Help Your Clients Look Beyond the S&P

Resetting Expectations

With virtually unlimited options for benchmarking, it’s time to shift our own thinking and our clients’ thinking beyond measuring everything relative to the S&P, which in our view has never been the best or most appropriate benchmark for most investors’ portfolios. A client who is heavily weighted toward value stocks shouldn’t be benchmarking against an index largely composed of growth stocks. A client who is retired and has half their portfolio in bonds shouldn’t be measuring their returns against any pure equity index.

It’s up to you, the advisor, to reset your clients’ default expectation that they should be keeping up with “the market” as they perceive it on CNBC. Most people don’t have the temperament and the discipline to ride the ups and downs of an all-stock portfolio, which is one reason few advisors would direct their clients to put all their assets into an S&P 500 index fund or ETF.

Remember, just as there’s no ideal portfolio that will work for every client, there’s no ideal benchmark for every portfolio. Each must be determined on a case-by-case basis, which often means starting with the end in mind. What are the client’s goals? What’s their risk tolerance? What are their future liabilities? Having the answers to those questions makes it possible to determine how much risk they should be taking and what kind of returns they need.

Many advisors are already moving away from the traditional S&P or 60/40 benchmarking approach and using goals-based or inflation-based measures instead. It’s easier to keep a client committed to a prudent long-term strategy if they can see that they’re still on track to achieve their goals and are growing their purchasing power after a market hiccup like the one we saw last month. The key is to be consistent and fight the temptation to move the goalposts by measuring against traditional benchmarks (or playing along when your client does) when your performance looks favorable and switching to alternative benchmarks when it doesn’t.

Whether it’s a mix of asset classes that roughly matches the portfolio allocation, a lump sum target amount they’re working toward, or a measure of purchasing power over time, there should be clear dialogue up front about the choice of benchmark, the rationale behind it, and what successful performance will look like. With consistent reinforcement, it is possible to break free from the tyranny of letting Standard & Poor’s dictate whether your performance is satisfactory or not. When it comes to discussions about performance, make sure you’re comparing apples to apples and pickups to pickups.

Mark is a co-founder of Intrepid Capital. He is also the lead portfolio manager of the Intrepid Capital Fund, the Intrepid Disciplined Value Fund, the separately managed Intrepid Balanced and Intrepid Disciplined Value portfolios and the Intrepid Capital, L.P. He has over 30 years of experience in asset management. Mark received his B.A. in economics from the University of Georgia. Travis serves on the Board of Trustees of The Bolles School and the Board of Directors of Jacksonville Clay Target Sports. He is also a member of the Ponte Vedra Rotary Club and YPO-WPO.