Benchmarks
I believe it is crucial for clients and advisors to agree on reasonable investment performance expectations. While it is common to use an equity index or combination of indices as a benchmark, I do not think this approach is particularly useful for our clients.
Ask yourself, “Am I taking a risk with my life savings to beat the S&P 500?”
Probably not, right?
You are likely investing to maintain your standard of living, fund your retirement, save for your child's education, make a philanthropic impact, or achieve some other family or lifestyle ambition. In these cases, the performance of an index is less relevant than whether you meet those goals. What matters is your performance, not that of the S&P 500. We encourage clients to focus on whether their investments are growing sufficiently to meet their objectives, instead of focusing on how they stack up against a more traditional benchmark.
When we tie performance expectations to your priorities, it is much easier to make proper sense of investment returns through time.
For example, would you prefer to earn 5% while underperforming the S&P 500 or lose 10% while outperforming it?
Of course, it is better to earn 5% than lose 10%. In this example, it does not matter if you underperform or outperform the benchmark. Those relative comparisons are distracting. They are not helpful.
All in, we believe goal-based performance appraisals should form the basis of one’s long-term expectations. Though, there is another important variable to consider; mainly, whether that chosen target is realistic. Investors need to understand that there is only so much juice we can squeeze out of a properly diversified portfolio. That is, there is an upper limit to our performance forecast. We will lay out our usual guidance on this matter in next month’s post.
As always, I invite you to connect with myself or Louise over the coming weeks. We would love to hear your story and see if there might be a fit for us to work together in the future.
The information contained herein has been provided by Fry Ormerod Wealth Advisory Group and is for information purposes[SI1] only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance. Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS. Fry Ormerod Wealth Advisory Group is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.
