229 – The Flaws of Comparing Investment Returns

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The Flaws of Comparing Investment Returns

Stop comparing investment returns to others and start doing this instead.

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“The grass is always greener on the other side” is a famous phrase that far too many people succumb to, especially when it comes to comparing their financial situations and investment returns to others. Shawn and Matthew highlight the importance of not comparing your investment returns to others since every financial situation is unique based on household, expenditures, goals, and more!

They cover why each investment portfolio is unique, and why investors should focus on the importance of understanding one’s financial goals and meeting those. Some key questions to consider after listening are: “Who owns it?”, “How much is enough?”, and “Are your next stewards chosen and prepared?”

Mentioned In This Episode

Shawn (00:18):
Welcome back to another episode of Christian Financial Perspectives. My name is Shawn Peters. I’m joined today by Matthew Barovecchio. Today we’re going to be covering the flaws of comparing investment returns. This was written by Bob Barber, who cannot be here with us today, but we are stepping in together in his stead. And we’re going to start with a couple opening scriptures. I’m going to start with Exodus 20:17, “You shall not covet your neighbor’s house or anything that belongs to your neighbor.”

Matthew (00:45):
Fantastic. And then another one we have here, Hebrews 13:5, “Keep your lives free from the love of money and be content with what you have,” -=which is obviously very important. And when we’re talking about comparing,

Shawn (00:58):
Exactly, comparing investment returns, that’s it. Probably a good one there. So our core message today, comparing investment returns with others is fundamentally flawed. Doesn’t matter who you’re comparing to because everyone’s financial situation is unique and we’re going to give you some reasons why. So key differences between investors. Why don’t you take the first one?

Matthew (01:20):
Yeah, different financial foundations. So when we talk about all that goes into one’s situation, we’ve got different time horizons, they have different net worths, they have different debt levels and goals with that debt, different cashflow needs, like expenses. So, all of those things are influences amongst investment returns.

Shawn (01:41):
Alright? So it’s kind of your financial foundations, if you will. Number two, different personal circumstances. So age, health conditions, family size, and specific family needs. So obviously whether you’re in your twenties or fifties or seventies, obviously that’s going to change a little bit on your personal circumstances, your health conditions, you could both be in your seventies, but if one person has minor health conditions versus more expensive ongoing chronic conditions, that’s going to make a big difference if you have a son or daughter or grandkid maybe that you’re helping with. But if you’ve got someone that’s special needs, whether that be mental, physical, they’re obviously going to change what you might need to consider from one investor to another.

Matthew (02:27):
So all very different. Third one here is different goals and values. So this covers investment objectives, giving goals, tithes/offerings, and giving, like that different moral beliefs and estate plans and the investment objectives. I think of those is really the key one that we need to focus on because amongst that, you can talk about risk tolerance and the result of how you have your portfolio set up, which when you’re looking to compare investment returns, you want to make sure that you’re doing it apples to apples, which again, everyone’s is different. So don’t compare.

Shawn (03:04):
Exactly. Number four, different asset allocations. So real estate, business interest, and risk tolerance levels within that allocation, because the allocation’s going to be different from one investor to another. If someone is capable of handling a 20% drop and their response, if anything, is, “Stay the course,” or, “Hey, I have some extra cash, I want to go and invest now.” Okay, they’re going to have potential higher long-term returns because they’re able to handle a higher level of risk versus someone who, hey, if it drops more than 5% in a six month time period, they’re freaking out.

Matthew (03:40):
Right, exactly.

Shawn (03:41):
And again, there’s nothing wrong with either investor, but that is definitely part of that. And what goes into the asset allocation.

Matthew (03:49):
Right. Yep. Last one here, different portfolio types. So conservative versus moderate versus aggressive. Comparing these makes zero sense. They’re not the same. They’re not the same. Someone who is more conservative oriented should not be in an up market looking at the S and P 500, as an example.

Shawn (04:11):
That’s not what they’re invested in.

Matthew (04:12):
Not what they’re invested in. Precisely. Yep.

Shawn (04:14):
Exactly. So the real question with all this then is how much is enough?

Matthew (04:20):
That’s right. Yep. So there’s three critical questions that as Christian investors we should be focused on. First off, who owns it?

Shawn (04:29):
God owns it all.

Matthew (04:30):
God owns it all. In 2 Chronicles 29, it tells us how much is enough, and then are the next stewards chosen and prepared? So this concept of how much is enough is something I want to spend a moment on.

Shawn (04:43):
But before we do, can you answer real quick, are the next stewards chosen and prepared? Just for those watching this?

Matthew (04:48):
What does that mean?

Shawn (04:49):
Yeah, just real quick, what that means.

Matthew (04:50):
Yeah. So the summary here is looking at multi-generational perspective. So individuals who are in a position where their investment portfolio is going to outlive them, they have more than they need in order to live the remainder of their lives. And so, where are those assets going? Who’s going to inherit those assets? And are those individuals who will be receiving them prepared? Now, that can oftentimes be family members, children, grandchildren. Sometimes it’s a charitable organization, a Christian organization. You may assume that your local church or some other Christian organization has the wherewithal to accept a large donation. But you probably want to check and make sure first.

Shawn (05:41):
Just because if you’re intending on donating.

Matthew (05:43):
Yeah, exactly.

Shawn (05:45):
Okay, great. So how much is enough?

Matthew (05:46):
Enough? Yeah, how much is enough? This is a real critical question because it’s not about investment returns only, it’s not about how much are you making in your portfolio, because that’s just one of several components. The real question is, are you on track to meet your investment goals? What’s your probability of success? How much is enough from an earthly perspective, very much focused on will you have enough assets to last you the remainder of your life. From an eternal perspective, it has the focus of capping what you need and then maximizing your generosity above and beyond that. But it really brings to light all of the different things that go into one’s true measure of success, which is will you meet your goals? So investment returns is just a part of that. The other side of the coin can be expenses.

Shawn (06:40):
Right.

Matthew (06:41):
So if we’re going to talk…

Shawn (06:42):
Because to answer that question of are you going to be successful? What’s the probability of success in meeting your goals? Well, yeah, you got to know what are the expenses now? What are the expenses you expect in retirement? And so if you’re comparing returns, which we’re saying you probably shouldn’t be, that’s kind of the point here. But if you are, well, why not also compare monthly expenses and budget to whoever you’re comparing to with your neighbor?

(07:06):
Because if your expenses and your budget are significantly lower than your neighbor, well then again, does it really matter if they may or may not be getting better returns? Yeah, no, it doesn’t. It doesn’t matter. And another one would be charitable giving. What’s the difference between, are they giving a lot more than you? Are you giving a lot more than them?

Matthew (07:28):
And it sounds silly, like, oh, why would I go to my neighbor and talk about how much I’m giving, right?

Shawn (07:34):
That’s right. But then why would you also compare to how much they’re making?

Matthew (07:36):
Bingo. Exactly.

Shawn (07:37):
They’re two sides of the same coin.

Matthew (07:38):
Exactly. That’s exactly it.

Shawn (07:39):
So do you have some examples of this from you’re over 20 years in working with clients?

Matthew (07:44):
Yeah, absolutely. So I’ve seen clients who have say $400,000 in their investment portfolio, and they are fine. They’re not stressed out because their expenses are such that they’re barely drawing from their portfolio and their assets that they’ve accumulated are going to outlive them. So this, how much is enough topic is very real.

(08:07):
Are the next stewards chosen and prepared is very much a question that we dive into. On the flip side, I’ve known individuals who have over $2 million in their investment portfolio, and they’re stressed to the max because their expenses are such that they probably aren’t even going to make it to age 80 before they run out of money. And so, this idea of chasing investment returns and comparing it to others is one, not even the question; two, it’s not even the full picture. It’s one of multiple things. So it really comes back to the heart issue behind it and making sure that we are not coveting, making sure that we’re not allowing the earth that we are surrounded by to influence us to align with the American culture, which is very much focused on greed and fear and wealth, wealth, wealth.

Shawn (09:00):
Right? Yeah. So in conclusion, stop comparing and coveting.

Matthew (09:05):
Stop it. Just stop it.

Shawn (09:07):
Focus on your unique probability of success rather than how you measure against others. I know when we’re doing financial planning with clients that you put in good data, you get good reports out, and we can run all the fancy things, the Monte Carlo analysis, and like, oh, there’s a 20% probability of you falling here. Oh. And it’s like you kind of look at those different scenarios and say, Hey, what’s your probability of success?

Matthew (09:29):
Bingo.

Shawn (09:29):
And so, okay, you did the work, so stop comparing and coveting. And in closing, just to draw from two different scriptures, one Timothy 6:10 where it talks about, “For the love of money is a root of all kinds of evil.” And then in Matthew 6:21, “For where your treasure is there your heart will be also.” Now, that’s not the full scripture for each of these, but just those are the two I think we should close with.

Matthew (09:53):
Sounds great.

Shawn (09:53):
Any final words?

Matthew (09:54):
No, I think it’s fantastic.

Shawn (09:56):
Yep. Alright. Thanks so much. Well as always, thanks for joining us and God bless.

Matthew (09:58):
Yep. God bless.

[DISCLOSURES]

* Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.