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

Trying to beat the Standard & Poor’s could lead investors down a path of failed expectations and excessive risk.

display stock market numbers and graph
(Image credit: Nikada)

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.

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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

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Oliver Pursche, Investment Adviser Representative
CEO, Bruderman Asset Management

Oliver Pursche (opens in new tab) is the Chief Market Strategist for Bruderman Asset Management (opens in new tab), an SEC-registered investment advisory firm with over $1 billion in assets under management and an additional $400 million under advisement through its affiliated broker dealer, Bruderman Brothers, LLC. Pursche is a recognized authority on global affairs and investment policy, as well as a regular contributor on CNBC, Bloomberg and Fox Business. Additionally, he is a monthly contributing columnist for Forbes and, a member of the Harvard Business Review Advisory Council and a monthly participant of the NY Federal Reserve Bank Business Leaders Survey, and the author of "Immigrants: The Economic Force at our Door."