The S&P 500 achieved positive returns for the prior past six years (2009-2014) and was slightly up as we entered 2015 before the downturn over the recent quarters. Often, when investors hear on the television that the markets are up they become obsessed on whether their portfolio is beating ‘the market’. This begs the question of which market an investor is talking about beating because there are many types of markets including international, real estate, gold, and bonds, as an example.
It may surprise you when I tell you that even though large company stocks have done well in this time frame (2009-2014), not once did large company stocks top the chart. In 2010 and 2014, real estate investment trusts were at the top. In 2013, small company stocks led the way. In 2012 and 2009, Emerging Markets were the top overall category and 2011 treasury inflation protected securities led the way. Although, it probably feels as if every time you turn on the news, the Dow Jones Industrial Average, The S & P 500, and the NASDAQ are the only news that you hear about for what is doing well from an investment perspective.
If you are attempting to create a platform to determine whether or not you are doing well or not with your investments, there are two potential ways for you to view this landscape. One, is to do something called ‘benchmarking’ your investments. This means trying to pick a particular index to measure your investments against to determine overall relative performance. The great news about this is that you have a measuring stick in the water to see how your portfolio is performing. The real negative part about this is hardly ever does the actual portfolio you have your money invested in at this time look remotely close to the investment holdings that are in the index. An example of this is that investors often want to compare themselves to the S & P 500. However, to do this effectively, you couldn’t have something such as bonds in your portfolio because there are no bonds in the S & P 500. It wouldn’t be fair to measure a portfolio that is 60% bonds and 40% stock against the S & P 500.
The second part to this analysis when you do relative benchmarking is to be able to accept the high of highs and the low of lows. What I mean by that is if the S & P 500 lost 33% return and your portfolio only lost 28%, would you consider that to be doing ‘good’ with your investments?
An alternative way to measure overall performance of your investments is to ignore how well or poor the markets perform and pick an absolute return that you are shooting for with your investments. An example of this is to choose that your desired rate of return with investments is 7.5%. In this scenario whether the market does extremely well or not, you are ultimately deciding what level of return is satisfactory. It is up to you or you and your advisor(s) to determine the right mix of overall investments year to year to create this return depending on overall market and economic conditions. It’s hard to choose this method and emotionally deal with it in massive up markets because everyone will be chirping in your ear they are getting big returns on their money (even though it probably isn’t the case).
I’m pointing out this smart money moves article to you because I don’t want you to feel depressed or angry if you don’t ‘beat’ the market. At the end of the day, you should be building your portfolio to minimize the risk necessary to achieve the rate of return your family needs to reach your goals. Anything more than that will be gravy, but don’t drive yourself crazy around whether or not you beat the market. It will often lead you down the path of making the wrong moves at the wrong time. Remember, what goes up must come down!