Fix It Friday - From Wall Street to Main Street: How the S&P 500 Benchmark Became a Dangerous Standard

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lk to you about what I call, [: 00:00:30

500 index. Particularly the obsession involved with their desire to consistently outperform that index [00:00:45] with their own investment portfolio or the manager's mutual funds that they choose to invest in.

th your host, Jonathan Blau. [: 00:01:00

And more to share fresh perspectives on making sound decisions that maximize your wealth. And now here's your host.

Jonathan Blau: So [: 00:01:30

Uh, and when that became available to individual investors, [00:02:00] the protocol that was used to measure the performance of these various money managers. Was adopted the same way that, that it was used by the pension managers and, and the institutional managers. So what they always did, those pension funds and institutional [00:02:15] funds is they would every quarter meet with the various money managers that they hired and they would look at how the each of the managers was doing relative to their respective benchmark.

[: 00:02:30

So [00:03:00] take a step back. The first thing is. There is no statistical evidence for the performance, the persistence of performance, meaning no one can consistently or has been shown to be able to consistently outperform any random [00:03:15] benchmark. In this case, we're talking about the s and p 500, and so trying to do that takes people off.

have to establish a plan to [: 00:03:30

And without taking those three steps, success as an investor is, is almost always [00:03:45] elusive. And so what we wanna do is say, how do I then measure my success if I'm not looking at the standard POS 500 index? Seeing how my investments do relative to that, what's a good way for me to measure it? So with that, I'm going to actually read from you [00:04:00] a little paragraph or two that was written in April of 2021 by my mentor Nick Murray.

c, and market events and ask [: 00:04:15

He then says, the answers will be found not in today's headlines, and [00:04:30] certainly not by attempting to predict tomorrow's nor will they be a function of whether the market's next 20% move is up or down. The answers you're looking for can only be discovered. By the light of your own personal financial situation [00:04:45] in practice, they'll depend on whether or not you're following in exactly this order.

olio. He then says, this may [: 00:05:00

One, have you set specific goals? And two, do you have a specific plan for achieving those goals and the time allotted? For most of us, that'll be our planned retirement date. [00:05:30] The great thing about this is the realization that the most important variables in investment success are within your control as opposed to economic and market variables, which are beyond your control.

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And based on that, what move should I be making? [00:06:15] The move should only be made in relation to the plan, never in relation to responding to current events, short-term market fluctuations, or anything other than life events changing. So once we understand that the plan should be our benchmark. [00:06:30] Let's take a look at the, not only the futility of looking at the portfolio often, particularly during declining or tumultuous periods.

we look, if we see something [: 00:06:45

Will we dislike the pain of a loss two times more than the pleasure gain is [00:07:00] felt pleasurable. And so we'll start to do things like sell our investments. So we want to, in order to reduce the short term pain, and that will likely be fatal to our long-term objectives being met. So as an example, I took a look at [00:07:15] the time period.

the pandemic decline, meaning: 2020

It's kind of like watching the water to see if you can get it to boil faster. They did not see their portfolio recover more quickly than the people who didn't look at the portfolio at all for the five months or so. [00:08:00] Between March and August, they all recovered the same way. But worse, the people who were looking frequently, daily, or weekly, most likely succumbed to the biases that the frequent looking ignited, and they changed their [00:08:15] portfolio in a very detrimental way and made a move from which they might never recover their retirement or their wealth could never recover from.

. [: 00:08:30

They saw their portfolio almost double. Those who went in and out in response to looking every quarter or every week or every month, most of them have much worse results. So [00:09:00] in summary, please don't think that you should be looking at the s and p 500 as your benchmark. Your plan should be a benchmark if you're in a portfolio of index funds, which is what we recommend to diversify.

It should be index funds, [: 00:09:15

It's staying diversified and capturing the long-term compounding in a portfolio, and increasing your odds of doing that by not looking too frequently and measuring your success against a random [00:09:45] benchmark. That, as John Bogle said, he never met anyone who could consistently outperform the s and p 500. He said, in fact, I'd never met anyone who has met anyone who could do it.

ks again for joining us. You [: 00:10:00

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