Do you find yourself comparing your portfolio performance to the S&P 500 and NASDAQ performance you hear in so many places? Is that the best yardstick to see if you or your adviser is in the best positions for you?

 

As investors, it is human nature to wonder “how are my investments doing?” and “should I be doing something different?” I expect many of you thought this at some point in 2013. The common S&P 500 benchmark was up 30% for the year! However, I hope that your portfolio did not do that well. Why am I satisfied with lower returns?

In a word, diversification. U.S. stocks flew high, but other areas of the markets did not. Long-term Treasury bonds were down 15%. Corporate bonds were down 7%. Many international equities finished in the red, and gold was hammered. If I had a crystal ball, my clients would have been in all U.S. equities, but nobody can predict where the money will be made. Even mainstream Wall Street analysts, who study the markets all day every day, were off by 20% on average in their 2013 market predictions.. (Source)

So “perfect” is not a reasonable goal. What can you do to properly evaluate your portfolio’s performance?

  • Make sure you are comparing apples to apples. Look for benchmarks that reflect a properly diversified portfolio similar to what you are trying to accomplish, or ask your adviser to provide one. What benchmark are they comparing themselves to?
  • Focus on the right things. Do not get sucked in to the “noise” of hourly, daily, or even monthly performance of an investment. Keep a long-term perspective.
  • Ask questions. Did your portfolio’s performance jeopardize the financial goals you have, or was it a bump in the road? Are taking too much risk or not enough?

Remember, the “rate of return” is not the most important thing to your financial success!

 
 

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