Is your investment a good deal or a rip-off? It's all about perspective - opinion

There’s no question that performance is important, but I’d say the real benchmark is how your investment portfolio is doing vis-à-vis your goals and needs.

 Illustration photo of the new 100 Israeli Shekel bill. December 31, 2017.  (photo credit: NATI SHOHAT/FLASH90)
Illustration photo of the new 100 Israeli Shekel bill. December 31, 2017.
(photo credit: NATI SHOHAT/FLASH90)

A few years ago I wrote, “Earlier this week we were sitting around the table eating dinner. I noticed that my son was drinking Snapple tea. The two of us were recently in the US and he very much enjoyed buying their tea in large sized bottles for very cheap. 

“Knowing that in Israel Snapple is expensive, I asked why he bought it, since it costs so much. He answered by saying that it was seven shekel for the bottle instead of the usual 12. I was a bit perplexed and said, ‘You paid seven shekel for a small bottle when you could get a 1.5 liter bottle of Spring tea for four shekel. It costs almost five times as much!’ 

“He just looked at me like I was from another planet and then said, ‘Huh? It’s usually 12 shekel and I got it for seven so I did great!’

“Then his sister chimed in, ‘Abba what are you talking about? He saved five shekel and it’s really cheap!’”

Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)

We were recently at a family celebration at a restaurant, Mazel tov Nadav, which happened to be right across form a well-known homeware store. The store had cereal bowls on sale for like 80% off. For some members of the extended family, this was too good to pass up. I innocently asked, “Don’t we have cereal bowls? Who cares how much they are marked down? Why do we need them?”

I’ve spent some time thinking about both of these stories., I came to the conclusion that success depends on your perspective.

Is it a good deal or a waste of money? It all depends on your perspective

In my eyes, buying the Snapple was a waste of money when there was a much cheaper alternative, and buying something that you don’t need is pointless. In his opinion, it was like striking gold to save five shekel off the regular price, and 80% off is 80% off and should be taken advantage of.

I think this lesson can be applied to finances as well. When it comes to investing, if you ask the investing public to gauge how their portfolio is performing, they will answer that they are doing so and so over/under the S&P 500. To compare your performance to an index is called benchmarking. 

Until a few years ago the average retail investor had no idea what a benchmark was, as this was saved for professional fund managers to use to see how they are performing. Then as do-it-yourself investing became the rage, benchmarking took off as well, as a tool to convince investors to leave their advisers because they underperformed the benchmark, and just invest by yourself.

BUT WHAT much of the push towards benchmarking misses is perspective. There are many reasons individuals decide to invest their money. There’s no question that performance is important, but I’d say the real benchmark is how your portfolio is doing vis-à-vis your goals and needs

Many pundits in the media will say that you have to keep up with your benchmarks, while I’m saying that it’s more important that the retiree who needs to generate $20,000 each year get that much or more. For that retiree, getting more than $20,000 is “outperforming.”

Recently I met a client whose portfolio had generated the low income that she required and who was preserving capital. She was very risk averse. Her 30% in stocks was designed to keep up with inflation. However, with the exception of the last nine months, the market had done exceedingly well over the last few years, while she had made only a small fraction of that. 

She complained that she was underperforming the market and that she was very unhappy with her returns. I told her that she was comparing apples and oranges. Her portfolio was all about capital preservation and income generation, not about aggressive growth and significant capital appreciation. Benchmarking tells people that they should be “keeping up,” and that’s not always in their best interest.

Investors need to keep perspective about their portfolio performance. If you have specific goals and needs it’s far more important to make sure your portfolio is in line with them so that you can achieve what you are setting out to do, than to have all your money invested in a way that, if wrong, will cause you to cancel your dream retirement cruise because you can’t afford it.

There are multiple ways to look at buying expensive tea on sale. For some it’s a bargain and for others you could buy something similar for cheaper. 

Keep that in mind when analyzing portfolio performance. Investors should focus on how they are doing vis-à-vis their goals and not get hung up on how the broader market is doing.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.; [email protected]