I’m just starting out in the stock market and I’ve made my first purchases in stocks that I think will do well over the next year. I’m trying to gauge how well I’m investing my money and I’m having a hard time coming up with a benchmark or criteria for this. At first I was thinking about going off percent gain, but that doesn’t necessarily mean my money was wisely invested. Is there a good way to gauge how strong your investments are?
First, some context. Based on the way in which you framed your question, I would suggest that you are speculating, rather than investing. There are a few key principles to consider when investing: developing an investment plan; considering your risk tolerance; diversifying portfolio; minimizing costs; and maintaining discipline. These are all actions that add value and can improve your odds of investment success in the long term.
Picking individual stocks does not add value. First, for all pratical purposes, the markets are efficient, which means that all available information is already priced into the stock. Therefore the only missing information is tomorrow’s news, and it’s difficult, if not impossible, to predict what tomorrow will bring. If current prices are “fair”, then there is no edge when it comes to forecasting.
Ok fine, let’s say that you don’t subsribe to the efficient market hypothesis (Nobel Prize-winning idea). Well, there is considerable real-world evidence to suggest that even the best money managers can not persistently pick winning stocks. If the professionals have a difficult time picking stocks, there is no reason why individual investors should have overconfidence in their supposed skill.
Now going back to your original question. The others have already described the best way to do this. It does really depend on the type of stock you own because it only makes sense to compare apples to apples (stocks with similar risk exposures). Stocks are not all the “same”. Some are relatively “big”, others relatively “cheap”, etc. Comparing a large-cap US stock to a small-cap emerging markets stock will give you misleading information because the latter is much more “risky”, so you expect the be compensated more (otherwise why take on more risk?). If you know the type of stock that you own, we can answer your question more specifically. Good luck.