Go Read!

Here's an excellent article that I first saw yesterday over at the blog "Abnormal Returns".  All investors, especially individuals with money in the markets, should go read "Why an Obsession With the S&P 500 is Unhealthy for Individual Investors".  Here is the key takeaway.

"The tendency {for individuals} to compare their portfolio performance to the S&P 500 is more often than not both inappropriate and counterproductive for individual investors. Unlike a large cap stock mutual fund where the comparison may be valid, individual investors have specific goals, objectives, and risk tolerance considerations. So, if this is inappropriate, what should they focus on instead?

If not the S&P, what’s the right question?

Constructing a portfolio requires considering a client’s goals, objectives, and risk tolerance. Instead of asking, how is my portfolio performing relative to the S&P, the right question might be, is my portfolio allocation still appropriate for meeting my goals, objectives, and risk tolerance? More recently, comparison to the S&P 500 is a function of performance chasing as equity markets have risen substantially over the last decade. An investor in the S&P 500 between April 1999 and August 2010 would have lost nearly 4%. If this same investor had “beaten” the S&P 500 by losing “only” 2%, would they feel better? Comparing your portfolio to S&P 500 in rising markets, and your own risk tolerance in down markets is an unrealistic expectation. Point being, relative performance to the S&P says nothing about whether an investor is meeting their goals and objectives."

The rest of the article makes some more relevant points and I urge you to go read the whole thing.  

Back Monday.

*Long ETFs related to the S&P 500 in client and personal portfolios.  Positions can change without notice.