This world seems to be one where benchmarking is routine. We always want to know where we stand relative to others or where our team ranks or how well a school’s education is ranked relative to its peers. Benchmarking gives us a basis for making decisions and this isn’t any different in the world of investing.
Sports tend to be a very common place for people to benchmark, especially how well their team is doing relative to the competition. Being a baseball fan, more importantly an Atlanta Braves fan, the best way to open up this discussion is with a look into how benchmarking works in baseball.
The Braves are part of the National League East division. They have four other teams in the division with them (the New York Mets, Miami Marlins, Washington Nationals and Philadelphia Phillies).
Every game in baseball matters, but because we must win our division (excluding the wild card for this comparison) to go to the playoffs, we (Braves fans) are always interested in how the other teams in our division have done each day. We are benchmarking ourselves (our team) versus the competition to see where we stand (one game back or two games ahead, etc.).
We also have another team in Atlanta: the Atlanta Hawks are our professional basketball team. They also play in a division in which they need to do well in order to get to the playoffs. Their league consists of teams such as the Miami Heat, Washington Wizards, New York Knicks and Philadelphia 76ers. Hawks fans track the performance of these other teams relative to the Hawks.
Being a Braves fan and seeing a headline such as “Miami Heat are Red Hot” means absolutely nothing to me, but a headline saying “Miami Marlins are Jumping Out of the Waters” would have an impact on me and my team because that’s a relevant headline to the team most important to me—the Braves. After reading the before-mentioned headline, I would look to see how the Marlins are doing and then compare them to how my Braves are doing, but I wouldn’t give the Miami Heat headline the time of day.
Sports and investments have many similarities. So, currently my individual investment philosophy is growth investing, given my current stage in life. I want my assets to be higher next year than they are at the beginning of this year. To do this, I am investing in stocks thus, a headline such as “Stocks Soar” or “Stocks go Sour” has a huge impact on me and I will look deeper into those headlines to see how it impacts my situation.
If I was nearing retirement or in retirement, I would be invested in income oriented investments such as traditional fixed income, MLPs, royalty trusts, closed end funds, etc., thus, the headlines such as “Stocks Soar” or “Stocks Go Sour” should be as relevant to me as the headline “Miami Heat are Red Hot” is to a Braves fan… not relevant at all. A headline that says “Yields Fall” or “Income Investments Breakthrough” should be of great interest to me because those are relevant benchmarks for my investment strategy.
With the abundance of information and ease of access to information these days, too many people are paying attention to irrelevant information for their investment strategy. This leads to people making decisions that are in complete contradiction of longer term goals. Despite seeming to be prudent, these decisions tend to be detrimental longer term.