Fix It Friday Ep. 13 - From Wall Street to Main Street: How the S&P 500 Benchmark Became a Dangerous Standard

• Benchmark obsession can distract investors from their main financial goals. There's no statistical evidence to support the consistent outperformance of random benchmarks, such as the S&P 500.
• Successful investing involves establishing clear goals, creating a plan, and choosing investments with historical returns that align with your objectives.
• An investor's plan should be the true benchmark for measuring success, not market indices. Adjustments should be based on life events rather than market fluctuations.
• Frequent portfolio checking can lead to harmful investment decisions driven by overconfidence or loss aversion bias, especially during market volatility.
• Diversification and maintaining a long-term perspective are crucial for capturing market returns and achieving financial success.
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A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or www.fusionfamilywealth.com. 

Jonathan Blau: Hello everybody. Welcome to another episode of. The Crazy Wealthy Podcast, the Fix it Friday edition. Thanks again for tuning in. Today I'm gonna talk to you about what I call, [00:00:30] uh, the investment public obsession with the standard and pos.

500 index. Particularly the obsession involved with their desire to consistently outperform that index [00:00:45] with their own investment portfolio or the manager's mutual funds that they choose to invest in.

Voiceover: Welcome to The Crazy Wealthy Podcast with your host, Jonathan Blau. [00:01:00] Whether you're just starting out or are an experienced investor, join Jonathan as he seeks to illuminate and demystify the complexities of making consistently rational financial decisions. Under conditions of uncertainty, he'll [00:01:15] chat with professionals from the advice world, entrepreneurs, executives.

And more to share fresh perspectives on making sound decisions that maximize your wealth. And now here's your host. 

Jonathan Blau: So [00:01:30] first thing I want to address is where does this obsession come from? Why is it that everybody wants to know, how am I doing relative to the standard and Poors 500 index? So there, there are a couple of answers, but the big one is that I wanna focus on is that in the [00:01:45] SE 1970s, um, what was only available before then to institutional investors and pension type investors was the availability to hire money managers.

Uh, and when that became available to individual investors, [00:02:00] the protocol that was used to measure the performance of these various money managers. Was adopted the same way that, that it was used by the pension managers and, and the institutional managers. So what they always did, those pension funds and institutional [00:02:15] funds is they would every quarter meet with the various money managers that they hired and they would look at how the each of the managers was doing relative to their respective benchmark.

A random benchmark, let's just call it the s and p 500 [00:02:30] for, uh, managers who are investing in large US companies. And then the pension fund would make a decision, do we keep this manager or do we fire them based on whether or not they happen to be outperforming the random benchmark? So the first thing I'd say [00:02:45] is, in the seventies when the availability of broadly became recognized by individual investors to hire these types of managers, they were also then put into this protocol of every quarter, I'm gonna look at my portfolio and see how they're doing.

So [00:03:00] take a step back. The first thing is. There is no statistical evidence for the performance, the persistence of performance, meaning no one can consistently or has been shown to be able to consistently outperform any random [00:03:15] benchmark. In this case, we're talking about the s and p 500, and so trying to do that takes people off.

The main goal of investing and the main goal of investing starts with the first word that I said, goal. You have to establish your goals. Then you have to establish a plan to [00:03:30] meet the goals. Then you have to choose investments. Whose historical returns would've helped you have that plan come to fruition in the time allotted?

And without taking those three steps, success as an investor is, is almost always [00:03:45] elusive. And so what we wanna do is say, how do I then measure my success if I'm not looking at the standard POS 500 index? Seeing how my investments do relative to that, what's a good way for me to measure it? So with that, I'm going to actually read from you [00:04:00] a little paragraph or two that was written in April of 2021 by my mentor Nick Murray.

And what he said is, every once in a while it's useful to step back from the permanent chaos of political, economic, and market events and ask [00:04:15] ourselves. The fundamental questions, what am I investing for and how will I know whether I'm succeeding or not? How indeed does one even measure investment success?

He then says, the answers will be found not in today's headlines, and [00:04:30] certainly not by attempting to predict tomorrow's nor will they be a function of whether the market's next 20% move is up or down. The answers you're looking for can only be discovered. By the light of your own personal financial situation [00:04:45] in practice, they'll depend on whether or not you're following in exactly this order.

The three fundamental steps to a genuinely successful lifetime of investing, goals, plan, and portfolio. He then says, this may [00:05:00] be somewhat startling to investors who think successful investing is a function of whether or not their portfolio is outperforming some benchmark or getting in and out of the market opportune considered properly, or all portfolio [00:05:15] issues are subordinate to the two vastly more important questions.

One, have you set specific goals? And two, do you have a specific plan for achieving those goals and the time allotted? For most of us, that'll be our planned retirement date. [00:05:30] The great thing about this is the realization that the most important variables in investment success are within your control as opposed to economic and market variables, which are beyond your control.

[00:05:45] So the, the sum of what I just said with, with a conclusion is the only relevant benchmark for any investor who wants to succeed over multi decades. Is their plan. And the plan is actually [00:06:00] the medium through which the advisor and the client relate to each other. So after two or three years, we can look at the plan and say, how close or far am I from where the plan objective says should be today?

And based on that, what move should I be making? [00:06:15] The move should only be made in relation to the plan, never in relation to responding to current events, short-term market fluctuations, or anything other than life events changing. So once we understand that the plan should be our benchmark. [00:06:30] Let's take a look at the, not only the futility of looking at the portfolio often, particularly during declining or tumultuous periods.

It's not just futile to look at the portfolio, it's actually destructive. 'cause when we look, if we see something [00:06:45] good, we get a dopamine rush. So we say, oh, okay, let me go out and buy that new Bentley now because I made so much money this month. Or if we see something bad, it ignites our loss aversion bias, which is.

Will we dislike the pain of a loss two times more than the pleasure gain is [00:07:00] felt pleasurable. And so we'll start to do things like sell our investments. So we want to, in order to reduce the short term pain, and that will likely be fatal to our long-term objectives being met. So as an example, I took a look at [00:07:15] the time period.

From the pandemic decline, meaning 2020, when the pandemic rolled in February 19th, the market was at a, at an all time high, and from February 19th to about March 22nd, the market went [00:07:30] down a record 34% in 33 days. Five months later, in August of 2020, it had recovered fully the 34% decline. Now I can promise you that investors who are looking every day or every week [00:07:45] at their portfolio.

It's kind of like watching the water to see if you can get it to boil faster. They did not see their portfolio recover more quickly than the people who didn't look at the portfolio at all for the five months or so. [00:08:00] Between March and August, they all recovered the same way. But worse, the people who were looking frequently, daily, or weekly, most likely succumbed to the biases that the frequent looking ignited, and they changed their [00:08:15] portfolio in a very detrimental way and made a move from which they might never recover their retirement or their wealth could never recover from.

So as we sit here today, the market has gone from where it was in February of that year of about 3,200. [00:08:30] To almost doubling about 6,305 years later. There were a total of about 1,950 or 60 days in that period, and people who didn't look at all and just let their portfolio, if they were in [00:08:45] the s and p 500 as example, do what it does, compound and interrupted.

They saw their portfolio almost double. Those who went in and out in response to looking every quarter or every week or every month, most of them have much worse results. So [00:09:00] in summary, please don't think that you should be looking at the s and p 500 as your benchmark. Your plan should be a benchmark if you're in a portfolio of index funds, which is what we recommend to diversify.

It should be index funds, [00:09:15] but not only the standard and Poors 500. From, uh, 2000 to 2010, the standard Poors 500 lost 30%. If somebody outperformed it and only lost 20, that did not solve their problem if they needed to take 4% a year out of their portfolio. [00:09:30] So outperforming the benchmark is completely irrelevant.

It's staying diversified and capturing the long-term compounding in a portfolio, and increasing your odds of doing that by not looking too frequently and measuring your success against a random [00:09:45] benchmark. That, as John Bogle said, he never met anyone who could consistently outperform the s and p 500. He said, in fact, I'd never met anyone who has met anyone who could do it.

So on that, thanks again for joining us. You [00:10:00] can catch us on all your favorite podcast venues and on crazy wealthy uh.com and our website, fusion family wealth.com.

Voiceover: Thank you for tuning into another episode of The [00:10:15] Crazy Wealthy Podcast. For more insights, resources and to sign up for a newsletter, visit Crazy Wealthy Podcast. Com. Until then, stay crazy wealthy.[00:10:30] 

Disclaimer: The previous podcast by Fusion Family Wealth, LLC Fusion was intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any [00:10:45] specific investment or investment strategy or any non-investment related or planning services, discussion or content will be profitable.

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