Why Your Investment Performance Might Be Misleading You
One of the most common questions I hear from clients is, “How am I doing?”
It’s a fair question. After all, every month you’re bombarded with market headlines, financial news, and enough performance statistics to make your head spin. If your portfolio is up, you feel good. If it’s down, you feel less good. And, if you neighbor starts talking about the stock he bought that’s up 47%, you may feel the sudden urge to change the subject.
The problem is that investment performance, by itself, can be a very misleading measure of success.
Many investors judge their progress by comparing their portfolio to a market or benchmark. While benchmarks can be useful, they have one major flaw: they don’t know anything about you.
A benchmark doesn’t know when you want to retire. It doesn’t know how much income you’ll need. If doesn’t know that you’re helping a grandchild through college, planning a dream vacation, or hoping to leave a legacy to your family or favorite charity.
A benchmark measures a market. A financial plan measures your life.
Another reason performance can be deceiving is that real life gets in the way – and that’s not a bad thing.
Money is constantly moving in and out of accounts. Contributions are made. Withdrawals occur. Required minimum distributions are taken. Taxes get paid. Home projects somehow cost twice what you expected. Life happens.
As a result, two investors with nearly identical portfolios can have very different outcomes. Looking only at the return number rarely tells the whole story.
Risk is another piece of the puzzle that often gets overlooked.
Suppose one portfolio earned 10% last year while taking significant risk. Another earned 8% with much less volatility. Which investor did better?
The answer depends entirely on the investor’s goals and comfort level. Yet, many people focus on returns without considering how much risk was required to achieve them.
Investing isn’t a contest to see who can earn the highest return. If it were, we’d all be borrowing money to buy lottery tickets.
The real goal is to earn an appropriate return while taking an appropriate amount of risk.
Perhaps the biggest misconception is that investment performance automatically equals progress.
It doesn’t.
A portfolio could earn 15% this year, but is you’re not saving enough, spending too much, or failing to plan for future goals, that impressive return may not move the needle nearly as much as you think.
Conversely, your portfolio might deliver a perfectly ordinary return while you’re comfortably on track to retire, travel, spoil the grandkids, and sleep well at night. That’s not failure – that’s success.
At the end of the day, the objective isn’t to beat the market. The objective is to build a life you enjoy and create a financial plan that supports it.
Investment returns are important. They always will be. But, they’re only one piece of a much larger picture.
The next time you find yourself asking, “How am I doing?” consider asking a different question:
“Am I making progress toward the things that matter most to me?”
That’s a far better measure of financial success than any benchmark will ever provide.
The most successful investors aren’t necessarily the ones who earn the highest returns – they’re often the ones who have a clear plan and consistently make decisions that support their goals. A Certified Financial Planner® professional can help you look beyond short-term market performance and focus on what matters most: building a financial future that supports the life you want to live.
