Getting a Good Night’s Rest
With stocks and bonds at nosebleed levels and interest rates now turning higher, markets are at risk. How’s an investor to get a good night’s rest? Well, for starters, you have to know how your portfolio is doing vs. your benchmark, your bogy … that means YOUR bogy, not some market benchmark.
Bogies vs. Benchmarks
That’s right. First you have to define your bogy, your performance objective, what you need as a rate of return to cover expenses, take family trips and save for retirement. There’s a difference between a bogy and a benchmark.
A bogy is what YOU need. A benchmark is what the MARKET is delivering.
Common Benchmarks
The SP500 Index is a common benchmark. Let’s say the SP500 is up 10% and your portfolio is up just 6%. If your portfolio is 100% in stocks, you need to have a discussion with your financial advisor, on two counts. First, it would be imprudent to have 100% of your portfolio in stocks (see our Free Investment Primer). Second, if you did have 100% in stocks, your benchmark is telling you that you are underperforming. Time to talk.
If, however, your portfolio is properly diversified, let’s say across stocks, bonds, real estate, and commodities (as it should be), then the SP500 is absolutely the wrong benchmark. We’ve seen many diversified portfolios benchmarked against the SP500, often because the financial advisor is not practiced at developing customized benchmarks. You can’t measure a basket of apples, oranges, bananas and avocados against an Apple Index.
When this happens, investors lose faith. They see their properly-diversified portfolio lagging. Then they hound their advisor to trash the diversification. Wrong response. Change the benchmark, not the portfolio. What do many investors do? Guiled by a rising SP500 Index, they often jettison the oranges, bananas and avocados and load up on the apples.
Now what? Well, when the apple-concentrated portfolio begins to rot in tandem with their benchmark, the focus then shifts to which is rotting faster? The portfolio or the SP500 Index. Not a happy comparison. Some investors may even conclude, “Hey, my portfolio is rotting at a slower pace than the SP500. Nice job! I love my advisor.”
Losing less than the benchmark is not the proper focus. Losing is losing. A loss is a loss. The higher the losses, the less you have to spend. Some folk think the Dow will hit 45,000. Let’s say the DOW doesn’t hit 45,000 or the S&P doesn’t double. If the next recession takes the SP500 down by 50% (as did the last) and your diversified portfolio leaves you down by 25%, you should not feel good. You are down by 25% and it’s going to take a 50% recovery to make you whole, without the U.S. Fed at your back this time around. So much for meeting those family and retirement objectives.
What to do?
Add a Benchmark That Tracks Your Goals
You can keep that SP500 benchmark, or better yet find a blended benchmark across diversified allocations to track market performance. Fine. We call these Relative Return Benchmarks. They track return vs. an Index or customized Index.
But you need to add that bogy benchmark mentioned earlier, the one that covers your spending and your goals. Relative Return Benchmarks do not track your goals. They track your portfolio. Absolute Return Benchmarks are another matter. These track performance against your goals, YOUR bogy – not the market’s.
Let’s say you need $100,000 in portfolio return to make ends meet and to cover your goals. Your portfolio is valued at $1,000,000. That means you need a combination of yield and appreciation of 10%. So, it would be good if you could know how your portfolio is doing against your 10% bogy, no? This way, if the apples are rotting, you’re going to see how it is impacting you. Here’s how.
When your portfolio is down by -10% and your bogy is +10%, you’re going to see a 20% negative spread between portfolio performance and your annual needs. This will catch your eye. Why? Because you will not want to sustain a 20% negative spread for long. What’s happening to you will be right in front of your eyes. You will notice the deterioration earlier.
Our Benchmark Here at Signals Matter
We eat our own apples here at Signals Matter. We don’t like to lose money and we want to know right away when this is happening. Here’s how we do it.
For starters, we use a 5% bogy, which means we track the performance of each of our Signals against a 5% absolute return. Actually, we go a bit further. We track not only the spread between Signal performance and our 5% bogy, we track the momentum by which that spread is expanding or contracting. We want to track and know not just how much money we are making or losing; we want to know how fast those winnings or losses are mounting or contracting.
This is how we gauge whether a stock is overvalued or undervalued. Stocks that are performing woefully below our bogy, with huge and rising negative spreads, are likely to be oversold. Think buy candidate. Stocks that are phenomenally outperforming our bogy, with widening spreads, are potentially overbought for us. Think sell candidate.
One more step, though. It takes a move in the opposite direction (UP if oversold and DOWN if overbought) and at the right pace for us to post a new “BUY” or “SELL” Signal. Once the Signal is posted to SignalsMatter.com as a trade, we monitor that Signal as we suggest your do, against our absolute return bogy.
Then what? If we lose more than our bogy, we EXIT the trade. If we are making more than our bogy, we HOLD the trade. Makes sense. That’s how we win considerably more per trade than we lose, as Our Results show.
Absolute Return Benchmarks (Bogies) Matter
Absolute Return Bogies matter to us and they should matter to you as an investor. By tracking how you are doing against your goals, leaving the markets aside, you’ll lose less with this approach. And losing less is a good thing.
Who’s Signals Matter? Never Heard of Us?
No worries. Signals Matter is an informative website intended to make you a better investor. Our Signals Watch in particular is a weekly publication of Signals Matter that showcases individual stocks and exchange traded funds that meet our rigorous technical and fundamental criteria for investment, including our absolute return bogies.
Why is Signals Matter important to you?
Because our Signals Take the Stress Out of Investing
Smart investing is about living, not trading; about knowledge, not fear. That’s why we do the heavy lifting here at Signals Matter, why we Signal each trade and why we manage the risk. All you do is pull the trigger, if you or your advisor are so inclined.
We built Signals Matter because we know that almost no one outside of a professional investment platform has the time, interest or resources to select, combine and derive sophisticated trade Signals as we do from our wide, essential spectrum of technical and fundamental filters.
Simply Condensed
Yet we know as well that anyone, including you, can deploy these tools if properly and simply condensed to an unpretentious and user-friendly dashboard of Signals.
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