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Better and Worse: Your Performance and the Market's

Professional money managers — financial advisors and portfolio managers alike — have often observed that the performance of a fund or stock in an individual investor’s portfolio can wildly deviate from the historical performance of that fund or stock.

Timing has a lot to do with it. An investor may buy a fund at a price substantially higher than the price at which he or she sells the fund shares, yet the fund may have gone up for several years in the interim only to decline at the end, for example. In such a case, the fund may have had above-average returns for several years, which would have been great for those who bought and sold at points along the upward path, and maybe only one or two years of declines. Meanwhile, to the investor who bought high and sold low, the fund is a loser.

You're Not the Market

I bring up this point to illustrate how the recent market convulsions may or may not affect your portfolio over the long run. It all depends on when you bought, when you plan to sell, why you bought a particular fund or stock in the first place, and how you feel when you compare yourself to benchmarks over specific time periods.

Since there’s an unspoken sense in most investing commentary that the smartest investors always buy the best-performing stocks just at the right time (and sell them before they’re no longer the top performers), or that they own sophisticated investments that perfectly zig when markets zag, it’s easy to feel like a nincompoop as an investor, or at least inadequate compared to the “smart” money.

My view is that if you approach investing with a modicum of intelligence, have a long time horizon, and you don’t beat yourself up for not being 100% right 100% of the time, you should pat yourself on the back.

My Experience

Let me give you an example from my own portfolio.

In late November 2011, I bought Duke Energy (DUK ) at $19.97 a share. My thinking was that it was a good utility in a good part of the country, and with interest rates going down it was a pretty low-risk way to get a great dividend. After adjusting for splits, and after the recent market decline, the stock is now at about $69.00 a share, making my investment return about 35% over almost five years. That’s a return of about 7.7% a year compounded annually, which is a lot lower than the 13% or so gain in the S&P 500 over the same period.

Did I do well or badly? I feel that I did OK. Sure, if I knew the S&P 500 would have done so well over that time, I would have put all my money in the S&P 500; truth is, some of my money is in the S&P 500. But as a utility, Duke is a lot less risky than the market as a whole. So I’m not beating myself up for earning “only” 7.7% a year. First, I feel great I didn’t lose anything. Second, I’m still earning what is now a 4.75% yield, which I keep reinvesting in Duke stock.

For kicks, I looked at another conservative dividend-oriented investment I bought at around that time and discovered that I beat the S&P 500 by a little bit. While it’s nice to be up one when you’re down one, I really don’t feel like either choice made me an investment savant or an investment idiot. Like most other areas of life, I’m kind of a B+ person in terms of investing: pretty good, but nothing that screams genius.

The Bottom Line

If you’re record is like that — steady and OK, but not top of the charts — pat yourself on the back and stop beating yourself up. You may not be the world’s top investor, but even A+ investors have plenty of F days.

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