It is not uncommon to hear brokers and others in the financial world talk about investment “outperformance.” Beyond the reference to broad categories of investments “outperforming” others, e.g. small stocks “outperforming” large, value “outperforming” growth, the term “outperformance” should have no place in the financial planning lexicon.
The purpose of investing, the sole purpose, is to achieve your goals, not to “outperform” some benchmark or metric. Rather than “outperformance”, real life financial outcomes matter most.
Ultimately, the deciding factor (as numerous studies by Dalbar, Morningstar, Vanguard and others attest), between achieving financial planning goals, or not, is investor behavior. The subtle problem with focusing on “outperformance” is this shifts your gaze from something that you can control (inputs), to something that you can’t control (performance). This focus can easily devolve into a destructive malignancy with an emphasis on “shiny objects” instead of financial planning outcomes.
We have developed a tool called The Personal Wealth Benchmark™ that concentrates on four primary inputs: saving rate, investment allocation, time, and behavior. These four inputs ultimately determine financial planning outcomes. If you need to save $50,000 per year to achieve your financial life goals but only save $20,000, investment performance will not save the day.
Investors who cling to “outperformance” like an infant’s favorite blanket believe that the future somehow can be forecast. You see, “outperformance” presupposes that you guessed correctly. When you try to predict the future, you are relying on the rational part of the brain, the prefrontal cortex. As soon as unplanned events or fear enter the picture, however, another part of the brain that is emotionally focused, the amygdala, takes over. The end result is your built in biases and emotions cloud your reasoning. This is widely understood, but some investors think they can simply “outsmart” brain science.
Seeking “outperformance” instead of financial life outcomes is very simply a gambling mentality. Even if for some fleeting period “outperformance” is achieved, it won’t persist. Seven or eight decades of academic evidence and research make this clear. Ready to change your focus? Ready for a real conversation?