How you are doing depends on what you are comparing

Tina Haapala |

Last week I began a series on measuring your investment portfolio against “the market.” Our first problem: there is no one all-inclusive market. Even if you zeroed in on stocks, there is still more than one stock market. Today, I want to look at what I think is a better measure of “the market.”

You likely don’t put all of your money into stocks, or bonds, or real estate, or your mattress. Likely you’ve got things spread out a bit. Exactly how and where they are spread is limitless. So how can I come up with a good “average” measure to go by? It’s actually pretty simple.

The measure I’d like to use is the Morningstar® Moderate Target Risk Index. Morningstar® is a company famous for capturing and reporting a myriad of data concerning mutual funds. They’ve branched out into many other areas of financial research, however.  For our purposes it is enough to know that they are very good at figuring out what mutual funds are doing. And since most people invest through mutual funds (directly or through their workplace), I think they are a good place to start our search.

There are five different Target Risk Indexes that Morningstar® puts together. What is common across them is that they mix domestic (U.S.) and foreign stocks and bonds  together. What differs between them is the percentage of the portfolio that is in stocks vs. bonds. My pick, the Moderate Index, is about 60% stocks. About one-third of the stocks are foreign. Filling it out is mostly bonds (which are close to 15% foreign) with some commodities thrown in. In other words, this is a diversified portfolio.

Why this one? Because of the various indexes out there, this comes closest to matching what I think is a moderate risk, moderate growth portfolio that mimics the way real people might actually invest. Does it match what I do? Nope. And I bet it doesn’t look like your portfolio, either. But the measure you use when determining how well you have done shouldn’t match your investments. If it did you’d always tie. Rather it should be comparable in the way it mixes risk and reward.

Here’s what I’m getting at. If you look at how this Moderate index did over the last six years, it underperformed the market every single year. Oops…we did it again. When I said “the market” we all knew I was talking about the stock market, and we probably assumed it was being measured by how the S&P 500 did. And over the last six years, U.S. stocks beat out just about everything. As such, based on that scale, if you invested in anything other than 100% U.S. stocks, you were going to underperform.

Of course, in that little downturn from 2007-2009 you also wouldn’t have lost over half your portfolio’s value.

And that’s the tradeoff. You aren’t in 100% stocks; you won’t want to be in 100% stocks, so why compare yourself against them?

Next time, we’ll discuss how you can use this information to decide if you need to make changes to your portfolio.