Comparison is the Thief of … Financial Health

henFinancial Health –  “We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.”

Dan Ariely said it well in his book, Predictably Irrational: The Hidden Forces That Shape Our Decisions. When times are uncertain – and boy have they been – we tend to compare ourselves and our actions to others. And that leads us to make financial mistakes.

Because even though times are uncertain, we have to be certain about our life goals. That means we stop relying on easy comparisons to gauge our success and make our financial planning decisions.

As humans, we just love to compare. We compare our cars to our coworkers’. Then, compare our wardrobes to our friends’. We compare our homes to our neighbors’. But like many of our markers of success, these things are irrelevant and have little bearing on whether we’re on track with our financial goals.

An Irrelevant Yardstick

If you’ve fallen into making these kinds of comparisons, join the club. It’s in our nature. But we have to guard against comparing our insides to others’ outsides. These kinds of simplistic comparisons gloss over important details.

For example, say you refinanced your house at 4%. You’re stoked – until you learn that your brother got a 3.75%. Obviously, he’s in a better position. Seems simple enough, but it misses the big picture.

On closer inspection, you learn that your brother paid closing costs. You didn’t. The monthly savings of the 0.25% difference would cover the closing costs after 10 years. But your brother only wants to stay there for five.

In this scenario, the lower rate ends up costing more. And if you look at the big picture using relevant yardsticks, you can see that.

And nowhere is this kind of irrelevant benchmarking more rampant than in investing.

Another example: Let’s say you’re in retirement and your portfolio is well-structured. Since COVID began, you likely underperformed the S&P 500. Maybe you’ve outperformed YTD in 2022. So what? What the S&P 500 is trying to accomplish with its money is not the same as your goals with yours. How you perform against the S&P 500 has little relevance to your financial well-being.

Many factors come into play when assessing whether your portfolio is working for you — funds available for investment, where you are in your financial journey, when you want to retire, your level of comfort with risk. These factors differ widely between investors.

Your Portfolio is Your Business

Revenue and profits rise and fall. It’s business 101. The reality is, the trajectory isn’t always upward. There are peaks and troughs, and business owners understand this. They don’t run their businesses to maximize returns at all times. They continue running their businesses with continuity and longevity in mind. And these businesses provide them with the lifestyle they want.

Your portfolio is not unlike a small business. This business comprises ownership (investments) in many real, functioning businesses. If your strategy is to maximize gains in all investments at all times, heedless of the economic climate, you’re gonna get burned.

Not to mention, just as your coworker’s car has little bearing on your own car budget or transportation needs, the performance of someone else’s portfolio has no relevance to your own. They’re running a bike shop. You’re running a bakery. It’s apples and oranges, and it makes no sense to compare.

Your portfolio should provide you with the lifestyle you want.

So, don’t fall into the trap of irrelevant comparisons, holding your portfolio up against someone else’s and wondering why they don’t look the same. Especially over short periods. It will tell you nothing about the soundness of your investments or their efficacy in moving you toward your life goals.

What are your relevant benchmarks? Well, that depends on your financial goals. If you’d like to improve the health of your portfolio using personalized measurements that matter to you, reach out to us at info@nestfinancial.net. At NEST, our mission is to make sure your investments work in service of your dreams and goals, and we love making the process simple for our clients. Learn more about our investment management services and Sean’s process.

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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.