How should you measure performance?

People usually like to point to a number--CAGR or annual return--to demonstrate their performance. The only number that counts is how much you end up with, and you cannot know that until the end. Giving last year’s number is misleading. It suggests a short term focus. A financial adviser or money manager who had a great year or two is probably heading for a fall (due to reversion to the mean), so if you decide to go with them because they’ve been hot you will probably be disappointed.

Of course you need to beat inflation, historically 2-3% a year. Sometimes treasuries can do this. But this is a very low bar. You really want to match (or beat) the market (about 9-10% a year), since a low-cost index fund will do that. You can beat the market with a basket of value stocks or dividend aristocrats--both of these categories perform better than the S&P.

If you’re the average Joe or Jane all you really want is for your portfolio to grow without much effort, worry, or risk. Focusing on numbers is distracting. You don’t have to justify your performance the way a fund manager does. Instead, you should be focusing on buying and holding quality companies at value prices.

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