Everyone is Different (and Better!): Part 3

Ease of Evaluation.  This subject is incredibly important and often ignored.  In fact, most people find the process so difficult they skip it entirely. 

I can’t tell you the number of times that someone has bragged to me about an investment that “doubled” their money.  Surely, that’s a terrific investment, and worthy of bragging rights, right?  Maybe.  Time is the critical element, often ignored.  Everything from bank accounts to mutual funds will eventually double your principal in just twelve (12) years!  At ten percent (10%), it’ll happen in seven (7).  At twenty percent (20%), around three and a half (3.5) years.  Clearly, doubling your money isn’t as impressive as it sounds.

The Danford kids used to argue with me about the intelligence of our family dog.  “She’s very smart,” they proclaim.  My response?  “She’s smart for a dog, but dumber than cement for a human.´ In investing or animals, it’s all in what you compare to!

I remember one meeting where a client raved about his favorite mutual fund.  And, truthfully, it had grown nicely over the years.  Yet, comparison with similar funds showed that it had, in fact, lagged during a raging bull market.  It had grown very well compared to a bank account, but not so well compared with similar investments.  His informal evaluation was flawed because he was comparing to the wrong benchmark. 

Any portfolio of common stocks or individual bonds faces evaluation problems.  Objective performance analysis requires an accurate picture of cash flows, trading practices, investment risks, time horizons, risk tolerances (of the client), and account objectives.  How easily is that accomplished with a portfolio of twenty-five (25) or more different stocks and bonds?  Most people find the task daunting.

Brokerage and mutual fund firms aren’t much help either.  Account statements routinely omit purchase prices (cost figures are reported upon purchase or sale by confirmation only).  They report current market values (important) but deliberately avoid the original cost (equally important).  If you don’t track the purchase price, and they don’t remind you, how can you easily judge performance or make decisions. 

Further, even if you do maintain accurate records, how do you compare investments meaningfully with economic benchmarks?  Almost everyone follows the Standard & Poor’s 500 Index^® (“S&P 500”) and the Dow Jones Industrial Index^® (“Industrials”).  They are reported every day on television and radio.  But, how representative are they for your portfolio?  Today, over 100 different indices provide meaningful benchmarks for evaluating various sectors of the investment markets.

Evaluation is one reason for the explosive growth of mutual funds.  Firms such as Morningstar^® and Wiesenberger^® provide detailed and objective information on performance, risk, expenses, and portfolio holdings for thousands of publicly available funds.  Magazines and other publications feature fund issues and evaluative criteria.  In all, there are reams of material to help gauge a fund’s success (or failure) in the market.

Excerpt taken from Million Dollar Management: Simple Lessons to Use Wealth Management Principles for Your Family Investments by Dan Danford (with Gary Myers), 2002