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.

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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