Planes, Trains and Indices.
Planes, Trains and Automobiles is a great movie starring Steve Martin and John Candy. This 1987 comedy was all about Steve Martin’s character trying to get home for Thanksgiving. He and his new BFF, John Candy, were using all means necessary to get home for the holidays. Steve Martin’s character did not care how he got home so long as he got home.
As we launch another trading year should you be more concerned with outperforming and index or arriving at your financial destination? It is common for investors to focus on an index, usually the Standard & Poor’s 500, as their primary benchmark. An investor will consider their investment year a success if they outperformed this index even if it was down for the year. A relative out performance is considered a victory for most.
There are a few issues with trying to outperform a standard benchmark. Standard & Poor’s website references that they track over 700,000 indices in real time. 700,000! If you were going to benchmark to an index, which one of the 700,000 indices would you choose? If you are an investor with a diversified portfolio, you may only have 15% or 20% exposure to the companies in the S&P 500. The majority of your portfolio will be linked to some other asset class like small companies, international companies, bonds, real estate, commodities or cash. These asset classes will have little, if any, connection to the S&P 500 index. It is recommended to broaden your market benchmark to combine all of your asset classes. A blended benchmark will give you a better picture of your overall portfolio performance.
To follow up on Planes, Trains and Automobiles, if I am scheduled to fly from Los Angeles to New York should I be concerned that there are other planes flying to Bend, Austin or Denver? Should I be concerned that there is more than one flight to New York and some of the planes will arrive before mine does? The answer is no! My only concern should be for me to arrive in New York on my scheduled flight.
As you travel through 2016 it is recommended to focus on your own goals and not worry about which one of the 700,000 indices is up, down or sideways. Your investment and financial plan should be collaborated to your hopes and dreams and no one else’s. If you arrive at your financial destination on your terms, then I would consider that a huge success!
Do you not know that in a race all the runners run, but only one gets the prize? Run in such a way as to get the prize. 1 Corinthians 9:24
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com.