I was recently interviewed by a financial reporter about retirement investing, and as often happens, we got a bit off-topic. We started to talk about how investors can define success. The reporter was following the conventional wisdom bandied about in the media that it’s easy to determine how an investor is doing by simply checking how they are doing vis-à-vis the S&P 500 index. This is called benchmarking.
According to Investopedia, benchmarking is defined as “a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.” I might add that the predominately used index is the S&P 500.
I take issue with the whole benchmarking concept, especially as it relates to individual investors. It’s one thing for a fund manager to be judged on his or her performance against a benchmark, but for individuals it’s far more complicated.
While it is important for all investors to gauge how they are doing, why use the S&P 500? It is just an arbitrary index. When I point this out, I am usually met with, “These are the biggest companies in the US!” I answer, “So? Why does that need to be the benchmark? Why not the S&P Small Cap 600 index, which historically has provided better returns? Why not some kind of blended benchmark with international stocks, bonds and real estate, etc?”
In fact, there is another type of benchmark that few talk about.
What is too often missed in the financial media is the reason most people invest. The goal of most investors isn’t to make as much money as humanly possible and then die, rather it’s for the money to serve a purpose (or multiple purposes throughout their lives), and they invest accordingly. I sit with investors every day, and rarely do we have in-depth conversations about portfolio performance. Rather, we define goals and needs and figure out a way to get there if possible.
Paying for children’s education, marrying off children, figuring out how to generate an income stream to supplement bituach leumi and pension payments is the real measure of success, not over-performing or under-performing some random index.
I believe it’s more important for the retiree who needs to generate $20K each year to get that much or more. For that retiree, $20K is “outperforming.” I would take the view that benchmarking misses the point, especially for retirement investing. For most investors, it’s important to define goals and needs, and then create a portfolio that will help them achieve what they are setting out to do. To generate the supplemental income needed to make ends meet takes priority. That has nothing to do with benchmarking. The true benchmark is for the retiree is to hit his or her goals.
Jared Paul of Capable Wealth writes about friends who sold a house and were looking to invest the proceeds. He says, “Before giving them any recommendations, I first asked them what their purpose was with the money they were investing. They told me that they were looking to buy another home in the next two to three years and wanted to use the money as a down payment. They hoped to grow the money a bit before doing so. Since they needed the money in the next two to three years, this was not money with which they could afford to take a big loss. We ultimately decided it was not a good decision to take a lot of risk with this money.
“Now, imagine if we had invested that money in some type of risky investment. There would be a potential upside, but what if the investment took a downturn over the next two years and they lost 20%, 30%, or even 40% of their money? They might not be able to buy the home they were planning to.”
For investors, real success isn’t outperforming some random index, rather, it’s achieving their goals and needs.
This article reflects the opinion of the author and not necessarily that of Portfolio Resources Group, Inc. or its affiliates.
The writer is author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill). He is a licensed financial professional in the US and Israel. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). For more information, call (02) 624-0995 or visit gpsinvestor.com or email firstname.lastname@example.org.