Wise parents don’t compare their kids to those of others. So why do we compare our investment portfolio performance with our peers?
Let’s consider the questions that might be lighting up in your mind as you read the above.
- But my friends invest, and comparison of funds and investments is like the whole point!”
- “How will I know if I am doing well or not?”
- “How will I know if I am invested in the right funds or right asset classes?”
These are all quite valid questions. But the point here is that why do we compare our investments with those of our friends, and does it even make any sense?
Why are you investing?
Let’s start with the most important question in investing. Why exactly are you investing? While on the whole we invest for “similar sounding” goals, like retirement or your child’s education, in reality our goals are deeply personal and differ a lot from, say the person you sit across the cubicle from.
For example, Retirement means different things to different people. We don’t just all decide on the exact same amount to retire on. You might want a luxurious lifestyle post retirement in a metro while your friend might want to retire to a small town to lead a life of blissful simplicity.
The point is, if your financial goals are so different how can you drive yourself crazy by trying to compare how you are getting there?
Different goals, different investments, different time frames
Now that we understand that we all invest for different reasons, we also need to consider that only very similar goals can be compared in terms of returns required and investments needed.
Let’s say you want to watch the Soccer World Cup in 4 years’ time, the ideal investment is in debt funds because you really can’t afford the volatility of equity markets for this. No one is going to push back the world cup for you! You will also be investing for a target sum that is generally going to be less than 6-7 lakhs. Smaller targets, in most cases, allow for a conservative rate of return.
If you consider a stylish retirement, where you are spending each year travelling foreign lands and living in style you better have invested in equity for decades, unless you happen to be inheriting a fortune. You would also be investing progressively larger sums each year, in line with your growing income (and the inadvertent lifestyle creep).
Your retirement target amount is likely to be much larger than anything you have ever saved for. Thus, the need for both time and larger investments, as well as more aggressive returns than fixed income investments can provide.
To stay ahead of inflation, which is the number one foe of a good retirement, only equity has stood the test of time.
What the above examples show is that whether your friends get greater or lesser returns doesn’t matter. What matters is whether the returns your investments generate are sufficient for the goal you are aiming at.
Stay on target, and compare your returns only with what you need to get, to reach where you are hoping to.