Curse of the Benchmarks (04-18-16)
How to Undo Your Retirement Plans
We love academic papers. Recently we came across a paper from the London School of Economics entitled Curse of the Benchmarks. In short, the paper concludes that the benchmarking of investment manager returns to short-term market performance can lead to underperformance and even the continuation of market bubbles.
The benchmarking issue of most concern to the authors is the short-term nature of performance evaluation versus the benchmarks. While investment managers need to perform, measuring the short-term results to standard benchmarks, like the S&P 500, ignores the long-term nature of some of these strategies.
Plus, what benchmark is best? What if the benchmark is down five years in a row? What if the benchmark has no return for ten years (S&P 500 2000-2010).
And this is the trap for investors. Changing investment managers during a period of short-term underperformance versus a benchmark, not versus their goals.
In our view, all investment systems regardless of flavor (value, small cap, growth, buy and hold) go through periods where they're killing it and periods where they underperform. Our preference toward our portfolios is the risk control features that seek to limit large losses. This allows us to build more consistent returns to help manage long-term financial goals.
Meeting and beating your goals is far more important than any benchmark!
If you have any questions regarding your investments, please Contact Us today.