Uncommon Wealth Building Wisdom – Trash The Benchmark

There's no such thing as one size fits all life advice, so why do people think it's true for investing advice? Grab some uncommon wealth building wisdom.

There is a common trait that shows up on the road to building your wealth. This trait shows up as you continue to add to your investment portfolio. You do have an investment portfolio don’t you? And don’t even start the blame game when this trait is revealed in just a moment. None of that “..but they said…” type of stuff.

Here is what this is all about: in a word, Benchmarks. In and of itself, a benchmark would seem to be an important part of evaluating the performance of your investment portfolio. And, truth be told, if there were actually one accepted benchmark that could be universally applied, that might actually work. But the reality is that investment performance is not so simple.

Instead of always trying to play catchup

with an industry benchmark, there is a better strategy. A strategy that will allow you to grow and expand your portfolio over time without freaking out every time you see your portfolio statement.

Lessons From The Diet World

Here’s an analogy that illustrates the point being made here. Head into any neighborhood Barnes & Noble or similar bookstore. You are barely into the entryway of the store before you notice the section with the largest selection of books. Yep, it’s weight loss. The point for you to see here is that if there were one diet that worked for everyone and every circumstance there would not be such a wide selection of diet books on those shelves.

The exact same concept applies to the world of investing. You can prove this for yourself with a quick Google search. Search for investment benchmarks and you get something like 26 Million Search Engine result pages. Obviously there are not that many ways to measure the performance of your investments, but still, the point should be glaringly obvious.

What “They” Say

Now take a look at the world of investments. Suppose you have a diversified investment portfolio that you have been funding for a few years. What do “they” tell you to look at? Most often, investors are told to compare the performance of their portfolio to that of a major benchmark. You might even discover that your financial advisor is using this benchmark to demonstrate how well you are doing. Suppose your portfolio is being compared to the S&P 500.

Actually, the S&P 500 is a commonly used portfolio performance comparison benchmark. How does this show up in the real world? Suppose you pay for the services of a personal financial advisor. Your advisor might send you a glowing report this quarter indicating that your investments outperformed the S&P 500. Wow! Your advisor is a genius. How about if you send in some more money?

Hold on a sec! What about the other side of this equation? Suppose, the next quarter you get a different letter. This time your advisor is lamenting the fact that for some inexplicable reason your portfolio lagged the S&P 500. Now what? Is your advisor an idiot? Or is there something else going on here?

Wrong Benchmarks

You see, the reality is that if the last scenario turned out to be true, you might not have reacted so well. In fact, you may have found your self dialing your advisor to find out what the_____ is going on here?

What’s going on here is you are engaged in a comparison game that does not make sense over time. As you have probably noticed by now, the market goes up and the market goes down.

Better Measurement

Instead of trying to always trying to play catchup with an industry benchmark, there is a better strategy. A strategy that will allow you to grow and expand your portfolio over time without freaking out every time you see your portfolio statement.

Where’s Your Focus?

Instead of trying to beat or exceed a specific investment benchmark, a superior strategy is to focus on your goals. Certainly you have a goal for your portfolio do you not? Yes, just like your personal life, your investments should be chosen based on SMART goals. Remember SMART goals are specific, measurable, achievable, realistic and time based.

Take a look at a real world example. Suppose like many of the very smart readers on this site, you took the oft given advice and set up your investment portfolio. It does not matter how much, it only matters that you did. Suppose, you now have about $15,000 or so in various mutual funds. So your overall portfolio goals could consist of returning at least 8% annually. (Remember the LONG TERM return on stock investments is about 8% or so). You could even break down your goals by the fund or the type of investment (say large cap stocks).

Bottom Line

Benchmark comparisons are not the best way for you to get ahead in the investing game. The big difference with this alternative approach is that your focus is on your own portfolio goals and not some pie in the sky industry benchmark.

Okay, you’re up. What’s your take on this whole idea of benchmarks?

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