The stock market routinely issues lessons to investors. That’s nothing new. But I’m not sure one calendar year has ever captured the full breadth of what makes investing so hard…until 2020.
Many investors don’t think about their investments on a day-to-day basis. They typically only receive an update on a periodic basis. Often that update is via a quarterly account statement.
This unassuming document provides a lot of data but not necessarily a lot of information. As an investor, it is convenient, though. And because of that, investors frequently draw conclusions based on what they see on their account statements.
Of all the numbers listed on an account statement, investors tend to focus most intensely on just one: the ending account balance. Why? Because it tells them how much more or less wealth they had compared to three months prior.
To be sure, the ending account balance is an interesting number. But just as surely, it should not be used as an indicator of whether changes should be made to your portfolio. It does not tell you if your investments are appropriate or if they need to be adjusted.
Take 2020 for example. If you were an investor and just looked at your ending account balance each quarter, here are the reactions you may have had and questions you may have asked yourself.
12/31/19: Everything looks pretty good. The long bull market is still squarely intact. Should I be more aggressive and put more money in stocks?
3/31/20: What in the world happened to my account? My stock funds have lost a ton of money! Why is so much of my portfolio in stocks?
6/30/20: Well, things are looking better. But I still have less money in my account than I did at the start of the year. Should I dump my stock now, before they fall again?
9/30/20: That’s better – my account is now higher than it was at the start of the year. But can these gains really continue considering what’s happening in the economy?
12/31/20: Wow – that’s what I’m talking about! My account balance is quite a bit higher than it was this time last year. Should I be more aggressive and put more money in stocks?
The truth is you can’t use your account statements as a barometer for the sensibility of your investments.
For one, they are a point-in-time summary. The moment they are printed – or issued online – they are immediately out-of-date. The next day the market could be considerably higher or lower based on the news of the day.
What’s more, account statements don’t tell you anything about what will happen next. And that’s what really matters. The well-worn investing phrase is apt: Past performance is no guarantee of future results. Just because your account statement shows a bad outcome, doesn’t mean your investments are wrong. And the opposite is true, too.
Investing is hard because we don’t know the future. While we have all kinds of information about the past – investment performance included – that doesn’t mean the information is helpful to make informed decisions about the future.
In the end, a portfolio should not just be an assortment of investments. It should not be a collection of things. Or random bets. There should be purpose behind your investments. Each should play a role.
Holding a thoughtful portfolio does not mean you will be immune from unpleasant surprises when you open account statements in the future. Investing in things like stocks means taking calculated risks, after all.
But as 2020 so perfectly instructed, next quarter – or next year – may be better. That’s one thing your ending account balance will never tell you.