How is your investment portfolio doing? You might answer this question by comparing its returns to a popular stock market index such as the Standard & Poor’s 500. For most investors, however, using the S&P 500 as a “benchmark” isn’t appropriate and can lead to investment mistakes. Reason: The index is dominated by large-cap US stocks, while many portfolios are, or should be, widely diversified. Your portfolio might include various asset classes such as small-cap and foreign stocks as well as bonds. Since US large-caps have outperformed most other asset classes over the past three years, it’s likely that your own portfolio’s performance has trailed that of the S&P 500, tempting you to adjust your asset allocations and/or investment choices. A better way to judge your investment performance quickly and conveniently…
First, determine what percentage of your portfolio is in stocks, what percentage is in bonds and what period of time you are using to evaluate your returns.
As a benchmark for the stock portion of your portfolio, use an index more widely diversified than the S&P 500. The FTSE Global All Cap Index tracks 98% of the world’s total investable stocks by market capitalization. For the bond portion, the Barclays US Aggregate Bond Index tracks most types of US government and corporate bonds. Both indexes can be easily found through a search engine.
If your portfolio has, say, a 60% stock and 40% bond allocation, to gauge its relative performance, choose a time period, multiply the performance of the FTSE index over that period by 60% and the performance of the Barclays index by 40%, and add the two results together. Although your portfolio may not be as diversified as these two indexes, using them likely gives you a more valid comparison than using the S&P 500.
