One of my sons once accused a sister of being a relativist. Her reply was a classic, “You can pick your friends, but you are stuck with your relativists.”
You should be aware when you are stuck with a relativist.
You have choices as to how you see the performance of your portfolio. One of them is to compare with an index or some other external measure. That is relativistic. It’s okay but needs a little help.
Be cautious with advisers who report realtively.
A manager with the Ontario Teachers Pension Fund, when congratulated that while the fund’s equity portion had lost 8% in the previous year, it was 4% better than the stock market had done, replied. “We cannot pay pensions with relative performance.”
A good lesson. Relative performance is not the goal.
On the other hand, absolute performance is not a given in any reporting period. You must look at it over a longer time frame. If your required yield is historically reasonable, say a balanced fund at 6%, you will have ups and downs but should succeed. An adviser can will help to keep it in perspective. It is is still relative but not to the noisy short term numbers.
If you examine the stock market over long periods, you will find that if your “comfort range” is any result between 0% and 12%, on average you will be outside that in 5 out of 8 years. Comfort is hard to come by in the stock market. You need a long view to make it workable.
Holding unreasonable expectations guarantees discomfort. An unreasonable assumption to be avoided is that “I will make 6% next year.” Your long term assumption about yield says nothing about next year. Maybe not the next five.
Advisers should avoid the relative performance reports. Focus on purpose. All reports should meet three requirements.
If the shortfall is yield driven, like early 2009, then perhaps nothing need change. The idea of reversion to the mean is a powerful one, but even so, when the plan is under target, more frequent monitoring is required. If they have no new target, the client will likely want to change something that may not be coherent.
Small adjustments made earlier work as well as a big one later. That is the key to control systems like the ones that drive the Bullet Train in Japan. Fuzzy Logic.
It is easier to accept small adjustments than large.
Proactive advisers bring a great deal of value. Clients want and need help when things are off the rails. Have a way to deliver that service or you will find yourself dismissed. Not because you did anything wrong, but because you failed to help your client understand their financial world.
People make weak decisions when they don’t fully understand what is happening.
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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.