Why You Shouldn’t Compare Your Portfolio to Those of Others

In his most recent book, David and Goliath, journalist Malcolm Gladwell tells the story of a young, aspiring scientist who leaves high school and enters into college with grand ambitions. Rising the top of her class in a typical American high school, she is delighted when she is accepted into the prestigious Brown University. Enrolling without a second’s hesitation, she is excited to become part of such an elite group.

When she begins taking science courses, though, she faces a stark realization. She’s no longer the smartest kid in the class. Every other student was also in the top of their high school classes, and the girl begins comparing herself to her new classmates. Her grades begin to drop and she gets discouraged when she sees others performing better than her. Eventually, she gives up on her dream of becoming a scientist. Discouraged, she switches her major to arts and humanities–because it’s easier and she is more equal to her classmates in the new major. In other words, it doesn’t make her look quite as bad.

In 1991, Psychologists Daniel Kahneman and Amos Tversky conducted a survey to see the extent to which people compared themselves to one another. They asked the subjects if they would prefer to make $70,000 per year while their coworkers made $60,000 per year or to make $80,000 per year while their coworkers made $90,000 per year. How do you think people answered? How would you answer?

As you might expect, the majority of the participants said that they would be willing to make $10,000 less per year in order to be happy.  Like the girl who attended Brown University, they were willing to be worse off if they felt more successful in front of their peers. It’s a natural human tendency for us to compare ourselves to one another. It’s natural, but it’s devastating.

As an investor, you will meet people who have bigger portfolios than you. They will have more assets, they will have more money, and they will have more experience in the world of investing. As you talk to these people, you’ll naturally begin to trade tips and insights. When you see how much better off your peers are, you may begin to feel inadequate. You may get discouraged and give up on some of your dreams. You might let your friend’s portfolio define yours.

Comparing yourself to others is poisonous. Why? Because it ruins the portfolio you already have and the investor you already are. Just because someone else is doing better than you, that doesn’t mean you are doing poorly. We’re all a work in progress. We’re all growing. We’re all getting better as life goes on.

If you’re going to compare yourself to someone, make that person yourself. More specifically, compare the you of today to the you of yesterday. The only thing that matters is that you’re growing. Are you becoming a better investor as time goes by? That’s the only thing you should be focused on. If you would like some additional information on how to stay focused on what matters in the world of investing, feel free to reach out to us for a free consultation.