Why Your Portfolio Shouldn't Match the Market

By Scott Thoma January 17, 2018

While it may be natural to try to compare your investments' performance with the numbers we see in headlines, using a market index to measure the success of your portfolio is a mistake that could cause you to stray from your financial goals.

Especially after a strong year for the markets like we've just had, it can be tempting to compare your performance to the return of an index, like the S&P 500. But while market indexes can be helpful to give you some perspective – you shouldn't use them as the only "yardstick" to measure your portfolio's performance.

Why Your Performance Shouldn't Match the Market:

  • A market index is not based on your goals or your comfort with risk. For example, if you're retired or close to retirement, you may have fixed-income investments in your portfolio to help pay for your living expenses, and to help reduce the overall risk of your portfolio while you're relying on it for income. So your portfolio won't have the same mix of investments that a stock index has and won't perform the same, but that is by design.
  • Indexes are generally not diversified across different types of investments, but instead usually focus on a certain asset class, such as large company stocks or international stocks. This means they often can have wider swings in value. And to achieve the extreme highs of an index, you must also be willing to accept the extreme lows. Your portfolio should be much more diversified - across different types of investments, like stocks and fixed income for example, and also by asset classes - such as small, mid-size and large companies, both domestic and international.
  • Your performance will be affected by your contributions and withdrawals, while the published market returns are not. This also highlights why controlling your emotions when investing is so important. Investors tend to overreact to short-term market volatility and chase performance instead of sticking with their long-term strategy.

In the end, the most important benchmark for you is the return you need to reach your long-term goals, which is what your portfolio was designed to accomplish. Therefore, we recommend reviewing your performance compared to your long-term goals, and not the return of an index. If you have any questions about your annual performance or any other investment-related questions, be sure to contact your financial advisor.

Important Information:

Diversification does not guarantee a profit or protect against loss.

Indexes are unmanaged and not available for direct investment.

Past performance of the markets is not a guarantee of how they will perform in the future.

Investors should make investment decisions based on their unique investment objectives and financial situation.

More Resources:

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