BusinessWeek Reminds Us How To Measure Investment Results!

Sometimes I will read an article and say to myself: "That's a simple concept, I'm glad this article reminded me of that, because that is easy to forget." This happened a few days ago as I was reading an article in BusinessWeek entitled "Taking Stock of Your Adviser." The part of the article that caught my eye was the section titled "How Well Am I Doing?" The article says:

"Many people make the mistake of comparing the performance of their investments to a popular stock market measure, such as the Dow Jones Industrial Average or the Standard & Poor's 500-stock index. Stephen Wetzel, a certified financial planner in Yardley, Pa. says your adviser should be giving you reports comparing your results with a composite of indexes that mimics your asset allocation strategy. So if your plan is to have 75% in stocks and 25% in bonds, your benchmark could be 75% S&P-500 and 25% Lehman Brothers U.S. Aggregate Bond Index."

This reminds me of my recent post about my sister's retirement account. Up until recently, she had been putting 35% of her money in a stable income fund. (It currently pays 4.5% to 5.0%). So even though we have reallocated her contributions, there is still a substantial sum of money sitting in this fund. So while I think she should shoot for earning 10% every year, this is going to be difficult in the next few years because so much of her portfolio is fixed at 4.5% to 5.0% return.

So how should you easily benchmark your investment performance: Benchmark against your own expectations. Don't worry about how the Dow does. Don't worry about how the S&P 500 does. Figure out how much you need in retirement and what rate of return you need to earn to get there. So if you set your sights on 10% return per year and after 3 to 5 years, you aren't achieving this, it might be time to switch things up.