It's Not All Relative
By Gary Silverman, CFP®
Investment returns—everybody loves them. At least they love them when they are positive. But people being people, they get disappointed rather quickly. And some of that disappointment is mixing their expectations for absolute versus relative returns.
Here’s an example of how absolute and relative works. Let’s say that I won all but three of my games and came in fourth place in a one-on-one basketball tournament. That result of only losing three games is an absolute value. The fact that I came in fourth place is a relative value. Whether those results are “good” or “bad” takes a bit more examination.
Now let’s take this into the world of investments. For instance, you might have been happy to own a mutual fund back in 2022 that was in the top 5% of all funds that invested primarily in U.S. stocks. That’s its relative performance. Or you might have been disappointed to find out that you lost well over one-quarter of your money during that same year. A 25% loss is an absolute measure of performance. Great relative return; lousy absolute one.
Likewise this year you may be giddy to open your statement and find that the fund you owned gained over 10%. That’s a lot better than a loss. Imagine your disappointment if you discover that the 10% gain ranked that mutual fund in the bottom 10% of all U.S. stock funds. Great absolute return; lousy relative one.
I find that most people like to measure their investments by a relative measure when the market is up and an absolute one when it is down. This can cause problems.
In an up market, one of the corollaries of Murphy’s Law goes into play—no matter how good an investment has done, my client will have a friend (or even worse, a relative) who had a better performing one. This makes them sad, so they call me up wanting to know why the heck I didn’t have all of their money in this magical Fund X that their friend was using.
Then, then the market tanks, I get a call again: “How come my fund is down so much?”
“Sure, your fund is down 15%, but your friend’s Fund X is down 30%.” For some reason, pointing out this fantastic relative return doesn’t make them any happier.
It’s just hard pleasing folks sometimes.
Oh, and about that basketball tournament: I don’t know how to dribble or shoot, so while I might have lost only three games and come in fourth, that’s only going to happen if there are only four people in the tournament.
One thing I am good at is running. By good, I mean it’s a healthy pastime that I have kept up at as opposed to most that do not. Interested in trying it? There’s a program, similar to the one I started with coming up in Wichita Falls starting March 7. More details will be forthcoming next week, but from a financial standpoint it has my full endorsement: It’s FREE!