Managing Your Money : IS IGNORANCE BLISS? : Tracking Your Portfolio Can Often Prove Painful

If you’ve made the decision to become a stock market investor this year, congratulations.

No doubt you found it impossible to ignore the Dow Jones industrial average as it soared to new heights. Seeing the paltry returns on bank CDs, the bursting of the real estate bubble and the tarnishing of gold, you correctly deduced that stocks are practically the only game in town--perhaps for years to come.

And maybe you’ve already noticed something else about this game, something that may just keep the whole thing going: Stocks are more fun, because most people don’t really keep score anyway.

Is that a gross exaggeration? You’d think so. People go into the stock market, after all, because they want to earn more money than the measly 6% they could get on a bank CD. Certainly they’ll want to know at the end of the year that their stocks in fact beat that 6%. Otherwise, what’s the point?

But most brokers and accountants say their clients have almost no clue about what they actually earn in the market over time. Ironically, the deeper you get into stock trading and investing, the more obscured your real return is likely to become.

Of course, some people may know that they bought and sold a certain stock at a profit or loss. But if someone is at all active in the market, by year’s end the jumble of purchases and sales blends together into a blob, and neither investor nor broker nor accountant can make much sense of it.

“I don’t think one in 20 investors could tell you within 0.2% the rate of return on their portfolio for the year,” says Roy Weitz, senior manager in the tax department at accounting firm Price Waterhouse in Century City. And he’s probably being generous with his 0.2% margin of error.

There’s a simple reason for this phenomenon, the accountants say: Nobody really wants to know the truth.

“My experience is that there’s always the perception on the client’s part that they made more than they did,” says Miles Margady, senior manager at accounting firm Grant Thornton in Los Angeles. “There’s a lot of wishful thinking involved in investing.”

Consider what often happens when someone buys a stock that ends up being a disaster, Margady says. The numbers get twisted in the client’s mind, no matter what the accountant records as the actual tax loss on the investment.

“They may lie to their spouse, or friends, or whatever. And if you tell the same fish story enough, you start to believe it yourself,” Margady says.

This is human nature, and it has always been thus. It’s also true that over the long run, stocks have on average beaten virtually all other investments. So plenty of investors have done just fine without bothering to track their stocks like laboratory experiments.

What is perhaps most significant about the lack of score-keeping is that it so conveniently perpetuates the species--that is, investors’ ignorance about their own performance keeps them in the market, which buoys share prices, which draws other investors, which further buoys prices. Such is the power of faith.

Says Weitz: “I know a lot of my clients are uneasy about the fact that they really don’t know what they’re making, but they keep going back for more. I think a lot of people think, ‘That’s just the way it is in the stock market.’ ”

Brokerage firms aren’t much help; in fact, their all-in-one monthly statements, which became popular in the 1980s, may only make things worse. They can tell you what your total portfolio is worth, but they’re often short on historical data and difficult to read.

A recent study of brokerage statements by Kiplinger’s Personal Finance Magazine used these unflattering descriptions for some of the 16 different statements reviewed: “Obscure terms needlessly confusing”; “no opening summary”; “opaque”; “you must guess whether it was a good month or bad.”

There are other basic difficulties in tracking stock returns. If you’re an active investor, you’re adding to, taking from and moving money around your brokerage account constantly. Dividends boost your balance, and commissions reduce it. Stock splits change share prices and make you lose track of what you paid.

Result: By Dec. 31, there is no way for you to subtract the ending account balance from last Jan. 1’s beginning balance so you can proclaim, “I won!”

The problem can be acute even for people who simply buy stock mutual funds. In its published reports, a fund will say what it has earned in some neat little period--say, July 1 to Dec. 31.

But what if you bought your shares on Oct. 12? You can’t just measure the change in share price since your purchase, because the funds routinely pay their shareholders dividends and capital gains, which essentially convert some chunk of your share price into new shares.

OK, OK--does it really matter that you probably won’t know exactly what you made on every stock investment in a given year? Isn’t it more important what you achieve in the long haul?

Sure. Except that if you don’t track annual returns closely, it becomes virtually impossible to nail together an accurate long-term picture of your stock investments. The point isn’t just buy-and-hold, hoping for the best; astute investors should be monitoring their winners and losers each year, pruning what hasn’t worked and reinvesting in something better.

Most important, you want to be measuring your overall stock performance against some risk-free benchmark such as a CD yield to make sure that your efforts aren’t just a big waste of time. You may love being a stock trader, but trading may not love you. It would be smart to find that out before you destroy your nest egg.

The simplest solution to the score-keeping problem is to keep your stocks in “pure” accounts that don’t mix with other investments, so you can quickly measure your balance at any time against what you put up originally. Or monitor your portfolio via a home computer spreadsheet.

Yet accountants--who must deal with investors’ failings at tax time--say few clients ever try to turn their stock-investing results into a single enlightening number. They hold little hope that the new wave of stock owners will be any different.

Maybe, all things considered, that’s for the best.