It’s natural.  We are wired to measure our portfolio against something to determine if our money is winning or losing.  Most often, stock market indices such as the DOW or the S&P 500 are assumed as proper measuring sticks. Many follow the logic of “well…my portfolio is doing as well as the DOW, so I must be doing ok”.  Additionally, information on stock indices is everywhere — jammed in our faces via smartphones, drive-time radio and across the bottom of the TV making it even harder to resist comparison.

Too often, market benchmarks may be an inappropriate measure of your portfolio returns. When we try to keep up with an inappropriate benchmark, we can add harm by creating additional risk that can derail your investment objectives.  Below are some points to consider to properly measure your portfolio’s performance and avoid the age-old bait-and-switch act of measuring against the markets.

Benchmarking Gone Bad: What to Avoid

  • Thinking You Can Beat the Market Consistently – Day In & Day Out: “The house always wins” applies to the financial markets. So, believing one can beat the market day in and day out consistently is an uphill battle with diminishing odds over time and can set unrealistic expectations with your portfolio returns.
  • Misunderstanding Risk vs. Return: It has been said that if you own several asset classes, you will hate at least one of them today. If you have a diversified portfolio, you will not always beat the stock market because your portfolio is intentionally designed to reduce risk (i.e., spread across different assets like stocks, bonds, etc.). Although having a diversified portfolio means you might not perform as high as the DOW when it’s up, this also means that you won’t perform as poorly when the DOW is down.  Understanding the relationship of both return and risk must be part of evaluating your portfolio performance.
  • Making Inadequate Comparisons: Measuring portfolio performance requires more than a quick look at a benchmark like the S&P 500. This classic benchmark represents the top 500 public companies by their market value. What does the performance of these 500 companies have to do with reaching your financial objectives?  If someone were to beat the S&P 500, would this say anything about how close a $100,000 portfolio is to funding a $1,000,000 retirement?  As we have mentioned before, if the market was down 40% and your portfolio was down only 20%, would you still consider yourself the big dog on the street? It is important to take a step back, see the big picture and understand what you sought to accomplish with your portfolio in the first place.

What is Your Personal Benchmark?

An appropriate benchmark takes into consideration your investment objectives and time horizon, not the shortsighted annual return of the S&P 500 index. In other words, an appropriate benchmark is personalized to your specific financial situation and goals. How, for instance, do you know if you’re on track to reach your financial goals on time? There’s no way to tell if you only look at the S&P 500 index for just a year. You’ll need to determine the amount of return you need to generate over time to accomplish your financial objective on time.

Second, have you considered measuring investment performance over time, say a 3 to 5-year time period? Daily index returns hardly come into play in measuring progress towards your long-term objectives. They fail to consider the track record and consistency of your investment portfolio over time. However, a personalized benchmark measures progress towards your investment goals over time, and can be readjusted to changes in your goals if necessary.

The Bottom Line

Stock market indexes over a single year can lure you into unrealistic expectations and disrupt a well-built investment plan. An accurate understanding of portfolio performance is met with a personalized benchmark that is aligned with achieving your financial goals on time and with the right return.

Want help defining your own benchmark?   Feel free to contact us. We would love to show you how we give more meaning to our clients’ portfolios.


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About the Author

Montgomery Gossen joined Billeaud Capital Management in 2016 as an Investment Adviser Representative. Montgomery previously worked for Advent Software, a financial reporting software firm based in Jacksonville, FL where he served several roles assisting financial advisory firms across the country. Montgomery earned a B.S. in Agricultural Business from Louisiana State University and is a Certified Financial Planner™…. Read more.