Is Investment Rate of Return the Right Measuring Stick?

What does the one-year, three-year or five-year return of any group of equities have to do with the achievement of the unique financial goals of a specific investor?

The answer to this question might actually be “nothing at all.” We are so programmed by Wall Street investment houses to think in terms of rate of return vs. a benchmark or some form of market driven measuring stick. What if the measuring stick was something else, such as a specific goal, and the actual way to measure success was if you were on track to meet that goal? Would it be less volatile and show actual risk vs. the typical market investment? Would most investors sleep better at night? I contend that yes in fact they would.

It is my experience that investors who concentrate on beating the market as their guide truly miss the essence of financial planning and investing. Investing for most people has more tangible goals attached to it rather than “I want to make the most money possible and I need to outperform the market.” These individuals tend to change advisors often, costing themselves more money in the long run due to lack of continuity of care for their assets and unfortunately they tend to sleep more restlessly.  They are interested in beating something…being the best…having a story to tell about how good they are and how great they are as selectors of investments and investment advisors. This can cause an investor to grossly miss out on the appropriate level of return needed to live life comfortably as well as produce a feeling of failure.

There will always be those people whose personalities require the beat the benchmark mentality. It has been ingrained in investors by big Wall Street firms for a long time as a means to attract investors to the products and services that they sell. As a fee only independent registered investment advisor, I believe reducing the stress that comes along with someone’s financial well-being is more important than capturing that little bit of extra return to justify the cost or commissions that are charged by product salesmen.

Having a plan that sets out established goals and what the cost/value of those goals are is the first step. Then developing a plan that includes the appropriate financial risk, legal and tax aspects to achieve that plan should be set in place. A review of investment performance that concentrates on how well you are doing towards attaining those goals and if the risk you are taking to do so is being managed effectively is where the stress relief and excitement can truly be achieved. Yes, using a benchmark such as the S&P 500 to assess risk as opposed to returns is necessary but concentrating on levels of risk while attaining the desired rate of return may actually provide a better experience for both the investor and the advisor.

To learn more about James Liotta, view his Paladin Registry profile.

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