How Your Portfolio Performance Compared With the Averages Determine the Risk You Are Taking

gambling in the stock market
The Dow Jones Industrial Average (DOW) shot up 11% (936.42 points) today, roughly representing $305 billion dollars of wealth. While it’s a great day for stock holders that make money when the stock market goes up, what’s more important is how much money we have gained today.

The indexes are great for a quick glance at market performances, but we all know that it’s really the price movements of the actual securities we own that affect us. Those that own Sovereign Bancorp Inc (SOV) definitely know what I’m talking about because it was actually down 3.41% today. Who cares about the DOW that went up 11% when I am down! If anything, it makes me even more angry right?

Let me tell you why looking at the indexes is important. Indices, whether we own ETFs that tracks them or not give us an important gauge in how much risk we are taking!

Take last week for example where the S&P lost 18% and gained 11.58% today. If your portfolio lost much more than 18% last week and gained much more than 11% today, you are taking on way too much risk! My friend used to tell me that if he’s making too much more money compared to the indexes on a percentage basis, he is actually scared! He is frightened because he knows he’s taking on too much risk, and that’s something no one in this market ever needs.

In order to limit the risk we are taking with our portfolio, we really need to make sure the daily performances aren’t way off the performances of the averages. Otherwise, we might be in for a rough ride.

More on this topic (What's this?)
Risky Business - what is risk, anyway?
Understanding The Optimism Bias
Read more on Dow Jones Industrial Average (DJI), Risk, Sovereign Bancorp at Wikinvest

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{ 2 comments… read them below or add one }

Joe October 13, 2008 at 10:11 pm

Good article. I took a look at my portfolio and I realized that I’m taking on way too much risk because I’m outperforming (both ways) by more than double. Thank you for pointing this out and needless to say, I’m hurting quite badly right now with the market down so much!!

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Sherin - Milliond Dollar Investing Tips October 16, 2008 at 8:27 pm

That is a nice piece of information you have in this article it is a good read as well as nice writing style to understand, Keep it up.

Wishes from Sherin
http://investinternals.blogspot.com

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