Context Always Matters

Yesterday, Buffalo hit a record high temperature of 82 degrees.

Let’s say I told a random person who didn’t know where I live that the temperature in my city was 82 degrees on a particular day. They’d probably say that was a nice day.

Now what if I told them that that particular day also happened to be in the middle of October? They’d be a little more impressed. They might even assume I live somewhere warm like Florida.

Lastly, imagine if I told them it was 82 degrees in the middle of October in Buffalo, NY. Most people would say that was a GREAT day, given that the average high temperature in Buffalo on October 9th is 62 degrees.

Context always matters when comparing and evaluating. This is especially important in investing. Your co-worker’s 401k is up 16% for the year and yours is only up 2%? Good for them, but chances are they forgot to mention they have it 100% invested in something like a high risk tech stock fund. Context matters! With 100% in a narrow tech stock investment, your coworker would have taken a significant amount of risk to get that return (and that risk will likely show up at some point). They are not likely to brag when the same portfolio is down 16% or more, while your diversified portfolio helps cushion some of that risk and declines less.

Diversified portfolios are designed to dampen the ups and downs of the global markets over long periods of time. They are engineered to handle short term peaks and valleys in a way that allows you to reach your goals for retirement without having to worry about what happens in the markets each day, month and year.

As of this writing, the global stock market, as represented by Vanguard Total World Stock Index (VTWIX), is up 1.36% for 2018. The US bond index represented by Vanguard Total Bond Market (VBTLX) is down -2.40%. A blended 60% stock, 40% bond mix would be down -.14% for the year. Meanwhile, the S&P 500 as represented by Vanguard 500 (VFIAX) is up 9.31% for 2018.

If you compare your globally diversified stock and bond portfolio to the S&P 500 you will likely feel disappointed. But if you apply context to the returns of your portfolio you are likely right in line with what your expectations should be, given the returns that the world’s markets have offered this year.

Always keep this in mind when you hear someone discussing returns; people like to talk about their investment gains, but they rarely mention the risk they took to get those returns.

Your job is to remember that context always matters.

Steven Elwell, CFP®
Partner and Vice President


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