How to Be Your Own Best Benchmark

Some people are born with an 11-month advantage...

A hockey player born in January is four times more likely to get into a pro league than a player born in November.

It's not that people born in January are inherently four times better at hockey. Because the age cutoff for playing hockey tends to be January 1, it favors those kids who just barely miss the deadline. Those January babies will be 10 to 11 months older, in the same grade, and on the same team as someone born in November or December.

Eleven months is a gigantic difference in terms of physical and emotional maturity. A stat like that might be enough for someone born in November to give up on their hockey dreams.

Yet if you ask any pro hockey player the key to his success, he'll undoubtedly mention all his hard work... and not the mini-lottery he won at birth.

Now, that doesn't mean personal effort is useless. Pro hockey players put in years of hard work and training to get where they are.

However, it's not the only factor that matters. There are a lot of factors outside of your control that play into your success... or lack thereof.

And as I'll explain today, you do yourself a disservice – both in your personal life and your investing life – when you don't acknowledge those factors.

The best investors know personal effort is only one piece of the picture...

Just ask private-equity king Carl Icahn. One of the most successful asset managers in the world, he's fond of the saying...

Don't confuse luck with skill when judging others, and especially when judging yourself.

What he means is that, when you look at yourself relative to other people, it's easy to put yourself on a pedestal. If you're further ahead than the Joneses, you want to believe it's because you worked harder.

Icahn knows you can't control the luck factors that caused differences between your experience and someone else's. You might not even be able to identify those factors. Something as simple as where... or when... or even in what month you were born can be a far bigger factor than your own personal effort. (And that's not even mentioning the genetic traits you were gifted.)

Don't get me wrong... I'm not saying you shouldn't benchmark your performance.

I'm saying you need to control for the factors that matter. And there's only one way to do that...

Stop comparing yourself to others. Instead, you should compare yourself... against yourself. Ask yourself how you're doing today relative to a month ago, or a year ago, or five years ago.

Hopefully, you're using criteria that aren't just monetary. If you don't have a solid set of health metrics, you may soon find yourself the richest man in the ICU.

It's impossible to know every luck factor that played into your personal success. However, the future you has won or lost the same "lottery of birth" as the you of today. By comparing your own achievements with those of your past self, you can still control for those unknown factors.

In short, you are your own best performance benchmark.

That lesson goes for investing, too...

If you compare your investing portfolio versus someone else's, you'll probably only look at raw performance.

Joel Greenblatt, a finance professor at Columbia University and head of Gotham Asset Management, tells investors that you "must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term."

Greenblatt is right... Diversification across different asset classes, like stocks and bonds or money markets, is one of the most valuable ways to protect your portfolio. Most investors are familiar with this notion.

What they might not have considered is that the application differs from person to person.

Everybody has different financial needs. And it goes beyond age, which is a common factor. (You've almost certainly been told that younger folks should put more money in stocks... while older investors should buy safer assets like bonds.)

That's a gross – and dangerous – generalization. It assumes every 45-year-old was born into the same circumstances, lived the same experiences, and has the same personal goals.

It's just ridiculous.

It makes no sense to imply that everyone in a certain group has the same risk tolerance...

And it makes even less sense to say that they should all rely on the same diversification strategies.

Rather than basing your allocations on age alone, we recommend splitting your money into four buckets...

• Money you'll need within two years
• Money you'll need in two to five years
• Money you'll need in five to 10 years
• And money you won't need for at least 10 years

Within those parameters, you should split your money between cash, stocks, and bonds. Here's how it breaks down...

As you can see, money you need within two years should be in cash. No amount of risk management can guarantee that money will still be there within two years if you put it in the market. Just look at how stocks and bonds performed last year.

For money you'll need in two to five years, bonds are your best bet. Historically, bonds have recovered from their biggest drawdowns within five years.

Money you need between five and 10 years from now should be a split evenly between stocks and bonds. This can vary depending on your market outlook and your personal risk preferences.

And as for money you don't need for 10 years... it should all be in stocks. Even the worst stock market performances ever have recovered within roughly 10 years.

This is the basis of my team's Equity Allocation Outlook in our Timetable Investor report...

Each month, we analyze the current state of the market... and that analysis informs our outlook and recommended investing timeline.

We don't tell you exactly what to do with your money. The Timetable Investor forces you to think about your individual monetary needs, and to diversify based on your spending requirements. These should directly reflect your goals in life and your financial situation.

It normally costs $199 per year to access the Timetable Investor. But if you want to check it out, I pulled some strings to make our July edition available for free. You can access it by clicking here.

We believe it's one of the most valuable services we offer... because it's driven by your individual monetary situation, not some one-size-fits-all approach. Strategies like that really do a disservice to you as an investor.

The market has changed from the past decade-plus. It's not enough to put money into the market and hope for the best. Now more than ever, you need to track your own performance.

It will allow you to minimize how much luck plays into your portfolio performance. And in the long term, it will allow your effort to shine through.

As for me, I have to make the hard choice of holding my young boy back a year in school so the odds aren't stacked against him. He's a November baby... and man, that hockey-player fact is ringing in my ears.

Wishing you love, joy, and peace,

Joel
August 18, 2023