Relative Returns Or Absolute. What's More Important?
Authored by Lance Roberts via RealInvestmentAdvice.com,
A couple of years ago, I wrote about absolute versus relative returns. Given the latest market run, I am getting a lot of questions about chasing returns, and individuals comparing themselves to the S&P 500 index. Historically, trying to beat a benchmark index leads to poor outcomes. However, understanding absolute and relative returns can help solve this issue. Notably, while most investors say they want relative returns, they want absolute returns. The problem, as we discussed in “Benchmarking Has More Risk Than You Think,” is that investors are often unaware of how much risk they are taking. To wit:
“There are many reasons why you shouldn’t chase an index over time and why you see statistics such as ‘80% of all funds underperform the S&P 500’ in any given year. The impact of share buybacks, substitutions, lack of taxes, no trading costs, and replacement all contribute to the index’s outperformance over those investing real dollars who do not receive the same advantages. More importantly, any portfolio allocated differently than the benchmark to provide for lower volatility, income, or long-term financial planning and capital preservation will also underperform the index. Therefore, comparing ...
Continue Reading »