investing

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.

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.

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

About the Author

Oliver Pursche, Investment Adviser Representative

CEO, Bruderman Asset Management

Oliver Pursche is the Chief Market Strategist for Bruderman Asset Management, 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 Kiplinger.com, 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."

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
October 13, 2021
15 U.S. Cities With the Highest Average Home Prices
real estate

15 U.S. Cities With the Highest Average Home Prices

Home prices have rocketed higher across most of the country, but housing costs are acutely painful in these 15 U.S. cities.
October 20, 2021

Recommended

Boost Your Retirement Savings for 2022
Financial Planning

Boost Your Retirement Savings for 2022

If you were self-employed or had a side hustle in 2021, you can save even more in a tax-advantaged account.
October 26, 2021
Don't Get Too Hung Up on a Retirement Savings Number
retirement planning

Don't Get Too Hung Up on a Retirement Savings Number

There's tons of advice about how big your nest egg should be for retirement but focusing too much on a single figure can lead to complacency.
October 26, 2021
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
October 25, 2021
How Snowbirds Can Be Taxed as Florida Residents
retirement

How Snowbirds Can Be Taxed as Florida Residents

If you live in a high-tax state during the summer but winter in Florida, you can save big bucks by establishing residency in the Sunshine State.
October 25, 2021