Investor Psychology

Our Practical Investor Gets Performance Anxiety

I now find myself tempted to check my returns against my benchmark several times a day.

A mild form of insanity grips you when you start publishing your investment returns regularly. Of course, I’ve known this for years. I even mentioned the phenomenon in my book Investing 101 to explain why individuals could invest better than the pros. You're simply better able to make reasonable decisions in private than when you’re telegraphing every move to the world -- and thus opening yourself up to public criticism.

SEE ALSO: Be a Better Stock Investor

And yet, as I continue with this experiment of investing in public, I'm reminded of those people who talk about out-of-body experiences when they came close to dying after their hearts stopped temporarily. I'm watching myself from a distance, understanding what's happening but seemingly powerless to stop the creeping mania.

Growing obsession. The descent into madness started almost imperceptibly. After launching this column, I began to check my accounts just a touch more often than before. Pretty soon, it was the first thing I did every morning. Then I began to wait anxiously to update my returns at the market's close. I now find myself tempted to check my results against my benchmark several times a day. Worse, instead of looking at whether I'm making money, I now focus on whether I'm beating my index. Winning the competition suddenly feels more important than the spoils.

Of course, I'm not really mad. The key to keeping grounded lies in understanding a simple truth: The biggest threat to long-term wealth is impulsive, short-term decision-making. When tempted to make a move that's based on other people's impressions rather than my own judgment, I force myself to sit on my hands and do nothing at all.

I share these musings because they are worth considering if you invest in actively managed mutual funds or allow a broker to make investment decisions for you. Even smart and experienced professionals make moves that can harm long-term results so they can improve their short-term competitive position.

Consider "window dressing." Near the end of a year or quarter -- right before the books are frozen on what will be reported to shareholders -- some fund managers sell their losers and buy big winners to "dress up" the portfolio that shareholders will see. Clients may think, Brilliant -- he's got Apple! But a window-dressing purchase is more likely to harm long-term returns than help them. That's because the stock was bought after it had run up, and the losers were sold after they'd hit their nadir. Many investors will never know why the sum of the fund's performance never seems to live up to its parts. To be sure, the performance is public and investors may eventually catch on. But at least for a while, the window dresser can claim (unearned) bragging rights.

Back to my portfolio: I still haven't sold any stocks. I glared menacingly at a few that were making me look bad (that means you, Corning, Johnson & Johnson and PPL). But I expect those stocks, like smart-alecky teenagers, to grow out of a bad stretch. Meanwhile, I will watch the firms closely.

I also took another look at the stocks we recommended in January (6 Stocks for the Year Ahead) and picked up the two that have done the worst -- Schnitzer Steel (symbol SCHN) and Target (TGT), at $45.56 and $52.14, respectively. Both posted disappointing numbers -- Schnitzer's earnings for the September–November quarter came in below expectations, and Target's December sales were lackluster. But I'm attracted to them not only because I think the stocks will do well over the next few years but because they help diversify my portfolio, which had been heavy on recession-resistant companies. Schnitzer and Target, by contrast, would benefit from a stronger economy.

Meanwhile, the stocks I bought in December -- particularly Apple and Microsoft -- are on a roll. It's a great time to be an investor.

Kathy Kristof is a contributing editor to Kiplinger's Personal Finance and author of the book Investing 101. You can see her portfolio at kiplinger.com/links/practicalportfolio.

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