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Are you benchmarking your portfolio appropriately?

Although investing can seem pretty complicated, the success of your portfolio strategy should really be judged by a simple question: What do you want your financial plan to accomplish

For most of us, the answer will begin with foundational goals such as capital preservation and a secure retirement with enough money coming in to take care of essential items such as housing, healthcare and everyday living expenses. Depending on your personal situation, your goals might also include travel, a vacation home, a college fund for your grandchildren, and other things uniquely important to you. It’s also important to factor in a realistic inflation rate and consider how your portfolio strategy fits with your estate plans.

Price tags and time horizons
These goals generally come with a price tag, which may need to be accounted for one time (e.g., vacation) or as an ongoing expense (e.g., tuition), but which usually can be estimated reasonably accurately if we account for inflation and build in a margin of error. Most of them also have a time horizon, such as our years to retirement or the ages of our grandkids.

Prioritizing them to determine how much money each will require, will give you both a specific financial target for each goal and an overall framework that will guide your portfolio strategy. You may find that one or more of your goals may need to be tweaked in order to give you a better chance of achieving other, higher-priority goals.

The progress you are making toward your objectives over time constitutes what can be thought of as a personal benchmark. While many people like to compare their portfolio returns against the S&P 500 index, this is only one way to judge how a portfolio progresses. For example, if your goals include a vacation home and you’re making steady progress toward that, what difference does it really make whether your portfolio is leading or lagging the S&P 500?

Measuring against the S&P 500 also doesn’t allow for the reality that your portfolio may be diversified, holding a variety of investments (e.g., mid- and small-cap, international securities, bonds and cash) rather than just the large-cap issues that make up the S&P 500, and that indexes do not incur the same expenses – commissions, taxes, management fees – that we do as investors. Benchmarks also aren’t always what they seem in other ways – the S&P 500 is often used as a proxy for the stock market as a whole, but its returns are heavily influenced by the price movements of the biggest companies in the index rather than all 500 equally.

Avoiding emotional decisions
Staying focused on your personal goals rather than an arbitrary benchmark can also help you avoid making short-term emotional decisions that can derail your long-term financial plan. We all know that today’s markets can be volatile, but that abstract awareness may not keep us from selling – or buying – at the wrong time, especially if our focus is only on percentage points rather than our specific objectives. Thinking emotionally about what an index is doing can keep us from recognizing that market downturns can present opportunities that may help accelerate progress toward your goals when markets recover.

All this is not to say that returns don’t matter. They do. But risk matters, too, perhaps even more. Determining your true tolerance for risk is central to your portfolio strategy and is likely to involve thinking long and hard about some difficult questions. Can you withstand a 20% or 25% decline in your portfolio without panicking? Will you be able to similarly withstand that decline if you are 3 or 5 years before retirement? Market declines of that magnitude are rare, but as we know, not unheard of, especially over more extended time periods.

Suppose your time horizon is longer than ten years, and you are willing to stick with your plan. In that case, your portfolio may withstand these declines and recover more easily than the portfolio of an investor who did not stay the course and left the market, locking in those losses.

Creating a Comprehensive financial plan
Finding the right balance – a place where you feel confident about achieving your personal goals but not anxious about the level of risk in your portfolio – should be a top priority.

The key point here is not to think about your portfolio in isolation but as a component of a carefully structured financial plan that focuses on what you want to achieve.

Of course, no financial plan can be “set it and forget it.” Monitoring the progress you are making toward your goals on a regular basis – and instituting any course corrections that may be necessary – is part and parcel of a successful plan. Some goals are moving targets – what is college tuition going to cost 15 years out? Some goals may be replaced by others – a stable coastal cottage may look a lot more appealing than a rollicking sailboat as the years go by.

Planning for unwelcome events
Thinking about ­and planning for – unexpected events can give you confidence that your plan will work in the real world. One can “stress test” your financial plan to determine if it can withstand events such as a change in your health, higher inflation or other setbacks.

Investors are deluged with information these days, much of it short-term noise and only a little of it really worthwhile. Staying centered on how your financial plan is helping you progress toward your individual goals – your personal benchmark – will help you ride out volatile markets and increase the likelihood of achieving the future you deserve.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.© 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Sources: Raymond James Worthwhile Winter 2016-2017. Past performance may not be indicative of future results. Investing involves risk, including the possible loss of principal. Diversification does not guarantee a profit nor protect against loss. Mid and small­ cap securities involve greater risks and are not suitable for all investors. The S&P 500 is an index of 500 widely held securities. This index are unmanaged and investors cannot invest in them directly.