Right around the time I was born, another birth was happening – one that would save investors millions of dollars in unnecessary fees while also reducing their tax bills. Yes, I’m talking about the birth of the index fund. A side effect of this creation was that performance-junkie investors and money managers could now easily compare their returns to an index and react (or overreact) accordingly. But why, almost 40 years later, do so many index fund investors compare their portfolio to a benchmark when their portfolio IS the benchmark?
Today, there is an index for pretty much every segment of the stock market, so it’s quite easy to measure a traditional mutual fund’s performance against a benchmark. For example, a fund that buys and sells large companies might be compared to the S&P 500 and one that buys and sells small companies might be compared to the Russell 2000 Index. There are enough index funds for an investor to own their share of thousands of businesses around the world. Since indices are used as the stock market’s performance benchmarks, a globally diversified portfolio of index funds is essentially a portfolio of benchmarks.
How do you benchmark a portfolio of benchmarks? In short, you can’t.
The best (and most sane) thing you can do is benchmark your portfolio against your personal financial plan – not the S&P 500, not the Dow, and definitely not gold. So when you’re interviewing a new financial advisor, or assessing the value of your current one, instead of asking about track record, I invite you to try a different line of questioning:
- How do I know you will be objective and transparent?
- How will you hold me accountable to my goal of never running out of money?
- How will you keep all of my investment costs as low as possible?
- How will you help minimize the taxes I pay from my investments?
- How will you rebalance my portfolio?
If you can get solid answers to these questions, you can remove “track record” and “benchmarking” from your vocabulary. Perhaps Bill Murray’s character in the movie Meatballs was referring to benchmarking when he shouted repeatedly, “It just doesn’t matter. It just doesn’t matter!”
The opinions expressed are those of the author and are subject to change without notice in reaction to shifting market conditions. This blog is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.