No one gets the market return
No one gets the market return, or ever will.
There’s a fascinating passage in “Skin in the Game” by Nassim Talib where he notes that “no one can get a market rate of return unless he has infinite pockets and no uncle points.” They can’t get them because life happens; they need money at the wrong time.
They are forced to reduce their risk because of retirement. Or, let’s face it, they panic. They take the advice of the wrong person at the wrong time because that person was hired by their bank or an asset manager, was on TV, or had some persuasive argument.
Why we need benchmarks
This doesn’t mean the investor shouldn’t aspire to make some indexes’ return. Jesse Picunko notes in Portfolio Management for Private Wealth, a great book about mixing wealth management with portfolio management “…as professional investors we need to develop a benchmark…[having a ] benchmark that you can defend as a baseline helps begin the conversation about your investment style The biggest problem I have seen with the amateur is they have no standards. This very day I have two prospective clients who think they are doing just fine but refuse to reference their account returns—or risks even—to equity markets. They are simply in denial that benchmarking their performance or risk to an index is worth their time. So long as everything is going up, this might make sense. But markets fall and industry sectors shift in and out of favor. Ignore this at your peril. Perceived cost of advice is trumping risk management.
