Why trying to 'beat the market' should be a misnomer

Question: E.K. from Independence: My advisor hasn’t been able to beat the market for the last few years (and this year has obviously been bad). How long do I wait this out?

A: First off, we have a problem with the whole concept of “beating the market,” and not just simply for the fact that you may be comparing apples to oranges. Many investors tend to compare their returns to the S&P 500, an index that tracks the stocks of the largest 500 companies in America; yet your investment mix is most likely diversified and includes several different types of investments, including perhaps bonds and/or cash. Therefore, if you’re comparing your personal returns to an index that is 100% stocks, you run the risk of making a poor conclusion about your investments’ overall performance.

Second, this has been a year where there’s been nowhere to hide – for anyone. But as we like to remind readers of this column, market downturns are the price of admission for investing. They’re going to happen from time to time.

And third, think back to when you hired the advisor. What was the point? Did you want he or she to try to, in your words, beat the market? If so, we would argue that that really isn’t the best use of a financial advisor (and it’s likely you’re actually working with a broker, not an advisor). Or, on the other hand, did you hire the advisor to help you with comprehensive financial planning and retirement planning? If this is the case, then you need to reset your expectations. Because a true fiduciary financial advisor shouldn’t be helping you chase returns in the first place. Instead, he or she should be designing a personalized plan that, among other things, pinpoints the rate of return that you need to achieve your financial and retirement goals. And if that number is, say, a 5% annual return, why would you try to reach beyond that?

The Simply Money Point is that the value of working with a fiduciary financial advisor comes from two things: The relationship the two of you establish together as well as the long-term investing strategy that the two of you put in place. It shouldn’t be about “beating the market” three, four or eight years in a row. It sounds like you may need to have an honest conversation with your advisor – and even yourself – about what you truly want out of this client-advisor relationship.