When people think about their investment returns, they tend to be happy if their account is up and unhappy if their account is down, provided they are paying attention at all. The relationship with their investment advisor or financial planner tends to follow the same pattern. However, this method of evaluating your returns has you looking in the wrong places for the wrong information. The point of understanding absolute vs. relative returns is to enable you to better evaluate your financial performance and to make better decisions in the future.

In investing, it’s pretty simple to see if your account is going up or down in value and for most people that is all they tend to care about, but that isn’t enough. You may look at your statement and see that your account was up 8% for a given year and be quite satisfied. However, how would you feel knowing the market was up 12%? That is the difference between absolute and relative returns.

Absolute return is simply whatever an asset or portfolio returned over a certain period of time. For example, if a mutual fund returned +8% last year, then its absolute return was +8%. Pretty simple.

Relative return, on the other hand, is the difference between the absolute return and performance of the market (or some other benchmark). To gauge the performance of the market, we use a benchmark index, such as the S&P 500 for large company stocks or the Russell 2000 to measure small company stocks.

By focusing on absolute returns, investors are missing the big picture and are potentially missing the big opportunity for improved investment returns! I recently spoke with a woman who asked that I review her investment account. When selecting the first mutual fund on her statement, that mutual fund’s return for the past 5 years was up about 45%. That sounds pretty good until you compare it to the appropriate small company index which was up 77% over the same time period. That 30%+ difference will have a significant impact on your retirement plans! Just when you thought you were doing so well!

If you are working with an “active” manager or investment advisor (someone who actively buys and sells securities seeking to outperform the market) the annual costs are much higher than investing through an index fund. If you are going to pay those extra fees, then you want to see results exceed the index on a relative basis. If not, you are simply paying more in fees to earn less in return. We can all agree that does not work in your favor.

While relative performance takes a little more homework to determine, it will shed new light on your real returns and unquestionably help you make better investment decisions in the future. If you need or want help with this kind of assessment, please feel free to reach out to me for assistance.

Gregory Saliba, Founder and President of  Taurus Capital Management, has over 20 years experience in advising corporate and individual clients on financial matters. Greg is also a proud recipient of the Oregon Ethics in Business Award. Taurus Capital was founded almost 10 years ago to address the true need for ethical, informed, and client-centric investment management and financial advisory services. Prior to founding Taurus Capital, Greg’s background was exclusively in institutional financial services and he brings that level of expertise to his individual clients.

Greg holds MBA, MA and BA degrees and is a Certified Treasury Professional. For the last 13 years, Greg has been an adjunct finance instructor at the Portland State University School of Business Administration and he will begin teaching in the Willamette MBA Program this fall. He was also a Forty Under 40 recipient and was a participant in the Leadership Portland Program.

Active community involvement has always been important. Greg currently sits on the “I Have a Dream” Foundation finance committee and is on the Alumni Board for Whitman College. He just recently completed his 3-year term as one of two public members on the Multnomah Bar Association’s Judicial Screening Committee. Greg is also proudly married with three great children.