How to Track Investments with Benchmarking

We are all accustomed to monitoring progress toward important goals. We have periodic performance reviews at work. Our children receive progress reports from school. We step on the scale to see if our weight management plan is working.

It stands to reason then that as investors, we need a way of monitoring the performance of our portfolios. Aside from reading account statements or meeting with your investment advisor for an annual review, there is another way to see how your investments are doing. It’s called benchmarking.

What’s in a Benchmark?

Generally, a benchmark is a standard against which you can assess the quality, functionality, or performance of something, such as a product or service. In the case of investments, market benchmarks can help you gauge the current as well as past performance of your portfolio.

Market benchmarks, or indexes, as they are often called, are not investments! Instead, they consist of a sample of securities that represent a specific segment of the overall market, such as large company U.S. stocks, small company U.S. stocks, or corporate bonds. Investors can assess how well their investments are doing by comparing their performance to the appropriate benchmarks.

Time to Reflect

An important aspect of benchmarking is taking the time to look past the current quarter or 12-month period and assess performance over longer periods of time – five years, ten years, or longer. Why? Because short-term performance tends to accentuate dips and surges over longer term averages. A stock or mutual fund could have a very strong year, or it could plummet for a quarter due to an isolated, one-time event. Current performance data tends to highlight that activity (negative or positive), skewing the investment’s more typical performance over time.

Compare Apples to Apples

When checking the performance of your portfolio, be sure you are doing an “apples to apples” comparison. You do that by choosing the benchmark that most accurately reflects your investment(s). For instance, for a portfolio of large company U.S. stocks, a good choice would be the S&P 500 Index. For U.S. bonds, you’d probably use the Bloomberg Barclays Capital U.S. Aggregate Bond Index. (see Ones to Watch below).

Note that in the case of mutual funds, the appropriate index will depend on the fund’s holdings. Often a fund that tracks more than one sector or asset class may list more than one benchmark to reference. Most prospectuses and annual reports list the benchmark most appropriate for your investment. When in doubt, ask your investment advisor or check the prospectus for clarification.

Ones to Watch

The following benchmarks, while among the most common, represent just a small sample of the indexes in use today.

• The Dow Jones Industrial Average (DJIA), often referred to in the media as simply “the Dow,” tracks the performance of 30 of the most widely held stocks of large, U.S. companies. Current members include McDonald’s Corp., Wal-Mart Stores Inc., and Walt Disney Co.
• The S&P 500. The S&P 500® is considered by many to be the best gauge of large, U.S. company stocks. The index includes 500 leading companies and covers approximately 80% of the U.S. equity market.
• Well-known for its concentration of technology stocks, the Nasdaq Composite Index includes all stocks listed on the Nasdaq stock market. Because it is so broad (listing more than 2,600 stocks, both domestic and international) the Nasdaq is one of the most widely quoted market indexes.
• Bloomberg Barclays Capital U.S. Aggregate Bond Index is a broad-based bond market index that generally represents most types of investment-grade bonds traded in the United States.
• Morgan Stanley Capital International's Europe, Australasia, Far East (MSCI EAFE) Index measures the market performance of large and mid-sized companies in 21 developed markets outside of the United States and Canada.
• The Russell 2000 Index measures the performance of the 2,000 smallest companies in the flagship Russell 3000 Index. It is considered by many as the leading benchmark for small company stocks in the United States.

Points to Keep in Mind

While indexes are good yardsticks for measuring performance, they shouldn’t be the only factor considered when evaluating an investment. You should also ask yourself questions like: Does this investment meet my needs and objectives? How long do I expect to hold this investment and how well can I tolerate the inevitable ebbs and flows of performance? Though past performance can’t guarantee future results, be sure to consider the performance record of your investment(s) over a similar time frame.

Individuals cannot invest directly in any index. The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indexes do not account for any fees and expenses of the individual investments that they track.

Investors in international securities are sometimes subject to somewhat higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.