Comparison is the Thief of ... Financial Health

Financial Health: What Really Matters for Your Portfolio

“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, Predictably Irrational

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.

An Irrelevant Yardstick

As humans, we just love to compare. We compare our cars to our coworkers’, our wardrobes to our friends’, 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.

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.

The Investing Trap

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

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 year-to-date in 2022. So what? The S&P 500’s goals aren’t your goals.

The real question is: Is your portfolio helping you meet your goals?

Many factors come into play when assessing whether your portfolio is working for you — funds available for investment, your financial phase, retirement timeline, and risk tolerance. These vary widely from person to person.

Your Portfolio Is Your Business

Revenue and profits rise and fall. It’s Business 101. The trajectory isn’t always upward. There are peaks and troughs. Business owners get this. They don’t run their operations to maximize returns at all times. They plan with continuity and lifestyle in mind.

Your portfolio is no different.

It’s ownership in many functioning businesses. If your strategy is to maximize gains in every investment at all times — regardless of the economic climate — you’re going to get burned.

Just like your coworker’s Tesla has no bearing on your vehicle budget, someone else’s crypto-heavy gains shouldn’t steer your financial ship. You’re running a bakery. They’re running a bike shop.

Instead, consider how your portfolio can provide the lifestyle you want.

And if your financial goals include diversifying through commodities, here’s how commodities can strengthen your portfolio.

So What Should You Compare?

If your investments aren’t meeting your expectations, step back and ask: are you using relevant benchmarks?

If you're trying to improve your saving habits or planning your retirement, your yardsticks must reflect those goals — not arbitrary index comparisons or headlines.

At NEST, our mission is to help you align your investments with your goals, using metrics that matter. If you’re ready to optimize your strategy, email us at info@nestfinancial.net.

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DISCLAIMER: This article is for educational purposes only and does not constitute financial planning or investment advice. For personalized guidance, reach out to us at info@nestfinancial.net.

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