You might be tempted to compare your annual returns to a broad index and then question why they might be different. But indexes are usually not a relevant comparison to your own performance.

Reviewing your investment performance over time is important in determining if you’re on track to reach your financial goals. But before you can evaluate your performance, you first need to determine the return you need to help achieve your objectives.

You might be tempted to compare your annual returns to a broad index, such as the S&P 500, and then question why they might be different. Though indexes can provide insight into the general performance of stocks and bonds, they are usually not a relevant comparison to your own personal performance.

Your performance is your own

Your annual returns shouldn’t match the market for the following reasons:

  • A market index is not based on your goals or your comfort with risk. For example, if your goal is to produce income for retirement, you’d likely allocate a larger portion of your portfolio to fixed income. Therefore, it wouldn’t be appropriate to compare your returns to those of a stock index.
  • 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 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. They tend to buy investments that recently performed well and sell those that didn’t, which can have a dramatic effect on your long-term performance. In addition, there are also expenses and fees with investing, and the index performance typically does not include these costs.

Ultimately, your investment portfolio should be designed to help you reach your individual goals. Because of this, you should look at investment performance compared to the return you need to reach your goals, 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 Edward Jones financial advisor.

Scott Thoma

Scott Thoma co-chairs Edward Jones’ Investment Policy Committee and is responsible for Client Needs Research, the team that develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy.

He is a CFA® charterholder and a member of the CFA Institute and the CFA Society of St. Louis. Scott also earned the CFP® professional designation. He graduated summa cum laude from Southern Illinois University-Edwardsville with a bachelor’s degree in business administration, with an emphasis in finance. Scott earned a master’s degree in economics and finance from the same university.

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