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You Are Not an Index. Don’t Try to Act Like One!

U.S. News and World Report Smarter Investor

Benchmarks matter, but planning does too. 

If you find yourself scratching your head and wondering why your portfolio is not keeping up with the indexes this year, you’re not alone. Many portfolio managers’ returns are behind their benchmarks. The main reason, I propose, is that every professional manager I know has some doubt in the back of their mind as to how the U.S. (as well as the rest of the world) will manage the massive amount of debt accumulated in recent years. Everyone should understand that too much government debt is never a good thing and rarely, if ever, ends well. I will not attempt to offer a solution, but rather an idea for investors to consider while we wait for political leaders around the world to begin making fiscally responsible decisions. If your portfolio return for the quarter or the year is below the benchmark, then take a look at your benchmark. If you are using the Dow Jones Industrial index, the S&P 500, or any of the other indexes, it is important to understand that these indexes don’t include an allocation to cash-an option open to wary managers.

There is a lot to be concerned about on the economic and political fronts around the world. Much can still go wrong in countless places, but the U.S. gross domestic product (GDP) continues to grow and the equity markets are performing better than anticipated. I hope it continues and America gets its swagger back. It has been a while since investors, portfolio managers and corporations were able to put the hammer down and invest in the future without fearing what was around the bend. I suggest we take a practical approach to how we invest. It has often been said that investors have short memories. They seem to make the same mistakes over and over again. Why? I believe it boils down to two basic human emotions: fear and greed. Sometimes it’s hard to tell the two apart.

Is it fear that keeps people on the sidelines and afraid to invest because they may lose some or all of their money? Or is it fear that if they don’t invest they won’t be able to keep up with inflation? (Maybe inflation is not a good word choice here because the government tells us there is very little of it.) A better example might the anxious desire to keep up with our bills. Like our grocery bill, our gasoline bill, our college tuition bill, etc. These are very real fears held by many Americans; leaving your money in a checking or savings account with next to no return does very little to help calm those fears.

Greed is something that sounds more sinister, which most of us were taught to avoid or control. But greed can be misunderstood or misinterpreted. Greed is simply wanting more than what you have right now. Is that a bad thing? Is that also the definition of initiative or desire to improve or change? Using this definition, and considering the current returns on low risk investments, it’s easy to let a little greed creep into how you make your investment decisions.

The point is that investors tend to forget how much pain or fear they felt when their portfolios dropped by 20, 30, or 40 percent or more just over three years ago. They get caught up with the emotions of today. Whether you feel fear or greed when you look at your monthly statement, please ask yourself the following: is this an appropriate rate of return for the amount of risk I am taking? If yes, sit back and enjoy your day. If no, then it’s time to revisit your financial plan to determine whether you are on track to reach your goals. It is not the time to let your emotions run wild and decide to make dramatic changes so that you can keep up with the indexes. Remember: indexes are not real people. They don’t have bills or obligations. They don’t have emotions and they don’t care how much they go up or down. They are just indexes. And you are not an index. You are a human being trying to do the best that you can in an economic environment that is far from certain. The best advice I can offer is this: understand your financial situation, have a financial plan, and make adjustments appropriate to executing your plan.

Timothy S. MicKey, CFP®, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @TimothySMickey, and on their Facebook page.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Timothy S. MicKey of Monument Advisory Group, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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