Getting what you want from your investments

Imagine a cricketer coming onto the field to bat, and on reaching 28 runs, taking off his helmet and waving to the crowd as if he had reached a century. Why did he do that? He did it because his batting average till that point was 27.6 and he had set himself a target of exceeding that average. When he reached the average, he felt that he had succeeded.

Not about cricket
That's just a joke. However, it's not a cricket joke but an investing joke. There are no batsmen in the world who would do that but there are plenty of investment managers who behave like that. They think that if they have exceeded some measure of average performance then they have achieved what their customers need.

This thinking has permeated down to the customers as well. As a saver, what is it that one has set out to do? Is it to beat some index or some average? A lot of investors feel that as long as they have done that, they have achieved something. If they are the fixed income type, they feel exceeding the FD rate is the benchmark and if they are the equity type, then they feel that exceeding the Nifty or the Sensex return is the measure of being a successful investor.

This line of thinking is also reinforced by the media and most analysts. Every year end, you will see newspapers, magazines and websites fill up with articles, tables and graphs about what did well during the year. This is of use only to those investors who always invest on January 1st every year and redeem their money on 31st December. In other words, it's useless.

An individual who invests or decides investments based on such benchmarks could end up making some decidedly suboptimal investments. One could exceed all kinds of frequently used average benchmarks and still be a loser. In fact, exactly like the cricketer I started with.

Which race are you running?
So what is the real benchmark that an investor could follow? What should that be based on? The self-evident answer to that is something that aligns with your own needs. 'Need' here encompasses the way you would invest as well as what you eventually expect from the investment. Most of us have a certain amount of money we should (or could) invest every month. From a returns or safety perspective too, regular monthly investments are the best. I looked up the investment performance of monthly SIP equity funds on Value Research Online and found that almost every single fund beat the public benchmark.

Having said that, the only benchmark that makes sense is one that is unique to you, one that is based on your needs. A general benchmark is always based on an average of a large number of investments. However, it makes no sense for your personal benchmark to be based on that. Instead, it must be based on your needs. How much money will you need in the future? Are your investments on track to achieve the target? Did you actually achieve the targets in the past? These questions, or rather the answers to these questions, are all that matters. If the answers are mostly in the negative, then it doesn't matter if your investment beat the FD rate or the Sensex. That's not the race they were running in.

Often, in many other endeavours, as long as one maintains some motion, some activity, one gets to the target. Savings and investments are not like that. This is the hard part - having an idea of how much money one will need in the future, then investing for it, and then knowing, en route, whether one is going to get there. Unfortunately, there is no easier alternative.