Numbers Can Be Dangerous

Measures of risk and return should be carefully selected to match investment objectives and to allow for any unique constraints inherent in the account. They must also be interpreted with great care. And once established, they should simply inform an investor as a gauge of his progress and relative performance.

Although "benchmarking" is a useful tool to keep investors on track, it is ironic that benchmarks can also suggest to uneducated investors that they should chase the latest pipe dream. It is all too common for investors, tantalized by claims of extraordinary returns, to lose sight of the fundamental purpose of saving and investing, which is to meet some future financial outlay. One can spend only dollars, not short-term relative performance. It requires discipline to ignore the acute disappointment that can result when short-term results are compared to a benchmark. It is a mistake to throw in the towel by abandoning a sound investment plan and chasing the latest "hot" manager.

Perhaps it is part of our culture to believe that there is an equivalent of a Michael Jordan or a Tiger Woods of investment management. There are none. It seems that we are predisposed to think that talent and hard work will lead to success in stock picking, as it does in so many other areas of life. But alas, markets simply work too well to allow this. There will always be a manager who will outperform your portfolio over the short-term. These money managers have simply been dealt a lucky hand. And rest assured they will trumpet their good fortune. However, we hope that common sense will allow you to avoid these distractions.

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