Let’s face it, much of life (academically, professionally, personally) is measured by performance. As investment advisors, we are always mindful of the performance of our clients’ portfolios. We clearly show the actual performance of each client’s portfolio (net of fees and expenses) four times a year in our quarterly reports, while we also track the overall firm performance of our two investment strategies.
As we think about performance, there is one thing that stands out to us: It is often misunderstood. So, we decided to say a few things about performance starting with this blog post and continuing in our upcoming quarterly letter due out in early July.
To begin the discussion, we suggest that performance be put into perspective as it relates to your desired outcomes. While some investors desire to make as much money as possible, and others choose preservation at all costs, most of us want to invest in a way that allows us to realize our life goals (college for the kids, retirement, leaving a legacy, etc.). In our business, we refer to this as Goals-Based Investing (GBI).
GBI is a wholistic means of investing (and viewing performance) in that it takes the following components into consideration:
- Goals: The logical place to start is with the end in mind by laying out the goals for which you are saving and investing.
- Savings Rates/Amounts: Next, you must know how much you are able to save and commit to those goals.
- Time Horizons: It is critical to know how much time you have, both during the saving AND spending stages of each goal.
- Taxes and Inflation: Both of these are a drag on performance and must be factored into the analysis.
- Risk/Return Considerations: Once all the above has been determined, then you can decide how to invest to achieve your goals with the highest probability of success.
- Ongoing Monitoring: Because everything changes, the investment plan should be monitored, updated, and adjustments made when necessary.
GBI provides purpose, context, and perspective to the investment process and the resulting performance. Assuming you have an investment approach that has been time-tested over many different market and economic cycles (which, by the way, ours has), performance becomes not a means of comparison to other approaches, but a matter of whether the results are keeping you on track to meet your goals. If this is the case, then your performance is just what it needs to be.
One quick note about risk and return: Having an investment approach that lends itself to a higher probability of success is very important. Recall that there is a distinct correlation between risk and return, which says: The more risk you take, the greater the POTENTIAL return. But with more risk, the probabilities of success decline. In an upcoming post we will talk more about how we design portfolios to seek a higher probability of success over time.
In closing, success depends greatly on our ability to execute our investment strategy in both good times and bad until your goals are reached. This is easier said than done for many. We look forward to talking more about “investor behavior” in our upcoming quarterly letter.