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How Do You Measure Success


One of the key questions we ask clients before investing is, “how will you measure success”? The answer to this question helps create a powerful decision-making map and review process for the advisor and yourself.


We generally find there are 4 key Dimensions to this question, which can drastically change your investments and planning experience. The dimensions are Planning, Diversified Benchmark, Concentrated Benchmark and Time.

The first dimension...Planning, is the key element to create overall success when done right and with clear expectations. Therefore, our preferred method of measuring success is against your own planning benchmarks. It is typical for most people to judge success by the advisor and managers ability to deliver the planning need such as income and/or long-term return needed to satisfy a specific plan all wrapped within your targeted risk and tax thresholds.

The second dimension...Diversified Benchmark is a slight deviation from the first dimension described above. We create a dual focus not only on your plan but also on making sure we compare favorably to an appropriately diverse benchmark. This may be accomplished looking at multiple benchmarks or a single mark that includes multiple asset classes. This can be an effective way to maintain a diversified portfolio for meeting the plan long term while maintaining a relevant shorter-term mark to compare.

The third dimension...Concentrated Benchmarks is often the most dangerous and most followed. It is dangerous because it is vastly different than a diversified benchmark. Unfortunately, it is most followed because it is highly published in the nightly news and media. Examples include the S&P 500 (all US large cap), The Dow Jones (30 Largest US companies price-weighted), and the Aggregate Bond Index. The danger is certainly not in the index itself. We have no issue owning 100% all large cap stocks if it meets your plan and desires. The danger is in the emotion created during comparison. This emotion can lead to poor decision-making that may hurt your long-term plan. A properly diversified portfolio will likely have exposure to investments well outside the benchmark. Examples may include international, small cap companies, or bonds dependent on the plan. Diversified portfolios can disconnect at times from a concentrated benchmark. Sometimes it disconnects above and sometimes below...but either way, it can create evaluation issues in measuring success.

The fourth dimension...Time is what connects and changes all the dimensions. Given enough time...10+ years, we would expect a diversified portfolio to meet planning objectives, diversified benchmarks, and measure appropriately against concentrated benchmarks. A full business cycle or two will generally wash away the short-term noise that creates any disconnect from long-term objectives. However, over a short period of time, we can and will see disconnects both positive and negative against various marks. The question becomes, how will you react when disconnects occur? What emotions will you feel and ultimately....How will you measure success?

If you measure success based on the plan and do not concern yourself with a comparison to monthly Dow Jones returns, then your portfolio should be designed in accordance.

If you watch the Dow or S&P 500, for examples, on a monthly, or even daily, basis and you are subject to making decisions or experience emotions as a result, perhaps your portfolio should simply be designed in a way that places an emphasis on correlation to the benchmark.

Perhaps you understand the value of diversification because you have some risk concerns and understand a concentrated approach may not be the best approach for you. Work with your manager and advisor to find the correct benchmark(s) that align with your financial plan. Many solid benchmark exist that can help show both a plan objective and what is happening in the diversified marketplace.

How you measure success will be key to your advisor relationship. Having a proper framework for measuring success will help keep emotions better in check. We find the less emotions involved with investing, the greater your odds of success will become.

If you get a chance, spend some time thinking about what dimension you prefer for measuring success and discuss with your advisor. I am sure they will greatly appreciate it.

Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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