Did you outperform the S&P 500 in '21?
Let's calculate our ROI and establish a baseline.
Welcome to the 7 new Thinkers who joined ThinkingCap, thanks for continuing to share this with friends, we’re now 89 strong 💪
Are you an investor?
Whether or not we identify with the term, many of us are investors. We purchase our homes, fund retirement accounts, receive a part of our compensation in equity, and may even go beyond that. Perhaps investing our free cash flow into anything from a low-cost S&P500 Index Fund (Warren Buffet’s choice for most people) to more volatile holdings like digital assets or startup equity.
Regardless of how you invest, let’s acknowledge that many of us are (at some level) making choices when it comes to these investments. We are investors.
Your mission, should you choose to accept it is to calculate your ROI.
By comparing your ROI (return on investment) with the baselines of the major indexes you can better judge whether or not you should be actively managing your investments or taking Buffet’s advice and simply dollar cost averaging (more info) into a low-cost S&P 500 Index Fund (source). Buffet famously bet hedge funds $1M that over the course of 10 years they wouldn’t be able to outperform the S&P 500. He won that bet (link).
So how did the S&P perform in 2021?
I like to compare my personal brokerage and employee stock plan to that of the S&P 500 since the S&P is my default buy when I’m not making a specific selection. Since the S&P had a fantastic 2021 at 26.9% growth, it’s a high bar.
On the crypto side, it’s best to do the same and choose a default portfolio. If your default was simply BTC (Bitcoin), your baseline would be 59.7% growth. Let’s take a look at some other baselines:
Now that we have established baselines, it’s time to plug in your own performance. I’ve offered a few suggestions in the Google Sheet to get you started. Go to “File — > Make a copy” to edit the spreadsheet privately.
Let’s recap…
We’re all investors, we’re responsible for our own performance, and using baselines like the S&P 500 will help us make decisions for the year ahead.
Let’s say you’re currently spending a few hours each month investigating stocks and deploying capital. Regardless of what her or not you enjoy it, it might not be best use of your time. Especially if you’re underperforming your baseline, this is an opportunity to reconsider your approach and perhaps outsource to Buffet’s recommendation.
Ultimately, it’s a healthy exercise to reflect, but it’s unhealthy to sulk. 2021 was a wild ride in many aspects, including S&P 500 performance. Over the course of last year we saw 70 all time highs, a record second only to 1995. While an average year yields ~10.5%, we almost tripled that, so don’t expect these returns to indicate future performance. On the other hand, the return on investing your time can lead to much greater things so it’s important to consider the opportunity costs of stock picking.
A slight diversion…
When Fahd was cleaning his house he was reminded of the financial, physical and even mental burden of owning so many things. I know that some of my own best work occurs when I remove distractions (close tabs, set do not disturb, go fullscreen) and promise myself not to get up until I complete the task at hand.
On a similar note, I was watching a documentary on the legendary producer Rick Rubin and was blown away by his minimal home.
What’s your strategy for focusing?
Until next Thursday!
<$ Armand