How Do You Measure Investing Success?
How Do You Measure Investing Success? I was talking to one of my listeners the other day, and we’re gonna call him Joe. He was mentioning how his friend made a 22% return in the stock market last year. For many reasons, I usually don’t give a statement like that much attention. I don’t even ask what they were invested in, because claims like that are rarely true. The 22% return rarely accounts for fees, taxes, other things that bring the real return down. People love to talk about a 22% return in reference to one investment they have with just a portion of their money.
Someone has a million dollars and invests 50 grand into an investment they get a 22% return on, guess what they talk about at parties. So a 22% return on 5% of their money might make a good story over some cocktails. But mathematically, it’s really not that impressive.
More importantly, people never talk about the money they lost. They definitely don’t talk about the total return they made on all of their money.
For some reason, this time, I didn’t let it slide. I had what you would call an impulsive epiphany and asked Joe if his friends spent all the money as soon as the year ended. He asked me, what do you mean? I asked Joe again. Is the money gone? Did he spend it? Joe said no, I don’t think so. So I asked Is it still invested where he made the 22% return? He said, I don’t know, but I think so.
I asked a question that Joe will never forget. I said, Joe, then how do you know he made a 22% return? The phone went silent. I could hear the gears turning in his head. And then quietly, humbly, Joe answered. I don’t know, Casey.
Some of you have already figured out why a 22% return is not a 22% return if it’s still invested. Let’s illustrate this with some other questions. If you’re married, and you have one really good year of married life, is that a successful marriage? If you have children, and you win father or mother of the year for one year in that child’s life, does that make you a successful parent? If you have a job, and one year you exceed in every expectation your boss had for you. Does that mean that you’ve had a successful career?
Hear the rest of my thoughts on how to measure investing success, the purpose of money, and the guessing game by listening to my Smart Money podcast below.
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