WHY IGNORING STARTING-POINT BIAS HURTS YOUR PORTFOLIO

Imagine two friends visit Delhi. One goes in May and returns complaining about the unbearable heat. The other visits in December, raving about the pleasant winter chill.

- SAURABH MITTAL

Both experiences are accurate yet completely contradictory, and neither can prepare you for what to expect if you visit the city at random.

Investing works in much the same way. Your returns depend on when you ‘visited’ the stock or fund. If two people start and end at different points, their experiences will be completely different, even if they both have identical investments.

Why portfolio-based judgements fail

When you compare the returns of one fund in your portfolio against another's, you're using your own investment timeline as the benchmark. If the investment dates differ, one scheme could look better or worse simply because of when you invested in it. In fact, within your own portfolio, or when comparing your holdings with those of a family member, you might find that the same fund, with the same manager and holdings, yielded divergent returns driven entirely by when the investment was made.

Also, two funds can have very different market-cap compositions; one may lean heavily on large-cap stocks while another could have higher exposure to midand small-cap companies. Since these segments behave differently across cycles, comparing their short-term performance directly within your portfolio can lead to incorrect conclusions.

The problem with point-to-point comparisons