I have an investment record of about 5-6 years.
For someone who is 30 years young, that’s considered pretty long. But to most “investors” out there, it’s too short a period to judge whether I am a good investor. Some of them would say you need to have at least 10 years of track record or go through at least a cycle or two of bulls and bears.
It’s then when you can judge if you really outperformed the market and should continue to manage your own portfolio rather than outsource to an ETF that tracks an index.
However, I feel such views could prove disastrous for a new investor.
Suppose he starts investing at 30 and pump $20,000 every year into specific stocks and this is his performance over the ten years.
Basically, at Year 4, he would be ahead of the index and that could give misguided confidence to that new and young investor. However, by Year 10, he would have trailed by $90,000, which is close to half of his invested capital. At least for me, that is a huge amount of money.
The opposite could also apply. Suppose the left side is the index and the right side is now the portfolio return. The person started out picking stocks and at Year 4, he might have trailed the index. Disappointed, he gives up and outsource his investments to an ETF.
If he had continued to have belief in himself, he would have been $90,000 ahead at the end of the 10 years.
$90,000 might not be a very big sum to some but looking at the table above, some investors might even feel that 10 years is too short a time. However, as the invested sum increases, any lag in returns would be amplified even more.
So, when should a new investor stick to his convictions or cut his losses?
I will be honest and admit that I also have no clue. Some financial bloggers have been outperforming for many years and it’s a no-brainer for them. They really do seem to have an edge. And it helps a lot that most of them enjoy the process of picking or even trading stocks.
However, if you are new and unsure like me, I would recommend a double-pronged approach which I had mentioned 4 years ago.
And then try to monitor closely and see which approach you would prefer. And there’s nothing wrong if you continue both strategies forever too.
Since no one will ever know if your under/outperformance will be a trend or if mean reversion would occur.