I’m rereading Malcolm Gladwell’s Outliers (ok, I’m listening to it on Libby this time – house/yard work stops for no one…) and I was struck by his comments about performance. Yes, he was talking about performance while sifting through the whole concept of practice and being gifted but the concept he was referring to could be applied to the financial planning world as well. Too often, when people talk about investments, or are talked at about investments, you hear things like “this fund had a great performance last year” or “our portfolios outperform the markets” but what is really being said here AND is that really the most important issue?

Public discourse about “the markets” is relatively young when you compare it to civilization as a whole (~100 yrs. versus ~4,000+). While the majority of adults know something about the crash of 1929, the reality is that only a very small sliver of wealthy predominantly white men were even participating in the investing world when it happened. The first modern mutual funds had just started (1924), front end loads were 8% (or more, and they were ALL loaded funds) and minimum investments could exceed the annual income of a family. My how times have changed. Now we have mutual funds (with and without loads), exchange-traded funds (active & passive), retirement accounts (of all sorts), individual accounts, private investments, and on and on. And just like our options have changed, our needs have changed. You can invest for income or for appreciation (or a bit of both), for a somewhat short-term goal or as a legacy, with tax management in mind or a devil-may-care attitude.

With all those options, what we need our investments to do has also changed which means that talking about “performance” has become opaque at best. If you are a conservative investor, an overly aggressive portfolio that might “out-perform” the market could also put you in the hospital with a heart attack. If you are in a high tax bracket and looking for an income from your investments, having to generate that income with appreciated investments (another way to say “performance”), could result in you needing a stiff drink while you sign your tax return. Someone who has concerns about guns / oil producers / faith adherence / social diversity/justice / whatever, might not be pleased to find that the “performance” of their investments is buoyed by holdings that fly in the face of those concerns. Is the “performance” of your mutual fund OK if that is the result of shares of ExxonMobil in the fund or if the top five holdings are related to technology knowing what we now know about the link between social media and mental health issues?

And what is “performance” anyway? An advisor can show you a stock based mutual fund, touting how well it has “performed” but what is that fund being compared to? To pull back the curtain and play Wizard for a moment, most advisors can run reports that will compare that fund to the market(s) (take your pick there – I can list 6 off the top of my head), to other stock based mutual funds in general, or to other stock based mutual funds that have the same objective as the one you are being shown. And what time frame is being used? Yes, a particular fund may have done well over the past three months (well, perhaps not but that’s another missive) but how has it done over the past 5 years, 15 years, or since inception? Removing the advisor aspect, let’s say you are looking your account statement and it says “your personal performance is XX%.” For that statement period, the year, or since you opened the account? With or without fees? Including any contributions you made during the statement period? Yes, there is usually a little footnote that tells you all this but let’s be serious, I’m lucky if you all look past the front page of your statements, let alone read page 8 with all the fine print.

Finally, what your investments need to do is the more pertinent, more modern issue. When we doing planning work, one of our goals is to align what you have with your goals, educate you on what those dollars can (and can’t do), and dig in to how you are going to handle things emotionally. It doesn’t do any good to look at your investments, allocate them aggressively for “performance” if your plan says “Hey, you’re OK to meet your goals with a moderate portfolio.” Adding risk to your portfolio when you don’t need it doesn’t do any of us any good (and life these days carries enough other risk, so why add more?).

When it comes to performance, leave that in the realm of Gladwell’s mental enhancements and focus on better understanding your money. In the long run, that will be more satisfying.