Creating and Evaluating Investment Success

Each year, financial journalists and bloggers write countless articles for their respective reputable newspapers and financial magazines about theories of how one might “beat the S&P” or “outsmart the markets.”

Yet despite what these so-called prognosticators would have you believe, financial advisors do not possess crystal balls to consistently beat the markets. Chasing hot stocks and timing the market often lead to disappointing results. Instead, investors should develop strategic investment plans, avoid the common investing mistakes, and most importantly, establish a personal benchmark—or required return—that aligns with their unique goals and objectives. A comprehensive approach to wealth management should involve an investment strategy that integrates tax and estate planning with appropriate investment consulting wherein a financial advisor measures the ultimate success of that strategy by its ability to achieve specific investor goals and objectives.

Moving toward a more comprehensive, goal-oriented practice of wealth management and financial advising requires an improved metric for assessing an investor’s tolerance for risk. Traditional risk profiling does not incorporate goals, the dollars required to meet them, or the time horizon. Instead of addressing the investor’s specific objectives or needs, the discussion of what might constitute an appropriate portfolio is framed solely in terms of “risk.” More often than not, this method of risk profiling simply encourages the investor to position his or her portfolio at the highest level of risk that he or she can stomach. During the economic downturn of 2008, this type of portfolio construction put many investors in a position where they took on too much risk. Because of this, many of these investors bailed on their strategy and missed the market recovery in 2009. This was a costly, yet all too common, mistake.

Another common mistake is the tendency of investors to adopt the "herd mentality," that is allowing current market conditions and emotions to dictate allocation and investment decisions. In short, a bull market can tend to make an investor aggressive (chasing returns) and a bear market can increase caution and apprehension (buy high, sell low). Investors often make portfolio decisions such as these irrespective of their goals, needs and time horizons. Emotional decision-making can have disastrous effects. The herd mentality exhibited in October 2007—the height of a bull market—led many investors to allocate large portions of their portfolio into equities simply because the market was doing well and, emotionally, it seemed to make sense to do so.

So how might an investor establish a required return and avoid some of these common mistakes? First, an investor must understand the limits of what can be controlled. No matter how much we would all like to control or consistently predict the direction of the market (and despite the fact that many claim to be able to), the unfortunate but liberating truth is that we cannot. Therefore, understanding and accepting what one can and cannot control will help ensure that investing efforts are properly aligned with goals. Focus on controlling the following:


Modern portfolio theory suggests that risk can be controlled through asset allocation. We define asset allocation as investing both across and within asset classes and styles. Historically, over short periods of time, stocks are more risky (volatile) than bonds and bonds are more risky than cash. Over longer periods, investors can be rewarded for taking additional risk.


Investors should seek out value, not just the cheapest investment or strategy. Expensive strategies should be evaluated frequently to ensure that their costs are justified.


If investment managers do everything right, investors will pay taxes. However, investors should be tax aware and efficient where possible.

Second, an investor must develop a plan based on his or her unique goals and objectives. Investors should create their own personal benchmark or required rate of return that will provide guidelines to help them achieve those ambitions. This personal benchmark can and should be used to measure success. How?


What do you want and need your money to do for you? What is most important?

Quantifiable Dollar Amounts:

How much will you need to achieve your goals?

Time Horizon:

What are your timelines or deadlines to achieve your goals?

After addressing these questions, investors should be able to synthesize both a required rate of return and an asset allocation policy designed to achieve that return. As a byproduct, this will position the portfolio at the lowest level of risk necessary, an inverse approach to that which would position the investor at the maximum level of risk that he or she can stomach. While this approach may not always produce outsized returns, it should help avoid outsized losses. Periodically, investors should reassess their goals, review the quality of their investments and rebalance when appropriate.

An objective and trusted advisor should help one develop and implement a plan as well as assist in keeping the plan in line with goals to ensure a high probability of success. As the last few years have shown, sometimes the most inscrutable strategies and investments are not the most appropriate, only the most complicated. Wealth is built over time with patience, discipline and consistency.