The Courage to Underperform

This was the title of an article I read many years ago by Nick Murray. Nick is a financial expert and author of many books for the financial advisory business. The headline caught my attention and the recent performance of the markets reminded me of his piece. He shared his thoughts, interestingly enough, on when market returns were significantly negative and he was encouraging investors to remain true to their allocation regardless of short-term fluctuations.

Similarly, when markets are providing exceptional returns as they have for the last several years, it is easy for clients to lose focus of their long-term goals, and the reason they are investing. Their objective morphs from a comfortable retirement to chasing the outperformance of the market. It takes courage to remain with your well diversified, balanced portfolio, when a less thoughtful approach may provide more return in the short run. Thus, the courage to underperform.

A few important reminders when the markets appear to only be moving up.

  • A well-diversified portfolio, consisting of many different asset classes, is the best way to work toward your long-term goals and objectives.
  • Balanced portfolios will almost always underperform the standard benchmark S&P 500. Consider using a customized benchmark if you are curious to see how you are performing against the broader markets.
  • With more return comes more risk/volatility. Volatility within your portfolio matters even for clients with longer term time horizons. The less volatile, more predictable movements of a balanced portfolio have the potential to provide better outcomes than chasing shorter term volatile allocations.
  • Focus on relative performance instead of absolute performance. Relative meaning as relating to your goals and objectives. If your portfolio provides the return needed to achieve your goals and objectives, you are in the right place. Why chase performance and thereby add unnecessary risk to your portfolio simply to outperform in the short run.
  • Lastly, beware of the brother-in-law syndrome. Everyone somewhere has a brother-in-law that’s making a fortune in some crypto currency or tech stock and just can’t wait to tell you about it. My experience with these folks is their willingness to discuss their investing success is directly proportional to their success. Meaning, they only talk about their winners and never their losers. Very few win in the end.

Have the courage to stay committed to your long-term objectives and avoid the temptations of chasing returns. Planning makes it possible.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA / SIPC. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principle. With any investment vehicle, past performance is not a guarantee of future results. Diversification and asset allocation strategies do not assure profit or protect against loss.