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investment advice

Three Reasons To Stop Benchmarking Your Investments

Arbitrary, unrelated and irrelevant.....there they are three reasons. Now let's take a closer look at the rest of the story. 


Comparing your investment portfolio performance to something has been around a long time. 

Many people use an index as a benchmark, comparing their portfolio to let's say the S&P 500 Index or the Dow Jones Industrial Average.  Those are ok choices, but they're more or less meaningless in the real world. You might as well be comparing your portfolio to the performance of your colleague in accounting. 

  • Arbitrary- any benchmark you pick is of your own choosing, there's no real way to tell which benchmark is better for you than any other. What about the EAFE Index, or the Russell 2000 Value or Russell 1000 Growth Index, why not them? (Other than the fact that those are a bit harder to get data on, but that doesn't mean that they might not be better does it? Gold is harder to find than wood and that's worth more right?)
  • Unrelated- depending on your holdings, the benchmark you pick might be totally unrelated, especially if you don't have any real idea of what it is that you own, beyond a Morningstar or Lipper style designator. What about style attribution, doesn't that matter? If you own a derivative laden large company growth fund, guess what, it's not a large company growth fund is it, if the fund's leveraged to the moon, it's more like a micro-cap fund than a large company growth fund, albeit that the fund company would prefer you continue to think about them as "large company growth" especially when they out-perform their peers by 8%! (Oh, did I mention that that 8% out-performance comes at 200% of the risk?)
  • Irrelevant- ahhhh, saving the best for last. The benchmark that matters most to you is the one that is "all" about you. How much do you need to earn on average so that the net present value of your [a] future income streams such as your pension, social security, annuity payments, etc., plus the net present value of your investment assets and cash, exceeds by some meaningful amount to you, the net present value of all your future spending?  That's the number that matters most, because that's the number that gets you to the finish line.  

If your goal is your future then your benchmark should be your benchmark. Not mine, not The Wall Street Journal's and certainly not Harry's in accounting.


If, in the future, you're forced to stop going on vacations, or trading down out of your house or not being able to throw the kids a couple thousand a year for the extras that they need but can't afford, it won't matter much that you outperformed the S&P 500 will it?

No, it won't because it wasn't your performance that let you down, it'll be the fact that you didn't invest enough....something that comparing your portfolio to a benchmark other than your own can't possibly tell you can it?

If they're your goals, and it's your life, make that your benchmark. 


Is This The Next Advisor

Robo-Advisors are a class of financial advisor that provides portfolio management services online with a minimal amount of human intervention. Wikipedia contends, that "It's the financial equivalent of booking an Uber on your phone versus standing in the cab line at the hotel." 

In reality though, the Wikipedia comparison fails at a couple of things. First, it's the notion that I could be sitting at a sidewalk table in the afternoon sun sipping a beverage of my choosing whilst I Uber up a ride from my iPhone vs. standing in the summer heat, sweating out the lineage waiting for the under-air conditioned cab to arrive.  I get it, that doesn't sound like a better deal than Uber'ing up my cab. 

But, here's the analogy reality.....the difference between your Robo-choice and an actual advisor is really more like using Uber to get your cab or just asking the Ritz Carlton Concierge to get a cab for you isn't it? If it isn't, then the problems not that Uber'ing up your cab is better, its that you've got get a better Concierge. 

The contention is that Robo-Advisors provide some real advantages to Consumers; 

1. They use essentially the same tools that Real-Advisors use, and; 

2. They can serve the underserved masses who either [a] don't meet the account minimums of Real-Advisors or, [b] can't afford the typically high fee structures of Real-Advisors

So, let's look at those two things. 

First, they don't come close to using the same tools are Real-Advisors any more than neurosurgeons use the same tools as auto mechanics. (You know, that tool that "removes something.") At point of fact, they might use the same "analytical tools" as Real-Advisors, but not the same tools. Making the contention that the same tools are used is inaccurate at best, lest we consider that "conversation", "goal setting" or "understanding your risk tolerance",  or "your feelings about money" or "your past behaviors and your predilections and behavioral biases" can simply be ignored. Reduced to it's simplest component parts,  an interior designer is going to use the same tools no matter who you pick right? It's more or less going to come down to, paint, rugs, curtains or window coverings and furniture isn't it?  Why muddy the waters by asking you how you feel about a certain style of furniture or paint color? 

Removing personal bias isn't good work, it's just simpler work. 

Secondarily, real-advice is expensive at really-expensive advisors, not at all advisors. Not at this advisor. And, not every advisor has an account minimum. The notion that only high-priced services result in effective outcomes is bogus, but that's in essence what you're doing when your contention is that there's only two flavors of advisors, Robo and High Priced.  If the price of things was the sole determinant of much of anything, then every golfer out there would be swinging the most expensive clubs they could find and they'd all be on the PGA tour, because of course price and success are inexorably tied to each other. Bottom line is that you're either good at what you do or you're not. Your fee schedule (while often way too high) is a marketing decision in response to market factors, not an indicator of intelligence or ability. 

There are many things surrounding the birth of the Robo-Advisor that I do agree with. I do think that as a rule, investment management fees in most instances are way too high, non-transparent and a bit over the top.  I also agree that account minimums are problematic. 

At Barry Capital we've solved the conundrum of pricing advice.  And we can prove that "Robo" is a "no-no" for most people, and clearly not your only viable pricing or advice option.