If you are picking stocks for your own portfolio, then you are competing against all of the smart stock pickers in the world. In fact, when you’re buying or selling, there’s someone on the other side betting against you.
While it may be fun, this may not be profitable in that you may end up underperforming the stock market as a whole. In fact, there’s a greater than 50% chance, you’re losing money by picking stocks.
That’s why I suggest putting an ETF (Exchange Traded Fund) inside your portfolio to benchmark yourself. This way you can see if all of your efforts are doing better than the overall market. ETFs trade on the stock exchange just like any stock. And you follow the same procedure at your online broker to buy an ETF as you would any stock like IBM (NYSE:IBM)or GE(NYSE:GE). Picking the right ETF to be a good benchmark is a little tricky. For example, if you are primarily buying large cap US stocks, then you should buy a few shares of SPDRs (NYSE: SPY). This ETF corresponds almost exactly with the price and yield performance of the S&P 500 index. By investing in SPY you’ll only be paying 0.08% for the computing system that continually emulates the weightings of the 500 companies in the S&P 500 Index.
Below is a list of SPY’s top 10 holdings. If you are picking large cap stocks, its highly likely you’ll have some of these in your portfolio:
AT&T (NYSE: T) 2.14%
Chevron (NYSE: CVX) 2.07%
Exxon Mobil (NYSE: XOM) 5.3%
General Electric (NYSE: GE) 2.3%
JP Morgan Chase (NYSE: JPM) 1.49%
Johnson and Johnson (NYSE: JNJ) 2.09%
Microsoft (NASDAQ: MSFT) 2.02%
Pfizer (NYSE: PFE) 1.41%
Procter and Gamble (NYSE: PG) 2.46%
Wal Mart (NYSE: WMT) 1.6%
Here’s how you benchmark your large cap stock picking abilities: Let’s say you have a portfolio that as of last night, had a value of $100,000 invested in a variety of your favorite large cap stocks. Last night, SPY closed at $83.66 per share.
If you bought 12 shares of SPY for roughly $1000, you would have a built-in benchmark in your portfolio. If at the end of the year, your portfolio was worth $110,000, but your SPY position was worth $1120, then you’d be underperforming your benchmark, i.e. had you done nothing, and invested your entire portfolio in SPY, you’d have had $112,000 — 18.2% more. . In this case, your stock picking lost you money.
Picking stocks is a lot of work. You might as well find out if you’re being rewarded for all of your efforts!