The Disciplined Investor

Your Portfolio Performance Compared to What?

Ah, we restless humans. Sometimes, it pays to strive for greener grass. But as an investor, second-guessing a well-planned portfolio can leave you in the weeds. Trading in reaction to the latest hot stocks or in response to fear tricks you into buying high (chasing popular trends) and selling low (fleeing misfortunes), while potentially incurring unnecessary taxes and transaction costs along the way.

Still, what do you do if it feels as if your investments have been underperforming? It helps to lead with this key question, to decide if the impression is real or perceived:

How am I doing so far … compared to what?

Compared to the Stocks "du Jour?" 

 It’s easy to be dazzled by popular stocks or sectors that have been earning magnitudes more than you have and wonder whether you should get in on the action.

You might get lucky and buy in ahead of the peaks, ride the surges while they last, and manage to jump out before the fads fade. Unfortunately, even experts cannot foresee the countless coincidences that can squash a high-flying holding or send a different one soaring. To succeed at this gambit, you must correctly—and repeatedly—decide when to get in, and when to get out … in markets where unpredictable hot hands can run anywhere from days to years.

Remember too, if you simply invest some of your money in the global stock market and sit tight, you’ll probably already own today’s hot holdings. You’ll also automatically hold some of the next big winners, before they surge (effectively buying low).

Rather than comparing your investments to the latest sprinters, be the tortoise, not the hare. Get in, stay in, and focus on your own finish line. It’s the only one that matters.

Compared to “the Market”?

What if your investments seem to be underperforming not just the high-flyers, but the entire market? Maybe you’re seeing reports of “the market” returning several percentage points more than you have lately. What gives?

Remember, when a reporter, analyst, or others discuss market performance, they’re usually citing returns from the S&P 500 Index, the DJIA, or a similar proxy. These popular benchmarks often represent one asset class: U.S. large-cap stocks. As such, it’s highly unlikely your own portfolio will always be performing anything like this single source of expected returns.

Most investors instead prefer to balance their potential risks and rewards. For example, if your portfolio is a 50/50 mix of stocks and bonds, you should expect it to underperform an all-stock portfolio over time. But it also should deliver more dependable (if still not guaranteed) returns in the end, along with a relatively smoother ride along the way.

 Even if you’re more heavily invested in stocks than bonds, a well-diversified stock portfolio will typically include multiple sources of risks and returns, such as U.S., international, and emerging market stocks; small- and large-cap stocks; value and growth stocks; and other underrepresented sources of expected return.

 Thus, we advise against comparing your portfolio’s performance to “the market.” Usually, any variance simply means your well-structured, globally diversified portfolio is working as planned.

Compared to a Similarly Structured Portfolio?

At last, we reach a comparison that makes more sense. Your portfolio should be structured to reflect your financial goals and your ability to tolerate the risks involved in pursuing your desired level of long-term growth. Thus, a more appropriate comparison is made among the “building block” investments available to achieve this ideal.

Once you’ve built a portfolio that reflects your goals and risk tolerances, there are two reasons your particular selections might underperform similar investments:

  1. Poor fund management: Are your products or solutions accurately capturing the specific sources of return they’re meant to deliver?
  2. Excessive costs: Are there lower-cost choices for achieving the same aim?

Admittedly, it can be easier said than done to avoid inappropriate benchmarks, and identify appropriate solutions as described, across shifting times and unfolding events. If your investments are accurately capturing the sources of return you’re seeking, you aren’t spending too much to make this happen, and you or your portfolio manager don’t have to make constant adjustments just to stay on course … any other comparisons become largely irrelevant for your investment journey.



Learn more about Saul Baumann


Hello! I’m Saul, a wealth advisor and financial planning specialist at Allodium Investment Consultants, located in Minneapolis, MN. I am dedicated to helping our clients reach their financial goals by specializing in investment strategies and comprehensive financial planning. When I am not advising clients, you will find me spending time with my wife, Khara, and daughter, Brielle. We live on a hobby farm, which supports my love of gardening and cooking. I have also been a downhill ski racing coach and enjoy outdoor activities, including canoeing, camping and photography.


The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.