Wall Street Wants You To Compare

Comparison is the root cause of more unhappiness than anything else. Perhaps it is inevitable that human beings, as social animals, have an urge to compare themselves with one another. Maybe it is because we are all terminally insecure in some cosmic sense.

Let me give you an example I discussed with Adam Taggart at Thoughtful Money last week.

Assume your boss gave you a new Mercedes as a yearly bonus. You would be thrilled until you learned everyone in the office got two. Now, you are upset because you got less than everyone else on a "relative" basis. However, are you deprived on an absolute basis of getting a Mercedes?

Comparison-created unhappiness and insecurity are pervasive. Social media is full of images of people showing off their lavish lifestyles, giving you something to compare to. No wonder social media users are terminally unhappy.

The flaw of human nature is that whatever we have is enough until we see someone else who has more.

Comparison in financial markets can lead to awful decisions. For example, investors have trouble being patient and letting whatever process they have work for them.

For example, you should be pleased if you made 12% on your investments but only needed 6%. However, you feel disappointed when you find out everyone else made 14%. But why? Does it make any difference?

Here is an ugly truth. Comparison-related unhappiness is for Wall Street's benefit.

The financial services industry is predicated on upsetting people so that they will move money around in a frenzy. Money in motion creates fees and commissions. The creation of more and more benchmarks, products, and style boxes is nothing more than the creation of more things to COMPARE with. The result is investors remain in a perpetual state of outrage.

The lesson we want to drive home here is the danger of following Wall Street's advice of beating some arbitrary index from one year to the next. What most investors are taught to do is to measure portfolio performance over a twelve-month period. However, that is the worst thing you can do. It is the same as being on a diet and weighing yourself every day. 

If you could see the whole future before you, making an investment decision knowing your eventual outcome would be effortless. However, we don't have that luxury. Instead, Wall Street suggests that if your fund manager lags in one year, you should move your money elsewhere. This forces you to chase performance, creating fees and commissions for Wall Street.

We chase performance because we all suffer from the 7th deadly sin – Greed. 

Most of us want all of the rewards without regard for the consequences. However, instead, we should learn to "love what is enough. "

In a year like 2023, where primarily seven companies drove the S&P 500 index, many individuals, thinking they "missed out," will want to change their strategy for next year.

As is often the case, such will likely be a mistake.

How We Are Trading It

Remember, our job as investors is pretty simple – protect our investment capital from short-term destruction so we can play the long-term investment game. Here are our thoughts on this.

• Capital preservation is always the primary objective. If you lose your capital, you are out of the game.
• Seek a rate of return sufficient to keep pace with the inflation rate. Don't focus on beating the market.
• Keep expectations based on realistic objectives.  (The market does not compound at 8%, 6% or 4%)
• Higher rates of return require an exponential increase in the underlying risk profile. This tends to never work out well.
• You can replace lost capital – but you can't replace lost time. Time is a precious commodity that you cannot afford to waste.
• Portfolios are time-frame specific. If you have a 5-year retirement horizon but build a portfolio with a 20-year time horizon (taking on more risk), the results will likely be disastrous.

As discussed here, there is a wide range of potential outcomes based on valuations in 2024. No one knows with any certainty what next year will hold. However, by focusing on risk controls and the technical underpinnings, we can safely navigate the waters to safety.

We are certainly anxiously anticipating the arrival of "Santa Claus." However, we remain keenly aware of the lessons taught to us in 2018 and 2020 that nothing is guaranteed.

Lance Roberts