Relative performance can be relative

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In my last post, I ended by talking about relative performance. I kinda wanted to clarify a few things since I may not have been as clear as I wanted to be.

The investment portfolios I construct for client’s are (almost always) directly related to what the financial plan tells me we need to return, in order to achieve the client’s stated goals. Each situation is customizable and unique.

In the last post, I mentioned 8.9% as the hypothetical return needed. Typically, based on historical returns and plan assumptions, I will construct a portfolio of stocks, bonds, managed futures, etc. that will put us slightly above that 8.9% number.

Some people may wonder whether or not that means we’re capping the performance in the portfolio? Not at all, we’re just keeping things in line with the client’s goals.

Most of the examples I’m using in these posts are coming from the perspective of my existing client base, the sweetspot, those that are using FORMAL financial plans, clients that are NOT in the accumulation phase of their lives, like you and me.

These clients are alot older than the target demographic for this blog and are happy to know the minimum amount of risk exposure they need to achieve their life goals.

It’s not always about relative performance!

Sometimes, a client may have alot of experience in the equity markets. When the financial plan comes back and says we only need a 7.2% return, the client may be comfortable trying to achieve returns above and beyond that. Just because the client knows what kind of relative performance is needed doesn’t mean they can’t go for more, within reason (and under my watchful eye:).

Not everyone wants to maintain a lifestyle that is consistent with the one they have in pre-retirement. Some people may have more extravagant goals for their retirement, therefore, elevating the returns we need to achieve.

Part of my job, is keeping all this in perspective, creating a balance, getting to know my clients very well and counseling them on the effects of taking on more risk than may be necessary. (The last thing anyone needs is a bad financial planning experience)

For those in your 30’s and 40’s, especially those getting a late start, you will discover (using some of the ‘down home’ financial calculators) that in order to maintain your current lifestyle, 30 years into the future, that you’ll have to achieve returns higher than the ones I illustrate in these examples.

The point here is, many of you, taking your risk profile into consideration, will be looking to achieve the highest returns possible, over a very long time-frame, while maintaining a diversified portfolio of course…

Tags: Financial Planning Retirement and Now!, informal financial planning, Relative Performance