By Curt Knorr, CFA
Director of Investment Research

Today, successful investing sounds like an oxymoron. For many people, the last 30 months have been a very unsettling time, especially for those whose investment accounts provide their sole source of income.

During the market run up from 1995-1999, we cautioned that the market returns were much greater than normal and that a return to reality was inevitable. The duration and magnitude of the current market pullback surprised all of the experts.

The experience of the last 5 years (2½ years of really good returns followed by 2½ years of really bad ones) begs the question – how do you measure success in investing? Let’s look at three ways to answer that question:

Compare the return of a mutual fund or money manager to an appropriate index or benchmark. The Investment Research Department at Ronald Blue & Co. performs ongoing comparisons for all of the funds and money managers on our approved list. Every investment vehicle has a stated benchmark that is an appropriate standard against which performance should be measured.

Compare the return of a mutual fund or money manager to an appropriate universe of similar managers. Market cycles exist in which beating an index is very difficult and at other times, outperforming an index is relatively easy. By comparing our funds and managers to their asset class and investment peers, we get another perspective on our portfolio managers’ performance.

At this point, an illustration may be helpful. If Fund XYZ declined 10% during the first nine months of 2002, that does not sound like good performance. On the other hand, if the S&P 500 Index declined 13% and the fund’s large cap peer group declined 15%, then on a relative basis, that manager was successful.

Compare the return of the overall portfolio to the targeted return originally stated in the client’s objectives. Investors who compared their investment results at the end of 1999 would have felt that their investment program was ahead of their targeted objectives. If someone made their initial investment in 2000 and looked at today’s portfolio results, they would conclude that their results were unsuccessful. In hindsight, the fact is that the initial investment in 2000 was made at the beginning of a market correction and short-term results are being measured against long-term objectives.

We refer to this phenomenon as “end period dominance”, meaning that your investment performance is dominated by the end date that you choose. Comparing overall performance to a targeted return can be misleading depending upon the time period chosen.

This may be a good time to sit down with your client manager and review your objectives and develop an Investment Policy Statement (IPS).

By all of these measures, the funds and portfolios recommended by RB&Co. have performed well through the market downturn. Although these comparisons are important to financial analysts and to institutional investors, they may not comfort a retired couple who are wondering whether their nest-egg is going to run out before their years do. Knowing that you have the world’s best portfolio managers in every asset class working daily for you is little comfort when your investment account continues to lose money. We understand that feeling.

So what is another measure of success? To answer that question, we must look into the area of financial planning. Success can be best defined as having sufficient resources to meet needs and desires at the time that you need them.

For many, even the recent market downturn has not placed their long-term investment objectives at risk and no significant changes are necessary to their financial plan. The worst-case scenario for these individuals is that, should the market not recover for a long time, there will be fewer assets left to distribute through their estate to heirs or charity and less taxes to pay to Uncle Sam. In other words, it is not a catastrophe.

For other clients, the decline in investable assets over the last few years has placed their goals in jeopardy and some short-term adjustments may be required. For example, retirement at age 55 may be pushed back a few years or that vacation home may not be affordable. Not catastrophic, certainly disappointing, but the portfolio has not suffered a total loss.

So what does successful investing look like? One definition is acceptable performance relative to a peer group or market index. A second definition is an investment portfolio that, within the financial planning context, still allows one to achieve one’s goals and objectives. Perhaps this would be a good time for RB&Co.’ s investment clients to speak with their client manager and discuss their overall financial planning objectives.