The Trouble with Talking Performance

One of the first things we’re often asked in meeting with prospective clients is for performance data. We fully expect the question and often know it is coming. The marketing efforts of the traditional brokerage model and the financial media have conditioned us to think it’s the only thing that matters. The only problem is, they’re wrong.

We often reject the initial request for performance data as we don’t want it to cloud the decision making process for the prospective client in selecting a partner to help them plan their financial future. If someone goes into a financial planning relationship using portfolio performance as their only or even primary scorecard, it likely doesn’t make sense to even begin the conversation. We’re insistent that clients consider their comfort level with the investment philosophy, planning expectations, and overall personality fit long before secondary issues such as performance.

We don’t deny that performance is important, we just know that we have no control over it nor does anyone else. Let me rephrase that, the only control we have over a portfolio is to make sure it’s as globally diverse and low cost as possible and that it is properly allocated for a client’s needs and risk tolerance. Beyond that, seeking higher performance or constantly tweaking our investment philosophy based on market gurus, economic prediction or other forecasting is simply a waste of time and money.

This doesn’t mean we’re not proud of how our philosophy performs. As many know, our portfolios utilize funds from Dimensional Fund Advisors, one of the top-performing fund companies in the country, currently managing more than $202 billion. Some thoughts worth passing along were found in Jessica Toonkel’s December 20, 2010 Investment News article,

“Of the 39 DFA funds with 10-year histories, 33 were in the top half of performance in their categories for that period as of Nov. 18, according to Morningstar. More than half (30) of the 51 funds with five-year histories outperformed their categories for that period - not a small feat, given the market downturn of 2008. In fact, 34 of 58 DFA funds were in the top half of their category just in 2008. And the firm has some of the lowest fees in the industry – with fund expenses ranging from 0.16% to 0.9%.”

The truth of the matter is, in any time frame, about half the people “win” and half the people “lose”. Picking who those people will be in advance is impossible. The middle of that road is the average market return, but the term "average" is a bit of a misnomer. Average return does not an average investor make. The average investor, over the long run in most any time period, earns well below average market returns. If you can earn close to what the market earns at the lowest possible cost and have the discipline to stay invested through thick and thin, you will likely enjoy a very successful investment experience over a 30-40 year retirement horizon.

We don’t really earn our money by providing our client’s with excellent performance. We earn our money by keeping the focus on what they can control; staying invested, being accountable to a sensible spending plan and helping address all the other financial questions that come up on life’s path. If we can do that, our clients will continue to meet their goals.

Chip Workman, CFP®
cworkman@taaginc.com
http://taaginc.com