Written by: Susan HayesCulleton
A month ago, I presented at Stan Heller’s International Forum about how to measure stock performance. I posed five different ways of looking at this whereby the first was one’s ability to execute, the second related to keeping a trading journal, and the third one was my own productivity metric namely the “Results/Effort Ratio.” Last week, I posed “what is your opportunity cost” as another lens to answer this question, and this week, I want to share my final point which is the most traditional one “What is your return on investment?” Please click here to view the Forum.
This might seem very straightforward, but there are a number of ways that people look straight past this important metric, and VectorVest has some superb tools to help you do this very simply.
For a start, I’ve seen people pour a lot of emphasis on certain stock performances i.e. the one that turned around from being a big loss to a marginal gain. The stock grew 50% over six months (but had a relatively small impact on their overall portfolio). The stock was highly volatile and took up a disproportionate amount of their concentration. The stock had a very big impact on their overall total cash balance, but they sold out too early and could have done much better.
The one commonality across all of these examples is the feelings associated with the narrative. As I’ve mentioned countless times in my Essays over the years, there is a whole field of study dedicated to the interaction of human emotion and the markets. It’s called behavioral finance and there are lots and lots of biases that we can uncover in these examples.
However, the key thing that matters for you, your family, your pension, your estate, your living standards, or your broker account balance at the end of the period, is your actual return on investment. This is the real performance metric that matters. VectorVest has a “Portfolio” tool that can help you understand:
- How much money you’re making after each trade
- How much money you’re making in aggregate after you consider all your trades
- How much you’re spending on transaction costs
- How much you’re making from your biggest winners and losers
- How much your portfolio is growing or shrinking (positively or negatively)
Therefore, if you want one simple method to bypass getting caught up in the stories behind your portfolio and cut straight to the chase so that you can see what’s having an impact and what’s not, take some time to build your portfolio in the “Portfolio” tab in VectorVest and see your stock and portfolio performance through different eyes.
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