Beating a Better Benchmark

fortpitt in Retirement Planning, Wealth Management 24 March, 2021

We spend a good amount of time talking about portfolios, performance, and benchmarks because your money must be working for you as effectively as possible.

I do, however, sometimes think that these conversations can lead to us missing the forest around the true benchmark that matters – the realization of your financial goals.

What Is a Benchmark?

First, let’s talk about what benchmarks, or indexes, are and are not. To get the definition out of the way, an index, very simply, is just a broad measure of how a particular market has done.

When you turn on the news and hear about “the market,” they’re often referring to the Down Jones Industrial Average or the S&P 500.

The Dow is 30 of the largest companies weighted by each share’s price, not the size of the company.  The S&P, on the other hand, adds 470 more of the largest companies then weights them by the size of the company.  This means that the bigger the company, the greater the impact it is going to have on that index, and it obviously works in both directions.  Seeing this day in and day out often leads us to ask the question, albeit the wrong one: “Am I beating the market?” And the hard answer is if you have a diversified portfolio, not always.

So what are benchmarks or indexes not? It is not something that you can directly invest in.  You can invest in a fund that tracks it, but there are fees, expenses, taxes, and the like.  All real-world stuff, but an index doesn’t really live in the real world.

What Is Diversification?

Diversification intentionally lowers your risk exposure meaning when “the market” goes way up, you’re likely to go up some, and when it goes way down you’re likely to go down some.  If you can find someone who consistently outperforms on both the way up and down, please share that contact with me as I would love to see those numbers.

A Better Benchmark – Your Financial Goals

More importantly, benchmarks do not measure the achievement of your financial goals. It won’t tell you if you’re on track for retirement, or saving for college, or meeting your income needs in retirement.  Further, it’s backward-looking and if you’re too focused on what things have done in the past, it can distract you, steering you off course from your goals in the future.

As an industry, we have done a pretty good job convincing everyone that the end-all-be-all is beating some index.  Again, it is important that you achieve the results you need on your invested money, but what matters most is meeting your goals, and they are not the same.  If you engage a financial advisor for holistic financial planning with the expectation that they will beat whatever benchmark year-in and year-out, you will be perpetually disappointed. That mindset will often lead you to worse outcomes by chasing the manager that did well last year.  Arguably one of the greatest values an advisor can add is to help you avoid making bad financial decisions and to keep you on track.

Beating a Benchmark Vs. Achieving Your Financial Goals

Let’s say, as an act of suspension of disbelief, that you were able to beat the benchmark every quarter of every year, but you didn’t achieve your goals. Are you satisfied and happy?  Again, meeting your goals and beating the benchmark are not one and the same.  Now let’s take the other side of that.  You achieve a life-time return of 7% per year and the whatever benchmark was up 10% over the same period, but you put your kids through college, retired on your terms, and are packing your bags for the dream European vacation you’ve wanted to take since your honeymoon.  Are you happy?

Personal finance is just that, personal.  What matters most is not beating some index, so let’s spend a little less time fretting about that and more time focusing on what truly matters, meeting our goals.

Talk With an Advisor

Written by:

Nathan Boxx, AIF®, CFP®
Director of Retirement Plan Services
Fort Pitt Capital Group, LLC
Foster Plaza 10, Suite 350, 680 Andersen Drive, Pittsburgh, PA 15220
(412) 921-1822 |

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