It comes naturally to us, as human beings, to check and know how we are faring against our friends/ relatives/neighbors. And it is absolutely healthy to do so. On the way to compare, we might end up learning something new, to help us reach our journey more efficiently.
But, it is an art, to learn how to compare correctly, and is very important to master it too. You need to make sure you are comparing apples to apples (and not apples to oranges). Let's learn to do that today -
Measurable Traits of your investment portfolio
If you've been investing since 3 years, and your friend is investing since 1 year or 5 years (or any time horizon other than 3 years), returns CANNOT be compared. Even XIRR basis, returns cannot be compared.
Reason - The market might be much cheaper 5 years back (when your friend invested) vs. when you invested 3 years back. And no matter what funds or index you have invested in, his return will always seem higher.
So make sure, the 2 portfolios that are being compared should be have been invested, across the same periods.
The Correct Return Metric
Make sure you're NOT comparing absolute return of your friend vs. XIRR of your portfolio. If you don't know what that means, click here Ofcourse the absolute return will always seem higher than XIRR of your portfolio, and you might get disappointed for nothing.
Multi-bagger Stock of your Friend vs. Your Investment Portfolio
We all have friends who brag about that one multi-bagger stock, which doubled their money in 6 months. Make sure to compare his ENTIRE investment portfolio return (and not just one stock's return) to your investment portfolio return.
Intangible (or subjective) traits of your investment portfolio
This is not a measurable metric but a very important one. An investor who is fine seeing -20% in his investment portfolio in bad times, is an aggressive investor and in times of bull market, chances are that he will sit on enviable returns.
Take a risk profile test and compare your portfolio returns with only those who have the same risk profile.
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