What is benchmarking?
Benchmarking is a way to measure the performance of your investment portfolio against certain models. Although you can use something like the latest 10-year Treasury note as a benchmark for all treasuries, benchmarking usually involves comparisons to standardized indices. The purpose of benchmarking is to evaluate the effectiveness of an investment strategy by measuring its results against a recognized standard. Some of the best-known and most reliable stock indices include the Standard & Poor’s 500, NYSE Composite Index, Nasdaq Composite Index, the Wilshire 5000, and the Russell 2000.
Why benchmark?
Benchmarking allows you to assess the performance of an investment relative to comparable investments. That way, you will be able to tell whether your investment did better, worse, or about the same as a typical investment of a similar kind. You can then determine whether you need to make changes to your portfolio.
For example, if you are invested in a growth mutual fund that gave you a 7 percent average annual return over the past three years, you might refer to an index to see whether that is in fact an appropriate return. If you find that similar growth funds as a whole provided an average annual 10 percent return over the same period, you might want to consider switching to a different growth fund whose results are closer to those of the benchmark.
Benchmarking also can be useful in down markets. If your fund is down by 7 percent but the benchmark average is down by 10 percent, your fund has actually outperformed its peers and may still be a worthy investment.
Determining appropriate benchmarks
It is very important that you select the appropriate index for comparison to your own portfolio. The index you choose should include investments that are as similar to the one you’re tracking as possible, and you should understand any differences between the index and your portfolio. Otherwise, you may be comparing apples to oranges, and the comparison may not be valid. For example, comparing a large cap stock fund to the Russell 2000, which is composed of small-cap stocks, is less useful than comparing it to, say, the Standard and Poor’s 500 index.
By comparing your portfolio to a benchmark, you can determine whether your returns are due to investment decisions or the overall market conditions. If you are ready to take your portfolio strategy to the next level, contact us today to learn more about our investment services. Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our weekly newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
