Stacking investment returns against index performance is an inherently flawed approach to benchmarking. The forward-thinking innovators at Flexible Plan Investments give clients a more realistic way to assess performance.

Founder and President of Flexible Plan Investments Jerry Wagner posed two questions:

1. Do you care about risk?
2. Are you investing to reach a goal?

If the answer to both is yes, then it isn’t sensible, he says, to use the Standard & Poor’s 500 or any other index as a benchmark of success. First, regarding risk, the S&P 500 was no stranger to steep market declines in the last decade. And when it plummets 50 percent or more, which it has done twice in recent history, it’s not an index one wants to be mirroring.

“Return is important, but you can’t ignore risk,” says Wagner. “Think about a lottery ticket. Your return can be almost infinite, but your risk is almost 100 percent. You always have to view potential performance in terms of relative risk.”

Second, if you’re investing to reach a goal, which most investors are, then does it make sense to gauge your success against an index that isn’t relevant to that goal?

“The definition of true benchmarking is whether or not you’re on target to reach your goal, not whether you measure up to an arbitrary index,” says Wagner.

OnTarget Investing: Customized Benchmarks

Defining realistic goals and setting appropriate benchmarks is the premise behind the OnTarget Investing system at Flexible Plan Investments, a nearly four-decade-old active investment management firm that holds more than $2 billion in assets under management.

Based on financial goals and time horizons dictated by the client at the onset of the investing relationship, the firm produces regular, color-coded charts that show clients where their portfolio stands in relation to their long-term goals.

The key here is long term. Subjecting oneself to the unfair expectations of short-term results can lead to emotional, knee-jerk decisions. In a perfect world, Wagner says, investors would be encouraged to only review returns once a year, not even quarterly. Reason being, true market highs and lows are only fully known in hindsight, and often results cannot be properly evaluated in quarterly—much less daily—snapshots.

“If you’re measuring against an index, most investors get overly confident at market tops and overly discouraged at market bottoms,” he says. “But when they can evaluate their progress based on a simple chart that tells them whether or not they’re on target to meet their specified goal, it’s easier to sleep at night.”

My firm, Richard Oxford Financial, works with Flexible Plan and offers the OnTarget Investing program to clients.

“Plan Early and Plan Often!”™

As Seen In Bloomberg Businessweek, Fortune & Money

The information provided is intended to be general in nature and should not be construed as investment advice from Flexible Plan Investments Ltd., Richard Oxford Financial or Dutch Asset Corporation.  Inherent in any investment is the potential for loss as well as the potential for gain. Prior to investing, read and understand the risk considerations in our Brochure Form ADV.

Bear Market/Recession

A bear market is considered to be a time when the S&P falls at least 20% before it begins to recover. Because the market is constantly ranging in a several percentage point range, the start of the decline and recovery are difficult to pinpoint at the time. They are very easy to see in hindsight.  On the other hand, recessions are two consecutive quarters of declining GDP.

The Last Two Bear Markets!

As you can see from the last two bear markets, market volatility makes it difficult to pick tops and bottoms in real time.

Since The Great Depression, September 1929-June 1932, we have had 14 bear markets.  The average duration of those was 17.0 months with an average time between of 49 months.  The average decline was 36% and the average time to break even was 43.2 months.  I’m seeing The Great Depression as an outlier that would significantly skew the math.  That bear market lasted 33 months, had an 86.7% decline and took 25 years to recover. In fact, we had 4 other recessions before the market recovered to the 1929 level.  Ouch!

Why should you care? Unless you want to be doomed to repeat the mistakes of your ancestors, you need to change your behavior.  Markets work in cycles. Whatever titles someone chooses to use, the cycle looks like this:

This chart alone shows a strong need for active management.  Passive managers would have you believe that buy and hold works for everyone.  I can tell you why it doesn’t. First, individual investors are emotional about their money.  Who cares more about your money than you?  This drives them to make mistakes.  The second reason is that no single person has an unlimited timeframe until they need the money.  If so, I would say split between the SPX and the QQQ’s and ride the storm.

Investor Psychology

The unfortunate reality is that investors’ fears get the best of them and they sell at the wrong time.  Then as the market recovers, greed takes over and they buy at the wrong time.  They hear the news, see the market and believe it should go on forever.   The classic example is my “former” barber and client who I could not convince to not buy gold when it was at $1900 in 2011.  Try as I might, logic didn’t overcome greed. He believed he would miss out on a fortune. This is typical investor psychology.

Market Cycle Clock

Look at the second chart again and ask yourself where you believe we are in the cycle? We’ve obviously moved out of the “Easy Money” phase and toward “Raising Interest Rates”.  Does that portend a recession? Remember what I said earlier.  It’s nearly impossible to pinpoint the top or bottom while living through them.  Depending upon how you count, we’re about 113 months into this bull market.  Remember the average is 49 months.

Does this put us in Market Correction territory?  I know what I think.  Tell me what you think!

Always remember, there are Advisors who actively manage the cycle!

“Plan Early and Plan Often!”™

Is it too late to qualify for merit based aid for college? The short answer is “it depends.”

In this interview on 550-AM KFYI, Richard Oxford talks about the many misconceptions regarding college financial aid. The biggest one is “I make too much money to qualify for aid.”

If you listen to this interview Richard Oxford explains the different types of aid and scholarship opportunities with colleges and universities. He also talks about how filling out the FAFSA form early can help you get in the front of the line, for the greatest financial aid breaks. If you are a family with a household income of more than $100,000 you may be interested to hear of the financial incentives available from colleges.

Richard Oxford is the head of Richard Oxford Financial, in Scottsdale, Arizona, and is a Certified College Advisor, with College Funding Solutions. For more information listen to the podcast, go online at www.richardoxfordfinancial.com, or call 602-697-7657.