During meetings with our clients, we discuss their investments and how they are doing relative to their different goals. One of the more common questions I get from newer clients is “how did my investments do compared to “the market?”
This question makes me cringe a bit; not because I want to run away from investment performance questions, not because investment performance isn’t important, but because “the market” is likely not the appropriate reference point for most people. Why is this the case?
Let’s start by talking about what most people think of when they refer to “the market.” For most people, “the market” is the S&P 500* or the Dow Jones Industrial Average (DJIA)*. If your investment objective is to own stocks of large U.S. companies, and the goal is to outperform the S&P 500 or the DJIA, those “markets” might be appropriate as a means of comparison to your portfolio.
However, the vast majority of investors with whom we work do not have this investment objective. Typically, our clients have very specific goals for their portfolio; such as growing investments over time, generating income that tries to keep pace with inflation, providing reasonable annual returns with low volatility, preserving principle while generating income, etc.
Our philosophy is to help clients pursue these goals by constructing a well-diversified strategy that includes investments that could be compared to several different stock and bond “markets,” such as:
- Small, medium and large U.S. company stock
- Large international company stock
- Emerging markets company stock
- U.S. and international commercial real estate
- U.S. Treasury, municipal and corporate bonds
- International bonds
Because a portfolio may have investments representing 10 or more “markets,” asking how your portfolio did compared to “the market” is like comparing 10 or more different looking apples to one orange. The more appropriate question should be “how are we doing relative to my family’s goals?” After all, isn’t that why you are investing? To accomplish something? Pay for college? Save for a new home? Fund retirement? Create a legacy?
The answer to this more appropriate question involves understanding if you moved forward or backward relative to your family goals. These answers can be provided by a financial planner who has quantified your goals and is able to measure your progress toward them. By going through this exercise, you should be able to understand if you need to make changes to the variables you can control: spending rate, saving rate, investment strategy, year of retirement, college choice, charitable and gifting amounts, etc.
Of course you also want to know how your investments performed relative to expectations. That is a fair question, and one your financial planner should be able to answer. In the short run, you might be interested to know if your results were within a normal operating range as defined by historical averages. You might also want to know if any changes need to be made to the individual investments. In the long run, you might want to know how well your results compared to the average of the different markets your investments represent.
But, please try not to focus on one “market” as a barometer – unless your portfolio has one goal: to outperform that one specific “market.” If this is the case, the “market” will be your benchmark. If not, information about the “market” is simply unnecessary noise!
What’s your Second Half Strategy?
*The S&P 500 is an index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ and the DJIA is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non‐diversified portfolio. Diversification does not protect against market risk.