Get Real: Benchmarking to the S&P 500 isn’t a Good Strategy

Study after study has shown that beating the S&P 500 is over the long-term is nearly impossible. Yet, nearly every time I meet with a new investor, they ask the question, “How have you done against the market (S&P 500)?”

My reply is generally something along the lines of “is that what you’re looking for?” and their answer is either a look of confusion or a resounding “yes.” However, in further conversation, investors come to understand that this is the wrong question. It inevitably will lead them down a path of failed expectations and missed goals (in my previous column I detailed the importance of setting and understanding your goals).

Beating the S&P 500 sounds great, but it does little to help investors gain peace of mind. Moreover it may also be impractical and require taking on risks that are unacceptable to you.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

You don’t have to look back far, 2008-09 is less than a decade behind us. If your portfolio lost 35% in 2008 and gained 3% in 2011, you beat the S&P in both years, so what? Neither seems an attractive return to me.

For the decade ending 2009 the S&P was flat, hardly impressive; and for the period between Dec. 31, 2009, and May 31, 2017, the index returned just over 26% annualized. While the latter is impressive, if you walked into my office and I told you that I have a strategy that has returned over 25% annually you’d rightfully assume that there must be incredible risks associated with this strategy.

My point is simply that benchmarking your goals and expectations to the S&P 500 or any other index is silly and impractical.

Instead of heedlessly chasing the S&P, investors should:

• Take account of their goals.
• Evaluate the costs associated with reaching these goals.
• Task their investment adviser with developing a plan that is likely to achieve these goals with the least amount of risk possible.

This column is the second in a six-part series. In my next column I will detail the importance of focusing on cash-flow generation from your portfolio instead of focusing on your expected investment returns, especially in retirement.

• Column 1: Understanding your goals
• Column 2: Why benchmarking to the S&P 500 is not a good strategy
• Column 3: It’s about cash-flow, not returns
• Column 4: How much are you paying for your portfolio?
• Column 5: 5 critical questions to ask your financial adviser
• Column 6: ‘Senior Inflation’ the not so silent retirement killer