More Straight Talk on Investing

23Getting to Boca

Your exchange-traded fund returned 7% last year. Are you pleased or displeased?

It depends, doesn't it? It depends on the type of fund you own and how it performed compared with the markets. Without a comparative dimension, absolute performance tells you only part of the story. Given that we're always comparing performance in other aspects of life—the gas mileage of our cars, the likes on social media posts, the batting averages of baseball players, the developmental milestones of our offspring, and so on—it should come as no surprise that there is a measure in investing called relative fund performance. Relative performance tells you how a fund stacks up against similar funds or a relevant market benchmark.

Absolute performance and relative performance are the focus of this final chapter because they're at the heart of the question on every investor's mind: “How am I doing?” You'll want to use both of those measures to assess your interim progress toward your goals and determine whether you need to make any course corrections along the way.

However, paying too much attention to relative performance can actually hamper you in your investment program. So, let's frame the discussion by getting one thing straight up front: Despite all the news you hear about performance ratings and rankings, making money is ultimately what counts—not how you did last year relative to the Dow Jones Industrial Average or your brother-in-law, Glenn.

Destination Boca

Some investors ...