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Avoid second-guessing: Investing doesn’t have to be complicated

Wall Street Physician, MD
Finance
May 14, 2018
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There are a lot of what-ifs in life.

If only I had made that putt on 14, I could have shot my best score ever.

If only I had taken a different job or performed better at the interview, I would be so much happier at my job.

For decisions large and small, there are ample opportunities to second-guess yourself.

I’m sure you have your own what-ifs when it comes to investing.

If only I had bought Amazon when it just sold books.

If only I sold before the market crashed.

If only, if only, if only …

If you had bought Amazon in 1997, you probably wouldn’t be reading this blog.

What’s your anchor?

In investing, most investors, whether they admit it to it or not, compare their portfolio return to a benchmark or a number that they “should” be getting.

Comparing yourself to others or the S&P 500

Many people actually gravitate towards a benchmark rather than an actual rate of return. This makes sense. Even if the expected return of their portfolio is 10%, most investors do not expect that the stock market will go up 10% every year. They understand the ebbs and flows of the market – some years will have +30% returns, while others will have -40% returns.

As a result, when most investors look at investment returns, they will compare themselves to a benchmark index. Even if their portfolio has bonds, or small cap, or international stocks, most investors will still gravitate to the S&P 500 or the Dow Jones Industrial Average. It makes sense — these are the indices that gets reported every day on the news.

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Some people enjoy picking individual stocks. Of course, the allure of picking individual stocks is that you can try to beat the market, at least in the short-run. But if a stock pick does poorly, you’ll wonder how much better your returns would be if you had picked the hot stock your co-worker told you about in the surgical lounge.

Even index investors do this

Everyone loves comparing their returns to others. Even the Bogleheads forum has a thread called “What are you up YTD (Year-To-Date)?” with more than 1800 replies. Even this group of investors who strongly believe in an index fund philosophy feel a strong need to share and compare their returns with others.

It’s easy to understand why. Even if you don’t pick individual stocks, you still have to pick an asset allocation. You have the choice of many different asset classes and can weight them in an infinite number of combinations.

If your portfolio underperforms the market or your peers, you’ll be left wondering whether you could have done better if you had invested in small caps or long-term bonds, or real estate, or Bitcoin.

In short, there’s a lot of opportunity for second-guessing in investing.

Whatever you can do, someone else can do better

The second-guessing and what-ifs in investing can eat at you. If you are a perfectionist, no matter how well your portfolio performs, you think about how you could have done better.

If you underperform the market, then, of course, you’ll second-guess yourself. If only you had just invested in the S&P 500 index, you could have done better.

If you actually do beat the market, you can still look at some of the other top-performing funds or individual stocks that year and ask yourself: if only I had bought that stock, my performance could have been even better.

Avoid second-guessing

When you invest in a solid, well-diversified portfolio of index funds such as the three-fund portfolio, there is no second-guessing. You’re confident that you matched the market, no better, no worse.

You don’t need to check your portfolio performance, because you’re confident that your portfolio will help you meet your long-term financial goals.

Target-date funds are a great way to invest in index funds without the second-guessing, because the target-date fund sets the asset allocation for you and adjusts it over time.

Conclusion

Investing doesn’t have to be complicated. In fact, if you make it more complicated then it has to be, it opens up the possibility of second-guessing. Be satisfied with market returns, and reach your financial goals through adequate savings and index investing, not performance-chasing.

What do you think? Do you benchmark your portfolio returns to an index? Do you often second-guess your past investment decisions?

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

Image credit: Shutterstock.com

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