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
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.