A few years back, I had a goal of playing the keyboard. I love listening to music. I love singing, too. Although my voice has never been described as smooth and velvety (My last glass of cabernet, maybe. But not my voice.)
In hopes of being more musical, I purchased a keyboard. I started with a catchy, yet challenging, classic: “Mary Had a Little Lamb.” My son, Danny, who was 16 years old at the time, also tried playing. He chose a far more intricate song. While I was hunting and pecking at the keys in what seemed like slow motion, Danny was quickly kicking it into high gear. Before long, he had the first several verses of his (more difficult) song under control. I was still looking for “B flat.”
Watching him get up to speed so much more quickly than me, I felt disappointed (maybe even a bit disillusioned). My inner voice was having a field. But, over time, I’ve learned that whether it’s running, playing the keyboard, or watching stock market indexes, comparisons can get you into trouble.
Once again, from the wonderful resource www.RealInvestmentAdvice.com:
“Comparison in the financial arena is the main reason investors have trouble patiently
sitting on their hands, letting whatever process they are comfortable with work for them. They get waylaid by some comparison along the way and lose their focus. If you tell investors that they made 12% on their account, they are very pleased. If you subsequently inform them that ‘everyone else’ made 14%, you have made them upset!”
In other words, run your own race! Develop a retirement plan with a reasonable rate of return that considers not only your risk tolerance, but how the market is priced. There is no rule that says you must be 100% invested in equities - 100% of the time. Your goal, always, is to manage the maximum drawdown or how far down your money goes when the tide turns and the market takes a hit. It’s not the up years that should concern you, it’s the down years. It’s unlikely that you’ll beat the market averages, and there are several reasons why:
Indexes don’t have cash - but you do. (Most investors carry some cash, which reduces returns.)
Indexes don’t have a life expectancy - but you do. (The index operates on its own time table. You have only so many years until retirement.)
Indexes don’t compensate for distributions to meet living requirements - but you do. Indexes don’t figure in if you have home improvements to do or if you take your grandchildren on vacation.
Indexes have no associated taxes, costs, or other expenses - but you have all of those.
Indexes can substitute at no penalty - but you don’t get penalty free changes to your portfolio. This is the biggest difference of them all. For example, when the market cap of an S&P 500 company falls, it is just miraculously replaced in the index. If you own the same company and it declines, you suffer the consequences. You don’t get a mulligan as it were - to coin a golf phrase. A do over. Just try that trick with your stockbroker when things go south.
Index averages are a different animal. Another factor is which index you are looking at. The Dow Jones Industrial Average contains just 30 stocks. The S&P 500 has, you guessed it, the stocks of 500 companies. If your portfolio is well-diversified, it may have 10,000 different companies. Big, small, in America, overseas. There is simply no way to compare. The bottom line is that chasing returns or comparing indexes are behaviors that cause investors to take on more risk. A better strategy is to “run your own race” by determining a reasonable rate of return for your retirement goals and sticking to a strategy that gets you there in one piece.
That’s just the way it works!