What Determines Your Benchmark in Investments and Life? By @AZAnswers

by Ann Zuraw | Featured Contributor

Most everyone has that person whom they “benchmark” themselves against.  Think about who you measure yourself against—Is it the “star” from your high school or college class. Or even a long-standing sibling rivalry with your sister or brother. In investment management, benchmarks are vital tools that compare the performance of different stocks, funds, and portfolios.

As an investment professional, I have found that outside of financial goals, clients often have personal benchmarks that play a vital role in achieving their financial goals.  Whether it is a specific educational degree, job salary, the age they wish to marry, the number of kids they want to have or the amount of money they want to accumulate.  These personal goals are equally as important to vocalize to your financial advisor.

In my experience, one of the benefits of working with clients and their investments is talking about their personal financial goals.  It may be to retire at 50 or to never retire. Or have $1 million or $10 million in assets.

A part of my job is to show the different ways to measure financial success. Beating a chosen benchmark is one that I focus on as a portfolio manager but not necessarily the best choice for an individual. For individuals, I focus on setting realistic objectives while taking an appropriate amount of risk based on their individual goals and financial situation.

With investments, it is important to remember that the choice of benchmarks can influence how portfolio performance appears. Always make sure you completely understand what, why and how the benchmark is being used by either you or your financial advisor. Is it really the best one or is it really the best way to measure your “success”?  Or is it the best way for the financial advisor to show they are doing a good job. Keep in mind there are more investment benchmarks then stocks.

At many of the conferences I attend, the portfolio manager will claim how they beat their benchmark over a specific time-period. I find it annoying to listen because:

A) they usually never disclose the time-period or they pick the benchmark that will best favor them

B) and they withhold specific details on the components of the benchmark

So here is my analysis and advice—take it as you will: 

  1. Be realistic in determining what your benchmarks are and analyze your expectations.
  1. Set a time frame that is achievable.  Many times,we decide with clients to invest in targeting a long-term time horizon. Then when there is a temporary decline in the investment, it is debated and has to be justified. So, before you decide an approach, make sure you have all the right tools or advisors to make your decisions.
  1. Diversify your goals.  Do not bank your success on one benchmark or asset class.  For instance, you planned to have 3 children but did not. However, now you are the most beloved Aunt to your 3 nieces and nephews, this is a sucess.  In investing, it is not just a measurement of return that implies success.  The risk is very important to consider as well as tax implications. My practice in life is to make as many base hits as possible not just home runs.
  1. Be flexible in adjusting your goals and benchmarks.  Circumstances and investing strategies change daily. It is important to recognize when these changes are significant, and there is a need to reflect on a change of strategy.  Every day there are new factors or inputs to consider.  I have been doing this for my entire life, my experience and training guides me to when it is necessary to change strategy.
  1. Have a positive attitude.  There is always someone or some investment that will do better than you.  Can you be satisfied with your own success?  I continually say we are looking for a 72% success rate; this is more realistic than 100%.
  1. Keep the conversation going whether personally or with your financial advisor.  Take responsibility for your part of the success or not.   If you are spending more than you have in income, it is hard for an investment to grow.
  1. Ask questions and make sure you understand.  If you do not get an answer, then ask again.

No one is perfect including me. But a day does not go by where if do not try my best and still I do not achieve 100%. So, I wrote this blog post to tell myself and all of you that reaching 72% is ok in life; a benchmark success.  Also, Never Give Up and Never Quit Trying.

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