Careful not to cut yours too thin!
Our data experts at blooom explain a more productive way to view performance.
Sometimes people are really, well, invested in their investments. They might check on the stock market’s performance frequently and compare it to their own portfolio. The rate of return seems like the most straightforward way to evaluate one’s investment performance, but the data can look very different from day to day. You might be wondering, ”How often should you check your 401k?” While at blooom, we aim to provide our clients with the peace of mind that allows them to detach from the rapid fluctuations of the stock market, the answer to “how often” may not be that straightforward. After all, viewing the data on a daily basis can be a source of stress—and a single slice does not tell the whole story.
Let’s take a look at the S&P 500, an index of the 500 largest publicly-traded companies in the United States and a benchmark people might use to understand or evaluate the stock market. It does not represent the entire US stock market, but it is a common reference point. Using historical data we can track the one-year rate of return for this index on any given day. For example, the one-year return for April 15, 2021 (versus April 15, 2020) is 49.83%. One might look at this rate and decide whether they feel it is a “good enough” return.
But shift the time frame back a couple months to February 12, 2021 and the one-year return (versus February 12, 2020) was 16.43%. Or go back to March 20, 2020 (compared to March 20, 2019) and the one-year return was -18.39%. Negative return rates can cause stress levels to spike, but that’s only part of the story — compare March 19, 2021 to March 19, 2020 and the return rate reached 62.41%. Market performance might have freaked some out the last several months (and certainly in March of last year!) but seeing investing as a long-term commitment can help alleviate those worries.
So that was a lot of math, but the point is that looking at time-based data points can give an incomplete picture due to which points are scrutinized. Depending on the points selected, the data in question can appear to be moving forward, backward, or standing completely still. Plus investors are often prone to recency bias, or assuming recent performance is an indicator of future performance. This is why it’s so important to look at multiple dates for reviewing the performance of funds or the stock market at large, and why we should all keep the long game in mind! At blooom, we also believe this is why it’s worth defining a strategy based on your time to retirement, not based on today’s market conditions or your stress levels. Then, more importantly it’s important to stay the course (or using a financial planning service to help manage your investments).
Using data from Nasdaq.com. Data points are the S&P close value for the given date, percentages listed are the one-year return calculations.
The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Just because an investment performed well in the past does not mean it will do well going forward. And vice versa. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed.
Published on April 23, 2021