by Fred D. Fischer, President
Fischer Financial Services, Inc. is a Professional Investment Management Firm. Asking if benchmarks of excellence are necessary in managing investments is equivalent to asking a professional golfer if keeping his score against par is relevant. Providing a client with an investment return of 5%, 10%, or 15% is irrelevant because it is not compared against anything to evaluate the contribution. For instance in some situations, it is better to earn 10% a year rather than 20% a year. How is that possible? In our example assume that with the 20% return, you have 18% inflation, but with the 10% return you have only 2% inflation. The real rate of return factoring out inflation for the 20% return is 2% while the real rate for the 10% return is 8%.
One must also consider how the market performed. A 10% return when the market grew 20% is not good. While a 5% return when the market grew 1% is great, even though the overall growth number is less. That is why one must consider the market as well as inflation when evaluating an investment manager’s contribution. In many cases the S&P 500 Index is one benchmark of excellence to beat with all stocks.