frequent comparison leads to other knock-on problems, such as paying too much attention to arbitrary timeframes: how did I perform this month? This quarter? This calendar year? It’s all so arbitrary, of course. And none of it matters over the long term. But to see how it can color our perception, consider this point Morgan Housel makes in a recent article:
Stocks are up 225% since 2009, which is one of the best five-year periods in history. They’re also up 53% since 2007, which, after inflation, is one of the worst seven-year periods in history.
So, are we in the middle of a blistering bull market or a drawn-out stupor?
What a difference a couple of years makes
Morgan goes on to say that “investing requires, more than anything, patience and discipline” but I think it requires something even more fundamental to truly succeed: confidence. Without confidence, it’s easy to give in to fear, or be swayed by headline numbers or the latest prognostications from the talking heads, or abandon ship at the first sign of trouble. We’re still going to be wrong and make mistakes, of course — confidence is not hubris. But it’s a lot easier to be patient and have the discipline to stick to our long-term investments and processes when we believe in the strength of our approach.
The best investments are often those companies that are out of favor at the moment, but it takes time for their true worth to become appreciated by the market. It’s only natural that there will be periods of divergence between our portfolios and the S&P. At best, comparison is a meaningless predictor of our portfolio’s long-term performance. But more insidiously, it can stir emotions, instill doubt, and erode confidence – all enemies of a patient, long-term approach.
So moving forward, I’m going to make an effort to pay a lot less attention to my performance relative to the market, especially over short time frames. It’s just not important, and I suspect it colors my decisions in subtle and unfavorable ways.