As you might expect, during times of increased volatility, we field more questions from clients about whether their portfolios are performing up to par. What is “par” for your portfolio anyway? The short answer is “it depends.”
I often hear people talking about the “market.” The “market” was up by 500 points or down by 1%. Sometimes people are referring to the Dow Jones Industrial Average and sometimes they are referring to the broader S&P 500 Index. Many investors evaluate their portfolio returns against these benchmarks. The reality is, however, that even the broadest index is unlikely to reflect the diversity of a typical portfolio, which likely includes not only domestic stocks but also international equities, bonds, and cash.
If your portfolio consists of both U.S. stocks and bonds, the S&P 500 would not be an accurate gauge of your performance because it measures only U.S. large-cap stocks. A more appropriate benchmark would be a blended benchmark consisting of the S&P 500 for the equity portion and the Bloomberg Barclays U.S. Aggregate Bond Index for the bond portion. It’s important to start by finding a benchmark that matches up with each of your asset classes, and then blending the benchmark indexes in direct proportion to your holdings. For example, if your portfolio consists of 60% stocks and 40% bonds, the index blend would also be 60% stocks and 40% bonds. If you have international exposure or emerging markets, include benchmarks for these asset classes as well.
Benchmarks can be useful for evaluating your funds, as the success of most funds is measured by whether they meet or outperform their underlying index; however, it’s important to keep a long-term perspective. Any fund can beat a benchmark over the short term, and even the best managers will under perform over short periods of time. It’s important, therefore, to evaluate your holdings over a longer period—ideally, three to five years, or even an entire market cycle. If you are investing in an index fund, your fund should simply track the benchmark as that is what it is designed to do.
Ultimately, the aim is to achieve your long-term financial goals. If your portfolio beats its benchmark by 2%, you’ll probably be pleased with your performance. But will you be on track for retirement? While the benchmark alone can’t tell you if you are on track to reach your financial goals, a good financial plan can. If you have questions about whether you are on track to meet your ultimate financial goals, we can help.