Whose portfolio is it anyway?

Personal investing success is about balancing your risk and reward attitudes and not about keeping up with the Joneses. If investing focus is on a single index’s performance versus balancing personal risk and reward attitudes, it is likely that goals are in jeopardy.

It’s Saturday morning. The coffee is brewing, the dog is outside and you begin going through a few days’ worth of mail. Favorite ski magazine goes in the keeper pile, a faux check from an insurance company goes in the junk pile and the statement from your investment account to the keeper pile.  After you let the dog in, you refill the coffee and make your way into your office to open your investment statement.

You flip through a few pages of disclosures in your investment statement and see the number you are looking for. Your portfolio was up 15% for the year and a comparison benchmark index was up 20%. (Keep in mind these are hypothetical numbers for a hypothetical year.) Your dog at the door again is not hypothetical. As you come back to the office and sit down, you are dismayed that your portfolio return was 5% less than the benchmark index.

Benchmarking’s impact on the financial services industry and how people invest has been significant. Prior to the popularity of index benchmarking, both professional and non-professional investors designed portfolios around needs, wishes and attitudes. Today, with a news heavy focus on indexes, many investors have turned their focus away from personal needs to a “keeping up with the Joneses” mentality as it relates to their portfolio.

Consider the following quote from Tom Dorsey of the investment research firm Dorsey, Wright & Associates:

“Comparison in the financial arena is the main reason clients have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them. They get waylaid by some comparison along the way and lose their focus.”

Tom Dorsey – Dorsey Wright & Associates

Maybe we are old school here are Lighthouse but, we tend to look at benchmarks as they were meant to be used – as a general gauge of daily market activity. We are of the mind that the only benchmark that should matter to an investor is the annual return that is specifically required to obtain the investors goals. Hypothetically, if you need a 6% annualized return over time to reach your goal and over-stretch for 12% you are likely increasing risk in your portfolio. As you increase risk unnecessarily, and something goes wrong, your goals may turn out to be further away.

Personal investing success is about balancing your risk and reward attitudes and not about keeping up with the Joneses. If investing focus is on a single index’s performance versus balancing personal risk and reward attitudes, it is likely that goals are in jeopardy.

So, don’t worry about comparing your returns to your friends or an index and focus on achieving the goals you have set out with the returns you need to seek. It’s YOUR portfolio after all.

Good luck out there.