However , the most common feedback the company derives when evaluating performance is how its portfolio stacks up against the S & P 500 Index . It seems that people are programmed to think that the S & P is the singlular reliable benchmark available , such that it has become the darling standard of many index lovers throughout the world .
Obviously , there is no basic logic to comparing the returns of a 100 % stock portfolio ( the S & P 500 ) versus a multi-asset portfolio that contains less than 50 % exposure in stocks . A better and more suitable benchmark for such a type of investing method would be the 40 / 60 allocation in the iShares Core Moderate Allocation ETF ( AOM ). That is where the data will exhibit a clearer picture of actual performance .
In a similar manner , comparing the 0 to 60 mph rate of starting acceleration of a Porsche in a few seconds to that of a Suburban would not make sense either , would it ? Although that is an accepted truth , in general , only a few investors consistently apply that universal principle in their investment practices .
It is vital to appreciate that fundamental concept in the process of accurately measuring risks or comparing similar approaches . Never compare investing in bonds and stocks to the revenues of a CD or a money market account . Never relate a portfolio of technology stocks to closed-end funds . And never compare hedge-fund revenues to that of a bunch of ETFs . We can continue down the line . . . .
Perhaps , the most difficult hurdle to making this logical conclusion is the fact that most investors do not know the suitable benchmark for comparison objectives or where to locate them . They merely gravitate to the S & P 500 , the NASDAQ Composite or the Dow Jones Industrial Average because they see them flashed on the news or on the web daily .
In the end , every particular asset type or investment instrument should be weighed or evaluated by a similar group of equals . ETFs have made that process less difficult for many years now ; however , you must always undertake the task of finding an appropriate index to serve as a benchmark . Ask a professional analyst how and where to find a good benchmark as a reliable yardstick .
The Ultimate Goal
Investing involves a lot of psychology and comprehension of the relationship of certain facts and information . This article hopes to develop a new perspective not considered previously or to strengthen an existing point-of-view . It is hoped that either way , the reader will attain a more reliable and more solid frame of reference for evaluating a portfolio ’ s performance in the future .