Nov 27, 2018
According to Investodepia, “A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured.”
Measuring your portfolio against a benchmark matters, because it gives you a gauge of how well your portfolio is performing, compared to something else - ideally, a basket of investments that are invested similarly to your portfolio.
When I was in college, I drove a red Honda Civic. The car was great - it was reliable, got really good gas mileage, and was low maintenance. It was also really fun to drive, even though I couldn’t figure out how to drive a manual transmission. If I was going to compare the quality of the Honda Civic with other cars, it should only be compared to like-kind cars - a Toyota Camry, Ford Focus, and other cars in the compact car category.
I wouldn’t take the Honda Civic out to the race track against a Posche 911 or a Ferrari. It’s just not fair to the Civic, because the car wasn’t designed for that and its a completely different type of car.
Your portfolio benchmark functions the same way. You should compare your portfolio to a like-kind benchmark. One of the most common benchamrks used is the S&P 500, but if you own a lot of international, small-cap stocks, or bonds - the S&P 500 as a benchmark misses the mark because it’s made up of large, US companies.
The point here is to take the time to understand the makeup of your portfolio, so when you’re comparing it to a benchmark, you know how to make a relevant comparison to measure how your portfolio is performing over time.
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