How to Benchmark Your Portfolio’s Performance

How to Benchmark Your Portfolio's Performance
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How to Benchmark Your Portfolio’s Performance

benchmark-portfolioAs investors opened their 3rd quarter statements while U.S. stocks dropped nearly 10%, I’m sure many of them sought comfort in comparing their portfolio’s performance to the market. I’m also sure that they didn’t get an answer. Why? Because they asked the wrong question.

You see, most investors require their portfolio to deliver a certain result, and that result is determined by understanding what their financial goals are and how are they tracking relative to those goals.

Let’s say John Smith has a portfolio of 60% stocks and 40% bonds. It would seem logical that he could compare its total return to a benchmark of 60% stocks and 40% bonds. But what does John truly learn from such an evaluation?

If John’s portfolio is down 5% while the benchmark is down 10%, John has outperformed. Congratulations! But John’s portfolio is still 5% lower than where it began, which means John is 5% further away from his goal.

What if John was up 5% while the benchmark was down 10%? Sounds like a win-win, right? Not if his overall financial plan calls for growth of 7%. John is still short of what his plan requires, what John needs … and therein lies the key point.

OK, now let’s say the market is down 10%, John is up 8%, and his overall plan only called for 7%. Now John knows his on track to meet his goals. Notice how unimportant a comparison to market indices has become?

The proper benchmark for any individual investor is … the individual investor.

Don’t get me wrong: Evaluating investment performance is critically important when assessing portfolio management skill. But that portfolio’s purpose is to fund and provide for the personal goals of the individual. What really matters isn’t performance vs. benchmark, but rather performance vs. plan.

James Callahan, CFA

James Callahan, CFA is Managing Partner at Janiczek® Wealth Management.

Jim brings 20 years investment experience to Janiczek®’s disciplined Evidence Based Investing (EBI) and Strength Based Wealth Management™ (SBWM) platform. He has a Bachelor’s degree in Economics from Santa Clara University, an MBA from the University of Michigan, and is a CFA charterholder.
(303) 339-4483

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