We need a benchmark

Setting a goal

We’ve been analyzing a bunch of fund options from different investment categories in the last few weeks. While that information is helpful, it’s time that we set a more refined goal for ourselves.

Obviously, the goal of investing is to make money. We also expanded into assessments of risk to balance that return. Otherwise, if we just chase the biggest return possible we would probably be all in on Bitcoin and Tesla.

One common phrase in investing is that “you can’t beat the market.” This has led to the rise of passive strategies that just index a broad-market portfolio as opposed to active strategies that select particular stocks or investing styles.

I think this passive versus active narrative is useful for financial journalists who want to evoke some kind of horse race excitement to investing but, in reality, it’s not like we are bound to one side or the other. We can use a strategy that benefits from the power of passive index funds while also using our knowledge and, yes, instincts (read: experience) to make active allocation decisions.

That helps us with a better defined philosophy but what is our real goal with all that? If we want to beat passive investing we need to beat a passive benchmark either from a return or risk perspective - I can’t think of a much better benchmark than the S&P 500!

Putting these random thoughts together, we want to introduce some active allocation decision making based on broad passive, low-cost funds to either equal or exceed the return of the S&P 500 while equaling or having less risk than the S&P 500. That’s our goal - so, analysis from now on should reflect that and always keep it in mind. And, we will see some interesting ways how this new goal changes things for us going forward.