This is something I often seem to discuss with People and to Tweet about but I am not sure if I have ever written much about it in my Blogs. Anyway, the point I am making here is that when calculating the Performance of your Portfolio or of the Stocks within it, it is always a good idea to think in terms of Percentages - not in terms of the Pound Notes.
There are many reasons for this but the main one is that once your Portfolio gets to a particular Size (and this will vary depending on each and everyone of us and our attitudes/personalities especially with regard to Risk and of course how ‘Rich‘ we are in total), if you start to think in Pound Note terms then you can easily frighten yourself and this will lead to Fear, Panic, and other Cognitive Errors that the amount your Portfolio moves about is instilling in you.
Look at it this way. The list below shows what a Move of 1% means for a Portfolio of a given size as shown - obviously 1% is often a Daily Move and for instance one Week recently my Portfolio was down 1.6% and on really bad Days my Portfolio can be down as much as 3% (ouch !!):
As you see it is not complicated stuff, but my Point is that if you start off thinking in % terms straight away when you are a Beginner and keep up the good habit then it means you are able to cope Psychologically a lot better when your Portfolio grows (and it is very likely that it will grow over time as long as you avoid the Trash Stocks and you stick to buying Quality and re-investing the Dividends and Gains etc.). I would guess many Beginners will have around £20,000 or so and many Readers will have Portfolios which are £200,000 or more - so you can see how a swing of just a few % on a Week can represent a big chunk of Money - and if you concentrate on the Pound Note values then it will freak you out.
It is also obviously a lot easier to get some idea of Comparison when you see what kind of Results can be achieved and what is a Sensible Target for your Annual Performance - thankfully People tend to talk in Pecerntage Gains per Year so you can compare even across different Sized Portfolios - although of course this is a whole other Subject Area when it comes to whether or not such Comparisons are Valid or Wise that I really don’t want to go into in this short Blog.
Another aspect of this is around when you have a good Day or Week or whatever - if you have a fairly large Portfolio you could easily gets gains of £5000 in a Day with fairly modest Percentage moves and it can be dangerous to concentrate too much on the Money viewpoint because you can get Overconfident, Cocky, become an Irritating T***, etc. and this kind of emotional response is highly likely to lead to stupid and expensive errors and all that. ‘Pride comes before a Fall’.
If you are fairly new to the game and you are starting off with a few Thousand Pounds, then if you concentrate on the Money you might think “Oh, this is a waste of time I only made £50 yesterday” or whatever, but the thing to remember is that if you can made 10% a Year consistently over time on a small Portfolio then it only gets easier as your Portfolio grows - and if you are still young and have many Decades of Investing and Working in front of you, then the opportunity to compound your Gains and add new Money from your Work Income is enormous and it is highly likely you will be very wealthy and have a comfortable life when you get to your 40s and 50s.
Here is the classic on Compounding - I love this Blog and think it could be the most important one I have written:
Here are the Parts of a Blog I wrote several years ago about Retirement - it sort of fits with stuff I mentioned in this short Blog:
The next one probably isn’t all that related but it might be useful for Newer Readers who have not see it before - this is 4 years old nearly !!!:
And this long Series about Spreadbetting is very relevant to the Retirement thing - there are 7 Parts and if you scroll to the bottom of this one there are links to the earlier bits:
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