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Benchmarks and Personal Financial Goals

by in Trusted Advice

Benchmarks and Personal Financial Goals or “How’m I doing?”

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Like former Mayor of New York Ed Koch, one of the things people invariably ask their investment advisor, is ‘How’m I doing?’ This is both an easy and hard question to answer. It is easy because there are generally accepted rules as to how to measure investment performance. It is difficult, because once you calculate, or are given that number, what does it mean, and what do you measure it against? Was it a good return or not?


The quick and easy answer is that you should measure it against the appropriate benchmark. At Covenant Asset Management, we use the S&P 500 Index as the benchmark for our large cap stock portfolios. It is a US large stock index covering 75% of the market value of US stocks and so makes a good fit for that portfolio. There are other indexes for international stocks, bonds, Real Estate Investment Trusts (REITs), commodities and hedge funds.

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While measuring your performance against indexes tells you how well you did versus the markets, it doesn’t tell you the much more important measure of how well this did in achieving your own personal financial goals in light of your own time horizon and risk tolerance. While some of this can be measured by how much you have allocated to what asset class, asset allocation does not cover everything. For example, a defensive stock allocation may underperform in rising markets, but still achieve ones goal. This will show up as underperformance versus the broad indexes, but not against your goals.

In this day and age, of constant information bombardment, it is important to keep an eye on what is right for you. A hot stock or ETF may be outperforming for the moment, but how does it fit into the portfolio as a whole? How much risk is in the entire portfolio? What would happen to the portfolio if the market as a whole enters one of its regular corrections of 5-10%? Or into a bear market of 20% or more? Can you still achieve your goals? Do you have the time to make up those loses? What happens if interest rates move up to more normal levels? These are factors we at Covenant Asset Management analyze on a regular basis.

With thousands of stocks, mutual funds and ETF’s straining for your attention, it is easy to lose sight of your own goals and be caught up in the daily hoopla. A good advisor can help you make sense of all of the noise and more importantly keep you focused on the more important point of achieving your financial goal with the right level of risk tolerance for you. Even more importantly, a good advisor can help you stay disciplined and not get too caught up in the latest craze, mania or bubble.

An illustration of how difficult this can be comes from a story about Sir Isaac Newton, one of the most brilliant and influential scientists of all time. Early on during the South Sea Bubble of the early 1700’s, Newton bought a reasonable number of shares and then sold them for a tidy profit after they rose. However, as they continued to rise and seemingly everyone around him continued to make ever more money, Newton a mathematician and scientist, got caught up in the mania. He then bought even more shares near the top of the frenzy losing approximately £20,000 (over $3,000,000 in today’s dollars) before selling. He is quoted as stating, "I can calculate the movement of the stars, but not the madness of men".

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If one of the greatest minds of all time can get caught up in the emotions of the market, what is the average person to do? That is where we at Covenant Asset Management come in. In our over 100 years of combined investment experience we have lived through many market cycles and a few bubbles as well. This experience helps us in maintaining a longer term perspective and the investment discipline necessary to stay focused on your goals and to help you achieve them, without being led astray by the market’s latest craze.

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Guest Sunday, 23 February 2020