A number of people have been in contact over the last couple of weeks wondering if, perhaps, they should be making some changes to their portfolios or their finances, or if this is a good time to start paying attention to their financial situation so I thought we’d chat about things in some broad strokes today.

The financial media services are usually more comfortable try to compare our portfolios “to” something, some set of data that’s been put together for comparison purposes. These are called “Benchmarks” and the tricky thing about benchmarks is that they can be shaped to look all sorts of ways. The first challenge with benchmarks is that they only consider some of the data – the majority of them don’t take any investment costs into consideration so that “moderate” portfolio they are suggesting we compare ourselves to is similar to putting a picture of Cindy Crawford on your mirror and then wondering why you don’t wake up looking like her in the mornings. Cindy will be the first one to say even SHE doesn’t look like Cindy Crawford in the morning so that’s a benchmark none of us have a prayer of attaining. Unless you are buying and holding a portfolio full of individual stocks, there are going to be investment costs that will sap a little strength from our portfolio which means we’ll underperform the benchmark. I’m a bigger fan of comparing our potential portfolio activity to how things have gone in the past – if you have a 60% stock / 40% bond portfolio, how might that have reacted during the 2007 – 2009 correction and how to you feel about that?  Yup, there are those squishy feelings I’ve been talking about for years. I’ll take those over benchmarks any day of the week.

Some companies, particularly mutual fund companies, put a little graph on their statements to show how you did over the past year compared to a “benchmark.” It could be the S&P 500, or a “moderate allocation” or something like that. Here’s the other thing about benchmarks – they don’t know anything about who you are and what you need your dollars to do. Perhaps you’re a teacher considering retirement with a pension that will equal the majority of your current take home pay but you are fairly aggressive investor. The benchmark picture on your statement may have nothing to do with what you are expecting (or needing) those dollars to do. The best “benchmark” is the planning you do for yourself so you know where you need to be at any point to know if you are going to be successful in your goals. Which leads me to “theories” …

The financial world is full of theories and all you have to do is type a quick internet search on financial theories to join Alice down the rabbit hole. There’s the Modern Portfolio Theory, which has to do with diversification, there’s the Efficient Markets theory, which theorizes that the cost of an investment includes all the known information about that holding (only Mel Brooks writes better comedy than this one), and my favorite, if only from a naming point of view, is the Greater Fool Theory, which says that you can make a profit as long as there is someone else who is a bigger fool than you and will pay more for the same thing that you hold. There are plenty more and for those of you suffering from insomnia, I can make some reading suggestions. In general, however, theories are just that, theories and we all live in the real world, not in some dusty academic office so let’s move on to thumbs… “rules of thumb” that is.

There are all sorts of financial rules of thumb and we’ve talked about some in earlier musings. There’s the budgeting rule (70 / 20 / 10 or 50 / 30 / 20, depending which thumb you are looking at), the stock exposure rule (120 less your age should be how much stock exposure you have in your portfolio), and the retirement savings goal rule (investments equaling your take home pay times 25 by the time you retire) and I bet you can already see the flaw in all of them. These rules know nothing about you. Let’s take that stock exposure rule – if you are 40 years old, this formula would have you invest 80% of your portfolio in stocks which, depending on market conditions, could be quite the ride.  If you aren’t prepared for that fluctuation or emotionally comfortable with that amount of hide & seek with your investments, perhaps 80% isn’t the right percentage for you, regardless of your age.  On the other hand, perhaps you are 75 years old and the bulk of your portfolio is earmarked for your kids and grandkids.  Having 45% of your portfolio in stocks might be way too low a percentage. I’m a bigger fan of the “Mirror, Mirror” rule of thumb – take a look in the mirror and have a strongly worded conversation with yourself to identify what kind of investor you are (conservative, aggressive, moderate, whatever) then invest according to your emotional capacity. That might mean you need to save a bit more to meet a goal if you are conservative, or you might have to adjust your goal if you are aggressive and the investment balances aren’t cooperating when you need them to but, in the long run, you’ve put together a benchmark / theory / rule of thumb that sees you for who you are and not some academic formula created by someone living an insulated life far from the real world.

If you are someone who does not enjoy the bumpiness of market movement, or you are preparing for a life change, then perhaps we should chat about your investment strategy.