Getting What You Need

Sometimes performance cannot be measured against an index

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Thomas Macpherson
Jan 06, 2017
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You can’t always get you want, but sometimes you get what you need” - The Rolling Stones

A lot of people ask me what index I use to measure against. I usually laugh and say the Consumer Price Index, that’s what I use. As long as I’m getting what I need for a happy retirement, what the hell do I care what my portfolio is doing versus the Dow Jones Index?” - Carl A. Adams

I think every day it's something to reflect on and think about "How do I become less competitive in order that I become more successful?" - Peter Thiel

Anybody that has worked in the investment world for any stretch of time knows performance versus a proxy defines success or failure. Whether it is the S&P 500 or the MSCI EAFE, investment managers are always feeling pressure to outperform. Much like the nervous groom on wedding night, the reach for something spectacular can lead to stunning failures. In this instance, the groom has a lifetime to prove his case. For the investment manager, it is likely he is looking for a new employer. It is not just investment management being driven by performance though. Individual investors pile into funds after a short period of outperformance to see their portfolio suffer an extreme regression to the mean. Most studies have shown an alarming gap between investor returns versus fund returns.

So if the drive for outperformance leads many into unwise investments, poor fund selection and outrageous trading fees, why do so many people blindly compete every day against a market index? As a manager of other people's money, I am aware that I too am a victim of such thinking. Underperforming against the S&P 500 TR is an anathema to me. Accordingly, the past five years have been a very long stretch with considerable heartburn.

Returns are relative

After a recent board meeting at the Nintai Charitable Trust, I apologized to the board of directors for my record over the past few years. One of the board members said, “Returns should always be taken in context. All I care about is that the fund can meet its current obligations and be ready for future ones. I don’t give a [darn] about the S&P 500.”

I think this is an issue that is grossly undervalued in the investment world. The needs of the Nintai Charitable Trust are significantly different from those of a 72-year-old widower surviving on investment income and social security payments. Trying to measure your performance against either an index (such as the S&P 500 TR) or a mixture of indices really is not an adequate measure of performance. Meeting my investors’ goals can sometimes be very different than how the targeted bogie does over a period of time. I want to be upfront that this is not an article condoning underperformance. As an investment manager myself, my animal spirits drive the competitive juices like most individuals. But what I am saying is that competitiveness in returns should sometimes be put in the proper context.

As an investor, I think there are three key questions that need to be asked as you create your portfolio.

Can you live your goals as you want?

It really does not matter what the markets are doing if your individual investment goals are not being met. For instance, a retiree may want to be in a 60% stock and 40% bond portfolio and generate $36,000 in interest and dividend income from a $1.2 million portfolio. If this individual cannot make her mortgage payment because she received only $29,000 in income, it really doesn't mean a lot how her portfolio did versus the general markets. Conversely, a 35-year-old attorney’s portfolio growth of capital will decide the status of his future retirement, so returns matter a great deal. He would be rightfully agitated if his portfolio returned substantially less than the market over a 10-year period. Comparing our retiree’s returns versus the S&P 500 makes as much sense as comparing our attorney’s returns versus the Barclay’s U.S. Aggregate Bond index.

Can you sleep well at night?

Nothing is more disheartening to investors than the permanent loss of capital. During market drawdowns, investors have a tendency to sell at exactly the wrong time. Those who make money in down times generally have several things in common, one of them being able to sleep well at night. If you are not comfortable travelling for one year with no internet access or means to check your portfolio, you are not invested in what you really need. Many people shouldn't listen to Jim Cramer every night and trade on a daily basis. A well-thought-out portfolio should give an investor confidence to focus on more important things in life.

How much time do you spend on your portfolio?

As a professional money manager, I spend a great deal of time reading and learning about new companies or industries. But I must admit I spend little time thinking about my current portfolio (with the exception of corporate filings and the competitive landscape). If I put a company in the portfolio, I should be comfortable with a 10 to 20-year holding period. For many successful investors, about an hour a year is adequate to rebalance a bucket of index funds. If individuals are spending 30 hours a week trading stocks, graphing butter production in Bangladesh [1] or sitting with bated breath for the aforementioned Cramer’s Lightning Round, it is likely you are spending way too much time thinking about your portfolio.


John Wooden once said, “Don't measure yourself by what you have accomplished, but by what you should have accomplished with your ability.” Investing is no different. Many investors should measure performance by what they need rather than what they want. All too often investors feel pressure to buy stocks in companies “guaranteed to triple in six weeks” or in funds that provide “4 times the Federal Reserve rate with NO risk!” While these are returns we would all surely want, it is extremely unlikely that is what we would get. As Thiel pointed out so wisely, sometimes the less we compete, the more successful we are in the long term.

[1] This is an actual a tool used by individual investors who believe that taking the change in butter production in Bangladesh and multiplying it by two will give you the exact percentage by which the S&P 500 Index will change in the year ahead. Based on that, a 5% increase in butter production leads to a 10% hike in the S&P. The same statistics are believed to hold true on the downside. Really. For an illuminating look at this, go here.

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