Jack and Tom are walking in the jungle when Jack spots a tiger stalking them. He yells a warning to Tom, who breaks into a run. “Tom, don’t be an idiot!” Jack shouts. “No one can outrun a tiger!”
But Tom doesn’t plan to outrun the tiger. He knows all he needs to do is just outrun Jack.
Tom may be a terrible friend, but he had the right idea about minimizing risk. When it comes to managing your investments, we all tend to assume the main objective is to “beat the market.” But is this assumption even correct?
The objective of beating benchmarks comes from the institutional world of investing, where managers are hired and fired on their ability to outperform markets. The same goes with mutual funds. Managers compare benchmarks to persuade the public to buy one fund rather than another. Since most investors are smart people who want to do what’s best for their portfolios (and their families), the strategy of beating benchmarks has become almost an industry standard.
But does that “beating the market” investment objective really nail down what’s important to you? When individual investors try to beat the market, their results are generally dismal. The very act of trying to time markets, engage in trading, find the “hot” fund, etc., usually ends up penalizing the investor.
In my opinion, beating the stock market is often just a default objective. Most investors aren’t really concerned about it; they just want reliable investment results. And in fact, trying to beat the market is potentially dangerous. It requires you to take risks that are way in excess of the usual market risk. Those risks don’t help you meet your financial goals, and could potentially cost you a good part of your net worth.
There’s an expression I like: “Having the right answer is nothing; asking the right question is everything.” Think of Tom and Jack, framing a problem properly makes a big difference to the final outcome.
That’s why the best way to realize your investment objectives is by setting realistic personal goals, and using them as benchmarks for measuring your portfolio performance. Don’t be tempted by a high-risk portfolio. In the investment world, that could well be the equivalent of trying to outrun the tiger.
