Trending
You are reviewing your investment performance from last year. You realize your investment portfolio gained 12%. Are you happy with that?
Perhaps your answer is “it depends.” What if I told you the stock market was down 5% last year? You would most certainly be thrilled. But what if you learned that the S&P 500 was up 24% last year and you were up only 12%? Would you be happy?
Because that is exactly what what the market did in 2024. And if you follow a truly diversified strategy (not just owning different investments, but different philosophies/strategies), you likely underperformed the S&P 500 index.
Relative Performance & Anchoring
By the time financial advisors sit down with their clients to have a review, most investors have an idea how markets performed. The anchor (expectation) has been set – and that anchor is heavily influenced by whatever the media is reporting the most. Unbeknownst to investors, they are being influenced by a combination of anchoring, recency, and availability biases.
Since the media most often reports on the S&P 500, investors may be expecting performance around that 24% number. And if their performance was materially less than that, the automatic and immediate feeling is disappointment. This means that advisors who build diversified portfolios may have some clients disappointed with their performance in 2024, even if it exceeds their stated goal. But it doesn’t have to be that way – if the correct action is taken.
Priming the Mind for Performance Evaluation
As I mentioned, clients seldom come in with no clue on what has happened in the markets. The media has already primed their mind for some expectation, whether they realize it or not. What we need to do is prime (or re-prime) the mind with unbiased facts and constructive perspectives. If we do that before we begin the review, we can greatly influence how they view the information, how that makes them feel, and ultimately how they respond to it.
My recommendation is that immediately before going into the portfolio review portion of the meeting (after discussing family, goals, life…whatever) you share with your clients the performance of a few major indexes that are represented in the kind of portfolio they have. For example, I have found success using the below for current reviews:
2024 Major Index Returns
- Bonds 1.5%
- S&P 500 24.8% (1/4 return NVDA, 1/3 Mag 7, 1/3 negative)
- Small 11.8%
- Int’l 5.4%
What I did was briefly discuss the performance of each index. And when it came to the S&P 500 I mentioned that its performance was very concentrated. NVDA made up 25% of the gain in 2024, the Magnificent 7 made up 33% of the gain, and 1/3 of the companies in the S&P 500 index were actually negative in 2024. I reminded the client that we follow a diversified strategy in line with their risk preferences, so the returns they achieved were a mixture of all those indexes – no matter how much we wish they would have been like the S&P 500.
The result of taking a few minutes to prime their mind with investment facts is a complete change of expectation. They are now free to be pleased with their performance, irrespective of the S&P 500, because they recognize that they would never invest in such a concentrated manner. This needs to be done, like most behavioral coaching, proactively – before you begin the performance review. Otherwise you may find yourself playing defense, and its a lot harder to control the message when you are busy defending why you underperformed…again.