The Retirement Corporation of America

Benchmark Your Investments—But Don't Obsess

You want to keep close enough tabs on your investments so you know when to make changes in your portfolio. Yet you want to keep enough distance—and perspective—that you don't fall into the trap of buying and selling because of short-lived events in the markets.

Most of your financial plans are long-term plans: college for the kids and your own retirement. The way to achieve long-term goals is by investing for the long term. That means making such sound investment decisions at the start that you don't have to keep changing investments on a whim.

The investment markets are always in motion—moving minute by minute, hour by hour, day by day. There are more than 23,000 seconds in each trading day on the New York Stock Exchange. The key market average will change in virtually every one of those seconds. If you tried to track the market second by second, you'd become a nervous wreck—unable to make intelligent decisions about anything.

The Four Great Truths About the Investment Markets.

•  Great Investment Truth #1: Investment Markets Are Always Volatile. Markets are made by humans, just like you—subject to the same hopes and dreams, fears, and concerns you have. When it comes to investing, economic fundamentals should rule the day, with emotions playing no part in the process. In fact, emotions often rule the day. Add to that the fact that our economy is always in motion—always moving from boom to bust to boom again—and you see that it is in the nature of the investment market to be volatile.

•  Great Investment Truth #2: The Longer You Watch, the Less the Volatility. Markets fluctuate from minute to minute and hour to hour and day to day. They even fluctuate year to year. But the longer the time period, the less volatile—and the more predictable—investment markets are. If you followed the course of the Dow Jones industrial average, minute by minute, during an average day it would look like a seesaw—ups and downs beyond counting. But stand back and look at the trend line of the Dow over the past 50 years. What you see is a steadily rising line, with occasional peaks and valleys along the way.

•  Great Investment Truth #3: When Markets Move, There Is Always a Reason. There is always a reason for everything the stock or bond markets do. If you don't see it right away, look deeper. Read the business pages of your newspaper. Listen to the radio, TV, and cable shows that cover the markets. Check out the best financial websites. Seek reasons for the market's behavior in terms you can understand. Take the time to understand why things are happening, and you'll be less inclined to sell in a panic, or to buy when all the best opportunities have passed you by.

•  Great Investment Truth #4: Watch Your Investments With a Telescope, Not a Microscope. The more attention you pay to those short-term fluctuations in the market, the more trouble you are going to be in and the more you will be tempted to respond to events, not to anticipate them. Sharp gains will tend to make you giddy—investing in stocks you want only in hopes of a short-term gain. Sharp dips will tend to make you weep—causing you to sell stocks when their low price should cause you to buy. Speculators buy in hopes of a quick killing. Investors—including you—buy for the long haul, hoping to post gains in most years for many years to come.

When to Benchmark Your Investments

You can't help but be aware of what is happening in the investment markets. A huge industry has built up, to keep you informed of every twist and turn in the markets. You'll find market news reported in newspapers, magazines, and newsletters; on radio, television; and on the Internet.

You do want to have a general view, at any given moment, about what's happening in the stock and bond markets. You want to have a general idea, at any given moment, about what is happening with interest rates. You want to have a general idea, at any given moment, of what is happening in the economy, and what is likely to happen next.

So you keep your eyes lightly focused on the investment markets at all times.

When it comes to focusing closely on your investments however, just look at the performance of each of your investments once a week, and you'll be fine. Maybe do it Saturday morning, when the market results for the week are in.

You certainly don't want to act on your investments once a week. That would turn you into a shoot-from-the-hip speculator who tries to outguess each twist and turn in the markets. Merely review the performance of each investment once a week. Look at how each investment has done on its own. Then compare each investment with an appropriate benchmark. You're not looking to buy or sell at this stage. You just want a general idea of how well your investments are doing—by themselves and in comparison to something else.

The more serious benchmarking of your investments will come at the end of each year when you pull together your personal balance sheet and your statement of net worth. That's when you get to put everything in perspective: Are you making satisfactory progress toward building your net worth? And if your progress isn't all you want it to be, how can you make things better?

How to Benchmark Your Investments

When it comes to benchmarking your investments, the rule is: Always have a basis of comparison in mind. In other words, don't sell the "Safety Above All Income Fund" because it had a bad quarter, a bad year, or a bad couple of years. Similarly, don't buy the "We Never Lose Aggressive Growth Fund" because it had a great quarter, a great year, or a great couple of years.

Remember, things change. Today's hot stock is tomorrow's dud. Today's dud is tomorrow's hot stock. Stocks soared in the 1990s and bonds lost money. It seemed to make perfect sense to investors to dump all their bonds and shift 100% to stocks. But stocks lost in the early 2000s and bonds made money. What seemed to make perfect sense at one point looked completely different a year or two later.

To drive the lesson home, look at what happened to the Internet funds that were all the rage in the 1990s. They lost fortunes for their investors in the bear market of the early 2000s—and some simply vanished altogether.

Don't look at things in isolation. Don't look only at how a fund did this quarter or this year. Look at how it has done over the long term: five years, 10 years, or even more. How has it performed over an entire stock market cycle: bull market to bear market and back to bull market again? You are a long-term investor. Make investment decisions based on long-term considerations.

Don't look only at the "Safety Above All Income Fund" or the "We Never Lose Aggressive Growth Fund." Look at the performance of other income funds or other aggressive growth funds. If your income fund did poorly over the past year while other income funds did well, you should be concerned. If your income fund lost money over the past year and so did virtually all other income funds, then you don't want to be overly concerned.

Compare the performance of each investment with the market index that most closely fits the bill. Here are the key market indexes to focus on. All are reported widely in the financial press and on Internet financial sites.

•  Dow-Jones Industrial Average covers only 30 stocks—all of them huge and most of them industrial companies. On that basis, it just doesn't cover enough ground to be useful as a benchmark. Yet it is the most widely-followed benchmark—tracked second by second through the trading day. When people ask—how did the market do?—they usually want to know how the Dow did. Use it so you always have an overall feel for how the market has done.

•  Wilshire 5000 Total Market Index includes virtually every publicly traded stock in the U.S. It covered 5,000 stocks when it was created in 1974, but covers over 6,500 stocks today.

•  Standard & Poor's 500-Stock Index covers 500 companies from every industry. The stocks are picked because they're representative of the whole U.S. economy. The average company in the index has about $20 billion worth of stock outstanding.

•  Russell 2000 Index covers 2,000 of the smallest U.S. stocks. The average company in the index has about $500 million worth of stock outstanding.

•  NASDAQ Composite covers 4,000 stocks, including such technology names as Intel and Microsoft that trade on the NASDAQ automated stock market.

•  Morgan Stanley Capital International Europe, Australasia, Far East (MSCI-EAFE) Index covers all the major stock markets of the world. Since it's a benchmark for foreign investments, it doesn't cover the U.S.

•  Lehman Brothers Aggregate Bond Index covers virtually all bonds traded in the U.S.—both government and corporate.

•  Lipper Index tracks the performance of every major category of mutual funds. It appears daily in USA Today.