![]() If our stock picks performed the same or worse than bonds, we know we took the excess risk with nothing to show for it. Would I have been better off putting my money in risk-free investments (bonds)? Here we would benchmark our portfolio against a bond index such as the Bloomberg Agg and compare our performance.How did my portfolio perform compared to the overall stock market? In this case, we would benchmark our portfolio against a broad stock index such as the S&P 500, which will show if we under or over-performed by comparison.So, choosing the right benchmark depends on which question you’re asking about your portfolio. For example, if you want to know how your stock picks performed compared to the stock market, benchmark your portfolio against a stock index, not a bond index. Choosing the Right Benchmarkīefore you use a benchmark to measure your portfolio, you must select the index best suited to give you the information you want. Your portfolio needs rebalancing if you have more risk exposure than the benchmark but are underperforming. Basically, this means that the more extreme the price swings of your investments, the more risk inherent in the investment. By comparing your portfolio’s volatility with the benchmark’s, you can objectively measure your risk – and, more specifically, whether that risk matches your risk tolerance. One way risk gets assessed is by measuring volatility. The second question we want to know is, “how much risk is built into our portfolios?” It’s important to know if your gains justify the risks you are taking, and benchmarks can help. How Investment Benchmarking Helps You Hit Goalsīenchmarking helps you become a better investor by letting you measure portfolio performance and manage portfolio risk. Instead, you can invest in a mutual fund or exchange-traded fund (ETF) that tracks an index as closely as possible (replication strategy) – but it will never be exact. It’s important to note that an index is not an investment fund. Indexes must be transparent so everyone can see exactly what’s happening inside, and indexes must be investable, so it’s possible to replicate the index. Indexes are designed and managed by reputable investing institutions such as Dow Jones, Standard & Poor’s (S&P), or Morgan Stanley Capital International (MSCI). If there is a market for an investment, an index likely exists to measure it. These indexes (or indices) are designed to create a clear picture of average performance for a specific asset class.Įxamples include blue-chip stocks, tech stocks, emerging markets, commodities, real estate, bonds, or just about any other interesting sector. Instead, we need an objective standard of measure.Īn index is a standardized portfolio of stocks investors often use for benchmarking. We could benchmark our portfolio against any random stock or fund, but that probably wouldn’t tell us anything useful. Investment Benchmarks ExplainedĪ benchmark is just a reference point used to measure something else. In this article, we’ll explain how you can use benchmarks to analyze your portfolio to be a better, more informed, and more precise investor. Sure, you might be making money, but are you optimizing your gains? Do your gains match your risk exposure? Do your losses indicate that you’re doing everything wrong? Carpenters use a tape measure, fruit sellers use a scale, and investors use standardized portfolios called benchmarks. To gauge growth, you need to measure it, and that requires a measuring device.
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