A mathematically inclined eight‑year‑old is given a choice: take $10 or take $5. He immediately chooses $10. Then the rules change. If he takes the $10, his younger sister gets $20. If he takes $5, she gets nothing. He pauses and switches his answer to $5, fully aware that he is choosing less money for himself.
Most adults would still take the $10. But the instinct driving the child’s decision is common. People often judge outcomes not in absolute terms, but relative to a reference point. In this case, the reference point was not how much money he received, but whether he did better than his sister.
That same instinct may quietly drive many of the most damaging investment decisions I have seen over decades advising families and institutions across billions of dollars.
Every investor evaluates performance against some benchmark, whether consciously or not. In practice, most rely on one of two reference points.
The difference matters.
The stock market is a relative benchmark. When markets are up sharply, a portfolio with solid but lower returns can feel like a failure. When markets fall, a smaller loss can feel like success, even though wealth still declined.
A required rate of return is an absolute benchmark. Under this framework, performance is judged by progress toward financial goals, not by comparison to an index. Whether markets are up or down matters far less than whether the portfolio is compounding at an appropriate rate.
Most investors would say they care about absolute outcomes like funding retirement or preserving purchasing power. Yet behavior often suggests otherwise, especially during strong equity markets.
One reason is unavoidable. U.S. stocks dominate headlines, media coverage, casual conversation, and peer comparisons. When someone asks, “How’s the market doing?” they almost always mean U.S. equities, not a diversified mix of stocks, bonds, commodities, real estate, or alternative assets. Because many portfolios are also overweight U.S. stocks, this reference point becomes embedded in daily life.
Different reference points require different portfolios.
If the goal is to track or outperform the U.S. stock market, the portfolio must be equity heavy. A portfolio that behaves differently from stocks will inevitably diverge from stock market returns, often for years.
If the goal is to earn a steadier return with controlled risk, the portfolio should look very different, diversified across return streams that respond differently to economic conditions and market environments, and therefore hold a relatively small share of U.S. stocks.
Neither approach is inherently better. The problem arises when investors build one portfolio and judge it against the other benchmark.
Imagine a hypothetical portfolio that earns the same long‑term return as the S&P 500 but does so smoothly. No sharp rallies. No drawdowns. Returns compound steadily to the same destination.
From a financial perspective, this portfolio is superior.
Yet when compared to the stock market over rolling periods, this smooth portfolio underperforms equities about 60% of the time.
This feels counterintuitive until you consider volatility. Markets tend to rise gradually and fall sharply, often described as taking the escalator up and the elevator down. Historically, they spend more time going up than down.
Because of this, the day‑to‑day experience of owning equities is usually positive. Those frequent advances allow stocks to pull ahead of a smoother return path again and again, even if both end in the same place. Over one‑, three‑, or five‑year windows, the volatile path outperforms more often not just in magnitude, but in time.
This makes it especially difficult to stick with diversified portfolios, since comparisons are usually made during periods when markets feel good. The irony is that the same volatility that eventually produces painful drawdowns is what makes equities appear superior most of the time.
Diversified portfolios are designed to reduce risk, not to win short‑term performance contests. That tradeoff improves long‑term outcomes but virtually guarantees periods of relative underperformance.
Those periods are expected. They are not a sign something is broken.
The temptation is to move back and forth, leaning into U.S. equities after strong runs and rediscovering diversification only after markets fall. In practice, this behavior undermines long‑term returns by repeatedly selling low and buying high.
Awareness is the first step. Ask yourself:
Do you regularly check how the U.S. stock market is doing?
Do you expect your portfolio to keep up with stocks over short or medium horizons?
Have you felt uncomfortable when equities were rising and your portfolio lagged?
If you answered yes to any of these, U.S. stocks are likely your primary reference point, whether you intend them to be or not.
There is nothing wrong with that. But being unaware of it increases the odds of making costly decisions at exactly the wrong time.
Reference points are unavoidable. But when they are misaligned with objectives, even well‑designed portfolios can feel wrong most of the time.
That discomfort shapes behavior. Behavior drives decisions. And decisions, far more than markets, determine long‑term outcomes.
Like the eight‑year‑old who chose $5 instead of $10, investors often prioritize relative standing over absolute progress. In investing, that instinct is understandable. It can also be very costly over time.
Alex Shahidi is co-CIO and senior managing director at Evoke Advisors, a division of MAI Capital Management.
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