This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 3 December 2016.
My wife and I recently attended a parent teacher interview at our eldest son’s school. Jack is only nearing the end of kindergarten, so perhaps my expectations were set a little bit too high, but I came out of the meeting feeling underwhelmed. We were shown some of his drawings, his list of sight words, his level of reading ability and the extent of his numeracy skills – all interesting enough information, but I wanted more. Perhaps it’s my finance background, but I felt the relative performance aspects of his year in kindy were impossible to ascertain. In which percentile of his class for reading skills does he fall? What about compared to other kids in NSW? In Australia even? How does his ability to recognise shapes compare to everyone else in his class? Where would he rank nationally in terms of his drawing ability? Are his colouring-in skills in the top 1% of kindy kids in the country? And so on. When I raised these important questions with my wife, Liz, after the meeting, her reaction was simply to laugh at me, karate chop me in the solar plexus and tell me to stop being so stupid and relax. Clearly the issue of relative performance is not one which keeps her up at night.
When it comes to investing however, relative performance is about as serious a topic as one can get. If I told you that your investments generated an annual return of 10% in the past year, you would probably be quite happy. 10% per year is pretty good, at that rate it would only take around 7 years to double your investment. However, if I then told you that everybody else in the world made at least a 20% annual return, how would you feel? Not nearly as happy I suspect. It’s your performance, relative to an appropriate benchmark, which is most important. The appropriateness of the benchmark is critical too. There wouldn’t be much point for Jack’s teacher to tell me that Jack was in the top 1% for skipping when compared to children aged six months or less. That’s a useless comparison and provides no information on how he compares to other kids in kindy, which is the most relevant benchmark for him to be compared against. If you’re investing in shares and your performance is being compared to interest rates on a savings account, you’re also not learning anything useful. Relative performance may not matter when you’re a five year old and just embarking on a lifetime of learning and development, but when you’re talking about your life savings, it really is no laughing matter.