Posted May 2, 2017 by: Billy Cardwell CFP®
I was having lunch with a good friend last week and he said something that has been sticking with me ever since. It sounded something like this, "I have been really happy with my 401k and investment performance lately, but it seems like no matter what I do I just can't beat the market!"
That is a big problem, he and his family are on pace to complete everything they wanted to do when we created their financial plan just a few years ago yet he still feels like he isn't "winning." Look, I'm as competitive as anyone. When I do something, I want to be the best at it. Seriously, I'm so competitive that I have a secret race between me and the other car stopped at a stoplight over who can take off the fastest.... (I know, it is a problem). I simply think we are comparing apples and oranges here. Hear me out:
Playing to Win
The idea that you should only invest, or you only win, if you can beat the market is crazy. It is important to remember why you started, or will start, investing in the first place (save for that first home, pay for the kids' college, retirement, or build your assets). Quite simply, I think it looks something like this:
Start a saving plan for a future goal
Monitor and track progress of future goal
Successfully do future goal
When we get down to it, It really can be as simple as, "did you do the things you wanted to do?"
What is More Important?
If we sat down and talked further about this, I would probably ask these two questions:
"If you could consistently beat the market but not achieve any of your financial goals, would you be ok with that? If you never beat the market, but achieve all of your financial goals, would you be ok with that?
Don't get me wrong, performance is important for the success of our plans, and I would put our portfolio returns up against anyone's, but it isn't the ONLY thing. My client above has almost $120,000 more dollars saved today then he had when we started working together two years ago! He is well on track to buy his next home, and retire comfortably earlier than he had originally intended. He is winning! If we apply the same line of thinking to my goals, I am saving for this little girl to be able to go to school:
Why "Beating" is Like Apples and Oranges
My client hasn't had a higher return than the S&P 500 for a couple of reasons, but mostly due to the fact that he has been in a balanced portfolio since just after we first started working together. We build well diversified portfolios because there has never been a rolling 10 year period, since 1926, where a balanced portfolio had a negative return. Seriously, this chart from Morningstar Illustrates that wonderfully:
Actually, if you really think about it, most of us have diversified portfolios (a fancy way of saying "hedging our risk") that are designed to underperform when compared to a rise in the overall market. Why is that you ask (or I imagined you asked)?
In an environment where the market as a whole is increasing we have literally created a disadvantage by introducing something into your allocation that is inherently not as aggressive. We don't do that because we don't want to succeed, but It is important to remember why we diversify in the first place:
"We don't diversify because we want to limit our upside, we do it for the downside protection."
Sometimes it is easy to look and see what our accounts have done in the last couple of years and forget what a downturn looks like.
So, How Do We (You) Win?
After reading all of this, if "What's next?" or "how do I know if i am winning?" was the first thing that popped into your mind, below are some steps to help you figure it out:
Read our Next Blog on Building an Investment Portfolio
Get connected with a CERTIFIED FINANCIAL PLANNER (CFP®) to help determine the risk level you should be taking
Work with your CFP® Use a combination or low-cost index funds and actively managed mutual funds to build a portfolio around that risk level.
Track, continually monitor, and make adjustments as necessary to stay in line with your goals
In tougher times, don't panic (recall the 10yr rolling period chart)
Happy Saving Everyone!
Bill Cardwell is the founder and President of Aurora Financial Strategies, a financial advisor practice based out of Kokomo, Indiana. He can be reached at email@example.com or by calling (765)438-4682. Advisory Services are offered through Creative Financial Designs, Inc., A Registered Investment Advisor, and Securities are offered through cfd Investments, Inc, a Registered Broker/Dealer, Member FINRA & SIPC. Aurora Financial Strategies is not Owned or Operated by the CFD companies