Is “Benchmarking” Helpful?

Today many investors follow a standard practice of judging their performance by comparing how they do to an industry benchmark.  An example of “benchmarking” is comparing your stock portfolio against the S&P 500 index. You may be doing this on your own as well… but what good does this actually do?

At Conscient Capital we don’t compare individual portfolio performance to industry benchmarks for one primary reason: Industry benchmarks have nothing to do with our client’s goals. If a particular investor has identified that they need an annual rate of return of 5% in order to reach their goals then why should the performance of an arbitrary benchmark matter to them?  The person with a 5% goal may be perfectly happy at the end of the year if he achieves the 5%. Then, they read the news the next day and see that the S&P 500 was up 8% during the same period of time… human nature leads them to become immediately unsatisfied with their results even though the original goal set was achieved.

On the other hand, what if an investor loses 10% of their portfolio in a given year? Does that person feel any better knowing that the market index was down 15%?  Is the investor any happier knowing that they did “less bad?” Probably not.

This all begs the question, “how does all of this comparing help?” In short, we don’t think it does which is why we encourage clients to forget about information and events that have nothing to do with them or their individual goals.

Tom Dorsey of Dorsey, Wright, & Associates summed it up pretty well with the statement:

“Comparison in the financial arena is the main reason clients have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them.  They get waylaid by some comparison along the way and lose their focus…  The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy.  Money in motions creates fees and commissions.  The creation of more and more benchmarks and style boxes is nothing more than the creation of more things to COMPARE to, allowing clients to stay in a perpetual state of outrage.”

If you have questions about comparing benchmarks against your investment goals & portfolio performance, we hope you will call us. As always, we value your comments and questions, and we welcome you sharing our views with your personal networks.

Categorized in: Blog

This post was written by Conscient Capital