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Investment Success? It’s All Relative.

May 2, 2023

What makes an investment a success?  The definition of a successful investment will vary depending on whom you ask.  For a retired individual, success may be generating enough income to support their lifestyle.  For a 20 something, successful investing may be outperforming the market. 

The definition of success in your investment portfolio will evolve over time, but it is important to thoughtfully and continuously define what success means to you.  In the investment industry, this definition of success is used to determine what is commonly referred to as a benchmark. 

Choosing an appropriate benchmark is critical in measuring the success of your investment portfolio.  Common benchmarks include using a market-based approach such as the S&P 500 for stocks, the Bloomberg Barclays Aggregate for bonds, or most likely, a combination of market based benchmarks that are in line with your asset allocation strategy.  However, a market-based approach may not be appropriate for all investors. 

There are countless other ways to think about benchmarking.  The insurance industry has historically benchmarked to their liabilities.  This can be a successful strategy for an individual as well, especially those at or near retirement.  Matching cash flows from your portfolio to your spending needs is another strategy.  Alternatively, just stating you would be happy with a return of X% each year, may be how you define a successful strategy. 

There is no single strategy that is either correct or incorrect.  Evaluation and discussion of what is appropriate for your needs and goals is the best way to select a benchmark. In addition to assisting us in defining a winning strategy, choosing an appropriate benchmark can also help us calibrate the level of risk we are taking. 

As investors, we should familiarize ourselves with something called risk adjusted return.  If you are taking more risk than the market, you should be generating a return that compensates you for the additional risk incurred.  If this is not occurring, you may want to reconsider your strategy.  Since you took the time to select an appropriate benchmark for your investment strategy, you are now able to calibrate your risk accordingly.

When it comes to investing and returns, what defines success is all relative to how you define your benchmark.  With an understanding of your benchmark, you can knowledgeably review your investment outcomes and determine if your strategy was successful or if it is time recalibrate.

At Iowa State Bank, our Trust & Wealth Management experts are here to advise and guide you. Whatever you empower us to do on your behalf, you remain in control. Reach out to a member of our team for more information and to get started on your investment journey!

Written by Lora Brons, CFA, VP & Trust Investment Officer.