You have probably read some of the reports that state approximately 80% of actively managed mutual funds under perform the average return of the stock market. Many people argue that if a fund manager cannot beat its benchmark, then it makes more sense to just buy an index fund with very low costs and match the market returns.

But what if your goal has nothing to do with trying to beat the benchmark? Many of the people we meet are not trying to beat an arbitrary benchmark. Most of the people we talk to are trying to beat inflation and do so without taking on exorbitant amounts of risk.

I’ve learned that index investing can be a really great way to diversify a portfolio and is especially powerful when you have a long term time horizon. But once you have retired you may not have time on your side to recover from a significant market sell off especially if you are also withdrawing funds from your account to supplement your income.

This is why structuring your investment plan around your retirement goals rather than just trying to match or beat an equity index is so important. If you create a retirement financial plan and discover that you only need to earn 2% per year to achieve your goals and have an amazing retirement, then maybe it is not necessary to take on any market risk. If you realize you need to earn 6% per year to meet your goals, then who cares what the market does. If the market earns 10%, and you only earn 6% well then your are achieving your goals and it doesn’t really matter if you beat the market or not because your return is based on your needs.

Creating a retirement financial plan before you start selecting an investment is a necessary step that should not be skipped. Your doctor would not recommend a prescription without first doing an exam. And it would be crazy for you to go to your financial adviser and request an investment product without knowing what it is your are trying to accomplish.

If your goal is to match the returns of the market over a long time horizon index investing is a great low cost way to accomplish that goal. If your goal has nothing to do with beating or matching the returns of the market, and you are simply trying to achieve a specific goal based on your plan, then maybe it makes more sense to choose the strategy that will help you achieve those goals with the least amount of volatility and not worry about trying to beat the market.