Is Your Portfolio Under-Performing ..... Compared to What?
Ah, we restless humans. Sometimes, it pays to strive for greener grass. But as an investor, second-guessing a stable strategy can leave you in the weeds. Trading in reaction to excitement or fear tricks you into buying high (chasing popular trends) and selling low (fleeing misfortunes), while potentially incurring unnecessary taxes and transaction costs along the way.
Still, what do you do if it feels as if your investments have been under-performing? It helps to lead with this key question, to decide if the impression is real or perceived:
How am I doing so far … compared to what?
Compared to the Stocks du Jour?
It’s easy to be dazzled by popular stocks or sectors that have been earning magnitudes more than you have, and wonder whether you should get in on the action.
You might get lucky and buy in ahead of the peaks, ride the surges while they last, and manage to jump out before the fads fade. Unfortunately, even experts cannot foresee the countless coincidences that can squash a high-flying holding, or send a different one soaring. To succeed at this gambit, you must correctly—and repeatedly—decide when to get in, and when to get out … in markets where unpredictable hot hands can run anywhere from days to years.
Remember too, if you simply invest some of your money in the global stock market and sit tight, you may already own hot holdings. In addition, you may also hold some of the next big winners, before they surge (effectively buying low).
Rather than comparing your investments to the latest sprinters, be the tortoise, not the hare. Get in, stay in, and focus on your own finish line. It’s the only one that matters.
Compared to “the Market”?
What if your investments seem to be under-performing compared to the S&P 500 Index? Maybe you’re seeing reports of “the market” returning several percentage points more than you have lately. What gives?
Remember, when a reporter, analyst, or others discuss market performance, they’re usually citing returns from the S&P 500 Index or the Dow Jones Industrial Average. As such, it’s highly unlikely your own portfolio will be performing anything like this single source of expected returns.
Most investors instead prefer to balance their potential risks and rewards. Your portfolio may under-perform based on historical standards. But over time it may deliver dependable returns in the end.
In our opinion, we would advise not making any hasty comparisons of your portfolio with the market indices.
Compared to a Similarly Structured Portfolio?
At last, we reach a comparison that makes more sense. Your portfolio should be structured to reflect your financial goals and your ability to tolerate the risks involved in pursuing your desired level of long-term growth. Thus, a more appropriate comparison is made among the “building block” investments available to help achieve this ideal.
There are potentially a couple of items you might want to consider for the under-performance in your portfolio:
1. Poor fund management: Are your products or strategies accurately capturing the specific sources of return they’re meant to deliver?
2. Excessive costs: Are there lower-cost choices for working toward achieving the same aim?
If your investments are accurately capturing the sources of return you’re seeking, you aren’t spending too much to make this happen, and you or your portfolio manager don’t have to make adjustments just to stay on course … any other comparisons may become largely irrelevant for your investment journey.
Compared to What?
Admittedly, it can be easier said than done to avoid inappropriate performance comparisons, and identify appropriate strategies as described, across shifting times and unfolding events.
We’d love to help with that! In roaring bull and scary bear markets alike, we team up with you to help address these critical “Compared to what?” questions about your investments. It’s what we do to help ensure you can accurately assess where you stand, and where you’d like to go from here.
Please be in touch if we can tell you more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.