In investing as in sports, there are winners and losers. The only way to tell which side you’re on is to keep score. While that may sound like a simple concept many of us just don’t know how to read the box score.
How do you measure performance when looking at your 401(k) or any investment statement? Admit it. Are you one of those people that simply look at the balance of your last statement and compare it to the balance of the current statement? More money good – less money bad! Are you missing something?
I recently reviewed the 401(k) statement of a close friend. He was happy with the growth in his account over the past fifteen years and very proud of his investment choices and performance. It didn’t take too long for me to see a problem. When I asked what he based his analysis of the account’s performance on, he told me he simply looked at the balance each quarter! See the problem yet?
I hated to be the one to tell him that the only reason he had growth in the account was that he was putting money in! In actuality his investment choices and maneuvering had performed poorly and his accounts true performance had actually lagged the market.
Believe it or not, I see this stuff all the time. While this is a common error, measuring performance is not as easy as you might think. It’s not enough to just compare periodic balances. You need to have the other teams score to compare. This is where benchmarks come into play. Using the proper benchmarks to compare your performance against is the only way to tell if you are truly on the winning team in your portfolio.
Next time we’ll get a little deeper into benchmarks and how to make sure you’re using the correct benchmark to measure the performance of both your portfolio and your financial plan.
Remember, in the world of investing there are no participation trophies.
David J. Seibel is founder and Managing Partner of AGS Aurora Financial Services LLC (www.agsaurora.com), an independent financial advisory firm in Matawan, New Jersey. You may contact him by email at firstname.lastname@example.org.
Investment Advisory Services offered through Global Financial Private Capital, LLC a SEC Registered Investment Advisor