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However, we’ve seen that people reach for different numbers when they ask this question, and two of them are always close at hand.
The first is the market return. It is quoted in most market reports and printed in the papers, so the figure is easy to find. The second is the people around us, and the numbers they mention when telling stories of their financial success. Both end up being used as a benchmark.
We don’t believe either of these numbers is the right benchmark for reviewing your progress.
A stock market index has no goals. It has no children starting university in four years, no income to draw next month, no tax position, no time horizon, and no reason to hold anything in cash for upcoming expenses. A like-for-like comparison can therefore be very difficult.
In any given year, a diversified portfolio will usually have trailed some asset class or investment product. This is the reason for being diversified. Knowing what has performed well recently is not the same as identifying it in advance.
A friend bragging about an impressive return seldom mentions the risk that was taken. The investment may have been concentrated in one thing, borrowed against, or held by someone who could afford to lose it all. You are also only hearing the stories that ended well, because the same bet going the other way never gets told.
The question is not whether your portfolio beat the market or a friend. It is whether it did what you asked of it, and whether it is likely to support the life you want to live.
We believe five questions are worth asking every year. Asking these, preferably with the help of a qualified financial planner, can give you a much better idea of your progress.
The last question is one that almost never appears on a scoreboard. A financial plan can be completely on track and still be paying for a life nobody chose deliberately. Answering it means looking at what last year’s spending actually bought, and asking whether you would buy the same things again.
If the answer to any of these questions is no, there is usually something that can be done: saving more, spending less, adjusting the income you draw, or moving the timing of something planned.
The index is outside your control, so last year’s return number doesn’t change anything you can do now.
What we measure tends to change how we behave. Someone judging the year by an index or by what a friend said may be tempted to fix a portfolio that isn’t broken.
Alternatively, if we judge a financial plan by what we can control, it usually points to something we can do.
Part of our job is to keep the right measures in front of you when we meet, and a large part of our planning meetings focuses on answering these questions. While we are happy to compare your returns to the market, we are more interested in whether you are on track and whether anything needs to change.
If these ideas raise a question about your own financial plan, we are always glad to talk it through.
