Why invest? Do you invest to achieve goals or to beat the market? If you listen to much of the financial media, you probably think you should strive to beat the market. But is that your true goal? Most money managers fail to beat the market – or their benchmark – on a regular basis. Does that matter, or should we be more concerned about something other than performance? I maintain that meeting your goals should matter more.
Trying to beat the market implies taking on more risk. That can lead to even worse performance in a down market such as the one we’ve been experiencing so far in 2022. As discussed in last week’s blog, just about every major asset class has delivered year-to-date losses. At their current pace, stocks and bonds are on track for their largest simultaneous decline in Dow Jones Market Data going back to 1976. In 1994, the S&P 500 Index fell 1.5%, and the Bloomberg U.S. Aggregate bond index – largely US Treasury bonds, highly rated corporate bonds, and mortgage-backed securities – dropped 2.9%. That was the only other time both indexes fell for the year. (Per The Wall Street Journal – subscription required.)
Investing to Achieve Goals
Why invest? People often invest to reach specific financial goals. You may want to buy a home or help fund your child’s education. Perhaps you want to save for your retirement or leave something to a charity that supports a cause that matters to you. Those represent long-term goals. We have a 24-hour news cycle. Markets can be volatile. We can easily get lost in all the related noise and focus on the short term.
We also may use benchmarks, like the S&P 500, to gauge performance. Using benchmarks can be appropriate when tracking specific investment allocations, such as large-cap stocks, but doing so can also put unwanted pressure on overall portfolio success.
Why invest?
As far as personal finance is concerned, it does not matter if you beat an index. Instead, focus on meeting your goals. Those two things are not the same.
Scenario 1
Why does it not matter if you beat an index? Think of it this way. Say you live in an alternate universe where you can beat the index every quarter.
Does that mean you will meet your financial goals? Not necessarily. What if your investments beat the index every year of your investment life, but you didn’t meet your goals? (That could happen if you didn’t save enough.)
Would that make you happy? The answer is, “No.”
Now let’s try a different scenario.
Scenario 2
This time you slightly underperform the index every single year during your investment life. But you implemented a financial plan and stuck with it. You set distinct savings goals and met them. As a result, you achieve each of your financial goals.
It’s hard to imagine that you wouldn’t be happier in this second scenario.
Why invest?
You invest to meet your goals. If you can meet your goals and live your desired lifestyle now and in retirement, you should be happy. Earning a market-beating return doesn’t mean you will meet your goals.
The market may be tough to stomach now. Returns are volatile. You can’t easily find investments that deliver strong returns in this environment. If you look at your portfolio, you will see more red than green.
When it comes to investing, you should only worry about one benchmark. That benchmark should be used to evaluate whether you are setting and meeting your personal goals.
Aligning our spending with our use of capital
Why invest? You invest to meet your goals. (I know I’ve asked and answered this question several times, but it’s important.) You want to align your use of capital with what’s important to you. If you want to reduce spending, you can start by reviewing your credit card bills. Do you subscribe to services that you no longer use? Are you spending your money in ways that reflect what’s important to you? If not, think about how you can change your spending so it better reflects what matters to you.
What matters more than beating the market?
Meeting your goals.
Effective overall financial planning and proper portfolio construction are the key variables that can help you meet them. Putting a process in place that allows you to achieve your goals is important. Design a framework that outlines the wealth needed to meet your needs and wants. Then save and invest according to a plan that leaves room for errors to happen. For example, what happens if your plans are interrupted or the market’s volatility exceeds expectations.
Invest based on your specific goals and timelines. Investing conservatively might not meet your personal “profile.” But you should recognize your time horizon and how the potential loss from an investment may outweigh the potential gain of staying aggressively invested. For example, would you use the hard-earned savings you were accumulating for your dream home and use them to buy today’s hot stock? I hope not!
Please note that nothing in this blog is meant to imply that you shouldn’t strive to realize strong returns from your investments. But the focus should be more on putting a plan – and process – in place that allows you to achieve your goals and live your desired lifestyle. In the end, living your desired lifestyle matters more. If your portfolio beats the market, but you don’t save enough to achieve your goals, you will be unhappy. Focusing on returns adds risk. Increasing risk can hamper the chances that you meet your goals. It’s often said that “diversification is the only free lunch in investing.” A well-diversified portfolio can reduce risk and help you achieve your goals. Isn’t that what matters most?
CLOSING THOUGHTS
Why invest? You invest to meet your goals. Put a framework in place that helps you maintain your discipline. You should diversify your investments, and you should remain diligent.
Discipline involves “doing the hard thing.” You must save even when you don’t want to, stick to your budget, and rebalance your portfolio based on a process. You should remain disciplined whether the market works for or against you.
Diversification keeps you from placing all your eggs in the same basket. You should own a broad range of investments. They can differ by size, geography, style, asset type, etc. Diversification helps you soften some of your portfolio’s market-related volatility. It also can keep you from missing out on areas of the market you might otherwise overlook because of your biases.
Diligence relates to the ongoing actions needed to manage your portfolio. You don’t just want to set it and forget it.
When it comes to investing remember that you invest to meet your goals. Your spending should reflect what matters to you.
I’ll be back next week with “Apprise’s Five Favorite Reads of the Week.”
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Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.
