This past week saw large moves in the currency market as well as financial markets generally. In an article talking to the volatility and losses in the currency markets, the Wall Street Journal’s Jason Zweig wrote that “all individual [investors]can still choose to do what most professionals no longer can: invest for the long run without having to measure their performance moment to moment in a mad race to beat the market.” Whether you are an individual investor or an adviser, I hope that you read and understand this comment in the broader context of investing and financial planning.
If all you expect as an investor is to have your investments perform better than everyone else or a particular benchmark or if, as a financial adviser, you see your value lies only in obtaining better than market performance for your clients, then you are going to spend a lot of time being disappointed. You might be smarter than a lot of folks but you cannot control the markets or governments or nature or – the list goes on and on.
Focusing your investments solely on performance ignores many issues that are also important, including real return (after factoring in inflation, taxes, fees and expenses) and what it is you intend to do with the money that is left, and when. Another often ignored factor is the concept of investing in things you understand, fully. Mr. Zweig points out, again in the context of the currency markets, that when an investor “use[s] borrowed money to speculate in markets you don’t understand, you have taken your basic advantage and distorted it into a lethal disadvantage.” It appears all too clear to some investors today that their investing in currency markets, chasing performance and a big win, was in retrospect a huge mistake.
The concerns expressed by Mr. Zweig extend to many other investments, I believe, even some that are not as complicated as the currency markets or perhaps as risky as investing with borrowed funds. It is great to win the performance game, but it is all too real when you lose.