“Bring along your Cadillac … leave my old wreck behind.”
— from “If You’ve Got the Money…” as performed by Willie Nelson
Years ago my husband coached our boys’ youth baseball teams and would lug gigantic, clay-caked duffel bags of bats and balls around in the back of his well-worn Oldsmobile. Neighbors, most of whom drove brand new cars, would frequently say to him, “When are you going to trade that thing in and get something nicer?”
Well, a new car would have gotten dinged up and dirtied pretty quickly. Plus, his old car ran fine and was paid for. So the payments we would have incurred had we purchased a new car then went toward savings, investing and college funds. When people laughed about his car, my husband used to smile and say, “It gets the job done for now.”
Keeping up with the Joneses is a powerful emotion, in both purchasing autos and portfolio performance. Relative return, which is how most of the investment world judges their performance, is defined by how your investment accounts perform compared to a benchmark. Absolute return is defined by how your investments fare compared to zero. In other words, are you making or losing money, regardless of what any one market does? Hedge fund manager and author Seth Klarman, whom Warren Buffett once said is one of the few people he’d ever let manage his money, focuses solely on absolute return. Klarman will not even acknowledge other benchmarks. Used copies of his book sell on eBay for $1,500.
In a rare speech in 2009, Klarman said “We think wealthy individuals and established institutions, because of their risk aversion, are actually interested in absolute returns … If you’re focused on absolute returns the idea of losing people’s money becomes fairly abhorrent and if you focus on relative returns you’re happy with losses as long as you lose less than everybody else … The idea of sending a letter saying ‘Dear client, the markets were down 30 percent. You were down 28 percent,’ would make us sick. Your goal is not to lose less; your goal is to make money all the time. Protect capital on the downside and still do well enough on the upside.”
From peak (October 2007) to trough (March 2009), the S&P 500 lost more than 50 percent. Beating that benchmark though, even handily, is nothing to shout about. No business owner, for instance, is happy losing money simply because he lost less than his competitor down the street.
If you’re retired or nearing retirement, chances are that you judge your portfolio performance by absolute return results, whether you know it or not. Most retired investors want one thing: to move steadily toward their financial goals, regardless of how their accounts performed versus a benchmark. Forward progress is the goal.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.