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.