Investing performance: All based on your perspective

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.

By AARON KATSMAN
Stacks of Israeli shekel notes [Illustrative] (photo credit: NIR ELIAS / REUTERS)
Stacks of Israeli shekel notes [Illustrative]
(photo credit: NIR ELIAS / REUTERS)
“So when these people sell out, even though they get fabulously rich, they’re gypping themselves out of one of the potentially most rewarding experiences of their unfolding lives. Without it, they may never know their values or how to keep their newfound wealth in perspective,” – Steve Jobs
Earlier this week, we were sitting around the table eating dinner, and 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 bottles for very cheap. Knowing that Snapple is expensive in Israel, I asked why he bought it, since it costs so much. He answered by saying that it was NIS 7 for the bottle instead of the usual NIS 12. I was a bit perplexed and asked, “You paid NIS 7 for a small bottle when you could get a 1.5 liter bottle of Spring tea for NIS 4 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 NIS 12 shekel and I got it for NIS 7, so I did great!” Then his sister chimed in, “Abba, what are you talking about? He saved NIS 5 and it’s really cheap!”
I’ve spent some time thinking about this back and forth. The best part was that instead of fighting, his sister actually came to his defense. I guess teaming up on me takes precedence over fighting! But what really struck me was that success depends on your perspective. In my eyes, buying the Snapple was a waste of money when he had an alternative that was significantly cheaper, whereas in his opinion, it was like striking gold to save NIS 5 off the regular price.
I THINK this lesson can be applied to finance 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.”
A few years ago, I had 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, the market had done exceedingly well over the last few years, while she had made only a small fraction of that. She called me, claiming 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, rather 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.
The writer is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), is a licensed financial professional both in the United States and Israel and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.


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