Goal Planning: Too Obsessed With Stock Benchmarks?

Report cards. Leader boards. Exit polls. We all tend to be a little “score” obsessed. And on Wall Street that often means an obsession with stock benchmarks. When it comes to your own investments, however, you may be indirectly and directly following results that are far removed from your own portfolio’s long-term aim.

John Bell spends his days working with investors whose human inclination is to keep “score” when it comes to portfolio progress; this usually involves a too-narrow focus on market benchmarks.

John has two roles: Director of Platform Management for TD Ameritrade’s Investment Products & Guidance and President & COO of Amerivest, TD Ameritrade’s affiliated Registered Investment Advisor. Both roles involve supporting long-term investors by creating investment portfolios and platform solutions to help them pursue their financial goals. We asked him a few questions about this not-so-healthy benchmark obsession.

Ticker Tape: Given access to wider market information, are today’s investors as benchmark obsessed as they were a decade ago?

John Bell: Yes, they’re still obsessed but, no, they generally shouldn’t be obsessed with benchmarks, especially general equities benchmarks that are frequently quoted.  It’s very easy to tune into CNBC on any given weekday morning and find out whether the S&P 500 (SPX), Dow Jones Industrial Average ($DJI), or NASDAQ Composite (COMP) is up or down for the day and then at the end of the year, fixate on index performance. The problem with this is many investors aren’t invested in just an index and for the most part they shouldn't be. When you look at a broad benchmark like the SPX or NASDAQ, it’s distorted at times by several large companies or industries that might have undue influence on the returns for a given day or period. 

TT: Should investors be so focused on performance at the risk of being knocked off their own goals?

John Bell: Since most investors should be allocated across multiple asset classes (possibly equities with varying objectives, plus fixed income, real estate, etc.), to use a broad equity benchmark that has significantly more risk and wider range of returns is not generally appropriate as a measure of one’s individual goals; broad performance may not even reflect what’s going on for them, personally.  I think too often people use “benchmark” a measuring stick on for their portfolio when for most people, their portfolio doesn't resemble any one or two benchmarks at all.

TT: How might investors consider tuning out the "benchmark" buzz?

John Bell: Step one is to create a financial plan with various goals identified and prioritized—retirement, putting your kids through college, or to buying a new car every five years, for example. These “benchmarks” of sorts are tangible and give you a real target to shoot for. Goals like this focus less on relative performance compared to an arbitrary market benchmark and instead focus on whether the goal is achievable. You should be prepared to identify changes you may need to make to give you the best chance of achieving those goals. In this way, the level of confidence in achieving the goal is the “benchmark.” In truth, relative performance versus a benchmark doesn’t really matter if one has not made the necessary tradeoffs to achieve that goal. Imagine if the S&P 500 went down by 50% in a given year (yikes, but we’re making a point here) and you were concerned of course but then you were able to review your financial plan and find out that you still had an  80% chance of achieving your goal. Or maybe you didn't but your plan offered ways to get back on track. That’s the power  of a plan versus some index that is constantly referenced in the  financial media.  In the end, that performance does not matter as much as you thought it might.

TT: This leads us to wonder if investors sometimes surrender diversification goals if they fall under the spell of “performance?”

John Bell: The headline-grabbing performer over short time frames tends to be a single asset class that is currently in favor, and it’s often a single stock not a mutual fund. This can leave some investors who had little or no exposure to that asset class—even if by design—constantly second-guessing. But comparing a broadly diversified portfolio with the best performer of the year is usually misplaced energy. In fact, some investors end up chasing those returns only to flow more money into a best-performing asset class that no longer presents value. They may dump a laggard that fits with their long-term plans and, in fact, could be poised for its turn as market “hero.” One of the toughest and more valuable discussions I have surrounds low correlation, or finding complementary asset classes in a portfolio that won’t move in lock-step. That means embracing the underachievers because they have a very specific role in your portfolio. It’s sometimes easier said than done.