I talk to a lot of financial advisors.
Normally the conversations are about their business and how Potomac manages money. The typical questions revolve around our risk reduction techniques, asset allocation, track record and our overall investment philosophy.
We work with a lot of smart advisors who ask a ton of probing questions.
There is one line of questioning from prospective advisors that makes me cringe.
-How are you doing YTD?
-How was your performance last year?
Now hear me out.
Of course, when looking at any investment you want to get the entire picture. However, when the lead in question is entirely about short term performance it’s a major red flag that the relationship will likely fail long term.
If a performance track record and a client’s plan spans decades, short term performance is meaningless especially when short term performance can be so deceiving.
Calendar Year Returns
On our fact sheets we report calendar year returns and I wish we didn’t. I know it’s the norm for our industry, but it rarely is something that is in the client’s best interest. Investors live their lives dynamically with different cash flows and starting positions. In a previous post, we talked about how much starting positions matter.
Side Note: In terms of behavioral investor mistakes, my two biggest pet peeves are calendar year returns and the improper use of benchmarks.
The current market environment is a perfect example of how the short termism of calendar year returns can be misleading.
Assuming the S&P 500 TR is your market proxy of choice, let’s look at the last two calendar year performance numbers.
Yes, the market is up almost 32% on a calendar year basis but… ???