Imagine a cricketer coming in to bat, and on reaching 28 runs, taking off his helmet and waving to the crowd as if he had hit a century. He did it because his batting average till that point was 27.6 and he had set himself a target of exceeding that average. So scoring 28, he felt he had succeeded.
Not about cricket: That was a joke. However, it was not a cricket joke but an investing one. No batsman in the world would celebrate a paltry score, but there are plenty of investment managers who would. Some managers think if they have exceeded any given measure of average performance then they have achieved what they set out to do for their customers.
This thinking has permeated down to the customers as well. As a saver, what is it that you would have set out to do? To beat an index or some average? A lot of investors feel that as long as they have done that, they have achieved something. This is further reinforced by the media and analysts.
Which race are you running? What is the real benchmark that an investor should follow? What should this be based on? The self-evident answer is something that aligns with your own needs. ‘Need’ here encompasses the way you would invest as well as what you eventually expect from that investment. I looked up the investment performance of monthly SIPs in equity funds on Value Research Online and found that almost every fund had beaten the public benchmark.
Having said that, the only benchmark that matters is one that is based on your needs. A general benchmark makes no sense. How much money will you need in the future? Are your investments on track to achieve the target? Did you actually achieve the targets in the past? The answers to these questions, are all that matter. If the answers are mostly in the negative, then it doesn’t matter if your investment beat the fixed deposit rate or the Sensex. That’s not the race you were running.
Savings and investments are about having an idea of the amount one will need in the future, then investing for it, and then knowing, en route, whether one is going to get there. Unfortunately, there is no easier alternative.
The author is the Founder and CEO of Value Research