Initial jobless claims are at 234,000. The 10-year Treasury note is yielding about 2%. And your neighbor says his advisor earned X% last year. How do you compare?
If this sounds like a math word problem from your nightmares, it’s because tracking your own financial performance is not as straightforward as simply comparing two numbers—although many people mistakenly take this shortcut. You need to compare apples to apples, and this is easier said than done. “Your economy” is certainly affected by “the economy” and all of the benchmark numbers and averages the economy produces, but of course your situation is highly individualized, and no benchmark can ever produce a completely accurate comparison.
However, you probably would like to know how you are doing financially. Now is a great time to look back, look forward, and make improving “your economy” a goal for this year.
How Not to Benchmark “Your Economy”
- The S&P 500: Since its inception in 1957, the S&P 500 has become the most common proxy of market performance here in the U.S.—and for decades, it was pretty accurate. The S&P 500 is made up of the 500 largest U.S. stocks, and because most investors’ portfolios were made up of large-cap domestic stocks, it was a good enough comparison. However, today investors have access to far more diversified portfolios including mid-size and small company stocks, emerging markets and various alternatives. The S&P 500 was never meant to benchmark this full spectrum of the global market—much less your individual mix of holdings.
- Your friends and family: It’s always tempting to compare yourself to people you know. Resist! Your situation, your goals, and your challenges are completely individual, and even well-meaning advice from friends or family may be a completely wrong fit for you. Worry about what your friends and family think about your finances when they start paying your bills.
- News stories: Editors know that both fear and greed get people to read—and that translates into advertising dollars that keep their organizations alive. However, as a consumer you need to keep a clear head when you see sensational headlines, and be aware of the difference between short-term news that is actionable for short-term traders versus news that is actionable for a long-term investor (much less frequent!). Remember—while certain financial news may affect you, it’s unlikely that drastic moves like selling to cash or completely changing your allocation will be a good strategy long-term.
How to Benchmark “Your Economy”
- Progress toward goals: If you don’t spell out your goals, write them down and revisit your progress, you may not reach them! If you have a particular goal like buying property or funding college savings, make sure you have a way to keep yourself accountable. Ideally, automate any saving you need to do to maximize your chance of reaching your goal. And make a deadline: a goal without a defined deadline is only a wish.
- Net worth: Each year we recommend totaling up your assets (home equity, savings, investments) subtracting your total liabilities to calculate your net worth. Ideally, this should increase each year as your saving increases and debt decreases. It is also important to maximize liquid assets (assets that can be easily turned into cash). If the majority of your assets are tied up in non-liquid assets like property, you should work to increase savings and investment accounts.
- Years of retirement income: If you were to retire right now, how many years would you be able to survive on your savings and investments? Would you have to downsize your home or change your standard of living? Thinking about savings in terms of years of replacement income can be a harsh reality check, but also a great motivator to increase saving.
While benchmarking your own personal economy is not as simple as comparing to the S&P 500, it’s not overly complicated. We hope you’ll find it to be a useful exercise!
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Halpern Financial, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Halpern Financial, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Halpern Financial, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.