Are Indexes a good benchmark for you?

As investors we oftentimes find ourselves using the Dow Jones or S& P 500 as the comparative index in order to determine if our portfolio is sufficient. This is just fine if you are someone who has a substantial time horizon or is purely focused on growth. However, most people I work with (baby boomer and older) are typically not in this scenario. Most investors that are nearing or in retirement should be more focused on what return they need to make in order to maintain the retirement goals or lifestyle they desire. More importantly, stay focused on protecting your capital.

Let me give you all an example. Let’s say you have done some income planning and determine that you need 6% annually in order to have enough money to live off of until age 95. Knowing that, why would this type of investor want to be fully invested in a S & P 500 like portfolio in the uncertain economic times we are in today? The answer is that they would not. As investors we always have to ask ourselves, “Am I taking the appropriate amount of risk for the return I need?”

In doing many reviews and meeting with clients and potential clients recently, I have noticed that many people feel they are missing the bus or are concerned that they are not maximizing their return in the markets. This is the same type of behavior that got people in trouble in 2008. Looking back, many investors have admitted that they we probably were taking too much risk then. Yes, 2012 has produced great returns, however, look at the amount of economic and political risk that has been occurring during this time period.

At the end of the day, we all have to remember to keep our emotions in check. Fear and greed is the root of evil when it comes to investing. It is my beliefs that if you focus more on what return you need in order to achieve your goals it will be much easier to manage risk, but more importantly manage your emotions when the markets make you start to get greedy or fearful.

Creating your own family or personal index may be the best solution to keep you on track.

Hope this helps. Enjoy your day.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.  You can not invest directly in an index.