I recently heard someone say, “Beat inflation, not the market.” That got me thinking about how important it is to choose benchmarks for judging success that really fit the problem you are trying to solve. This is especially poignant now, since it's the start of a new year, and many of us are taking stock of 2019, looking at our goals and accomplishments, and making plans and adjustments for 2020.
We manage what we measure, adjusting our strategies based on our metrics of success and failure. It’s important, then, to know which measures are truly appropriate and which are red herrings. Looking at your own investment strategy, what is an appropriate measure of success or failure? Here, I’ll talk about why the overall market is the wrong benchmark, and what will serve you better, based on the current stage of your financial life.
Why Measuring Against the Market Doesn’t Make Sense
It’s easy to compare your annual returns to the returns of the overall market, mostly because you can find market-return information so easily. Every investment platform and news outlet reports market performance practically up to the minute, so the market’s return would seem to be a very important measure and a good way to judge if your own investments are keeping pace. This assumption doesn’t really hold up well under scrutiny, for a few reasons.