Financial Opinion and Insights

How To Measure Success The Right Way

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Quite often you’ll hear people talk about their stock portfolios and tell you about the returns they’re achieving; but seldom will you hear any discussion of risk management.  The closest thing you hear on television is usually when some pundit tells you that diversification means investing in two different unrelated industries.


You shouldn’t be.  There are more risks than that you should take into account when it comes to forming a portfolio strategy for your serious, long-term assets  – and let’s face it; if you’re over 50, all your money is your serious money.  What’s worth noting is that you can not avoid risk.  You can only manage it.

Here are some risks you might find familiar:

  • Market risk
  • Business risk
  • Inflation risk
  • Political/legislative risk
  • Liquidity risk
  • Interest rate/reinvestment risk
  • Currency risk
  • Market timing risk
  • Credit risk
  • Economic risk

Believe it or not, some of these risks cannot be diversified away!   If you purchased every single stock in an index, you wouldn’t diversify away market risk; you’d only replicate it!  So, some risk is can’t be diversified away.  However, ‘business risk’ can be reduced through diversification.

Most people are familiar with all these risks; but few have their portfolios constructed to optimize performance against these risks; and that’s where the rubber meets the road.

The Risk No One Talks About

Ask anyone how they compare their results to what they think they should be doing and they’ll almost always compare their portfolio’s performance to the ‘Dow’ or the S&P 500 index.

That’s their frame of reference.

For investors in the U.S., their reference is the U.S. market; and, it’s reinforced every time they turn on the television or read a newspaper.  It’s also reinforced every time they talk to their friends.  The broadly diversified, multiple-asset-class investor, however, would be in the minority in this conversation.  His portfolio will not behave the same way as the portfolio of his golfing buddies who don’t follow a portfolio strategy with the same breadth and degree of real diversification.

Do investors in Japan use the same frame of reference?  How about those in Great Britain, France, Brazil, or India?

Sound like a silly question?  Consider this:  During the ten-year period 2000-2009, the US market finished in the top 10 developed stock markets only three times and never finished higher than 3rd!  Only New Zealand finished 1st more than once!   Australia, New Zealand, Canada, Austria, and Switzerland finished in the top two more than once – Norway did it three times!   The U.S. made it to #3 only once.  It’s next highest finish was 8th![1]

Do you think the people in these countries compare their success to the U.S. market?  Should U.S. investors even compare themselves to the U.S. market? 

This is called `frame of reference’ risk.  People getting trapped into believing success is beating the market they’re most familiar with.

If the U.S. markets shouldn’t be your benchmark for comparison, what benchmark should you use?

The answer:  Your plan.

Your business plan – the one you create for your financial future – should be your frame of reference.  You’re either on-track or you’re not.   Your plan outlines where you are, where you want to go, how you plan to get there, and takes into account all the risks outlined on the slide.

And, not having one – a good one – can very likely prove to be the most expensive money you ever saved.


Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

[1] Source: Morningstar