If yesterday was the first time you have paid attention to investment markets in a while, you are probably not alone. When the Dow Jones plummets over 800 points in a day its rather challenging to find refuge from the horrifying headlines.
I hear it all the time. Having lunch with a friend, “My portfolio is up 15%” or from a friend at another financial firm, “Our portfolios are up 10%”. My initial reaction is to do a quick back of the napkin comparison. Reality sets in and I start asking questions to better understand what they are talking about. What I realize is they are quoting raw returns. The raw return is the return over a past time period (such as 6 months, 1 year, etc.), without adjusting for risk. Looking at only the raw return can twist your perceptions about how your portfolio is performing and lead you to bad choices – i.e. taking on more risk or flip-flopping from one investment strategy to another.