What Benchmark Should You Use to Measure Investment Success?

Comparing apples to oranges is just bananas. Unfortunately, that's what investors do all the time, and it can be a risky prospect. Here's what investors should use as a measuring stick instead.

(Image credit: Christine Balderas 2016 (Christine Balderas 2016 (Photographer) - [None])

One of the biggest mistakes we see people make with their investments is to try and compare their portfolio performance to “the index.” We’ll hear comments from clients (and friends, and family and people in passing) that go something like, “The index did X, but my portfolio did Y and now I’m not happy about it.”

There are a few problems here. For one, saying “the index” doesn’t really mean much. What index? Most people make the mistake of assuming the S&P 500 is representative of the total stock market and often refer to that when they talk about benchmarks … but the S&P 500 is only one index of literally thousands (albeit a very popular one). And that’s just in the U.S. If you look at the global stock market, that number climbs exponentially.

Not only is saying “the index” and assuming that automatically means the S&P 500 problematic, but so is believing that one specific index reflects the entire stock market. Again, that’s U.S.-specific, so it ignores almost half of the total global market. Even if you focus only on the U.S., the S&P 500 is so named for a reason: This particular index includes the stocks of about 500 companies. There are about 3,600 public companies listed in America as of 2017.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

And the last issue? If you talk about an index without specifying which one, or even if you mean the S&P 500, it’s all a moot point if your portfolio isn’t set up to track the indices you’re looking at.

Using General Benchmarks Usually Leaves You Comparing Apples to Oranges

Many investors spend a lot of time worrying about benchmarks. Few actually stop to consider what benchmark actually matters to them. What the S&P 500 is doing, for example, doesn’t mean too much if your portfolio does not precisely replicate what the S&P 500 looks like. You’re comparing apples to oranges, and that data might be meaningless.

I understand why investors want to compare their performance with an easy-to-understand benchmark: It gives some context, something to measure against to determine if their portfolio is doing “bad” or “good.” But each benchmark is representative of an index that may or may not be relevant to your specific investment strategy, and expecting them to line up might lead you astray.

A well-constructed portfolio should be unique to you, because your needs, goals, risk tolerance (and perhaps even more importantly, risk capacity), and timelines for deploying the wealth you build probably don’t look exactly like all these individual factors for the next person. To create an apples-to-apples comparison of your portfolio to a benchmark, you’d need to construct a custom dashboard that represents the exact index weightings and strategy components of your specific portfolio itself.

Misunderstanding Benchmarks (and the Purpose of Investing in the First Place) Can Influence Your Risk-Taking

When people ask me how much they need to invest, where they should do it, and how much risk they should take, I always have the same follow-up question: “Why are you investing?”

Most of us are not looking to grow wealth for the sake of having more. There’s a purpose for the nest egg we want to build. That purpose can vary, but we all have an underlying why for our interest in jumping into the market in hopes of making more money.

I believe the only way to make the best, optimal investment decisions for you is to understand the context in which you need to make those choices. That means knowing the answers to questions like:

  • Why do you want to invest?
  • When do you need to access and use your money?
  • What are your goals and how much money do you need to achieve them? (“Goals” could mean anything from buying a house to starting a business to generating enough of a nest egg to live your ideal lifestyle in retirement.)
  • How do you respond to risk emotionally?
  • How disciplined are you? Can you focus on the long term?
  • What can you actually afford to risk with an investment?
  • What does enough money look like to you? What’s that dollar amount?

Once you understand the answers here (especially that last one) you can back into what investments are most appropriate for you based on their risk-reward tradeoffs. For most of us, the goal of investing should not be to make as much money as possible or to get the absolute highest return possible. Of course we all want to earn more money. But when it comes to your portfolio and the desire to see it grow as much as possible, you can't separate reward from risk.

They're inversely related, which means if you want the highest return you can possibly earn, then you're going to take on massive risks that you may or may not be able to afford. If you jump into an extremely risky investment vehicle or follow an overly aggressive strategy in an effort to chase returns, you may sacrifice your ability to fund your lifestyle and meet your goals should you lose out on your gamble. Your tolerance for risk and your capacity to take risks are two different things.

The Benchmark You Should Use to Measure Investment Success

This all brings us back to benchmarks and finding the right one for you to use — and those benchmarks are your own goals. The best benchmark to use is your own “enough.”

If your investments are tracking to provide you with enough return to fund your life and what you want to accomplish within your stated time horizon, then your investments are performing well. I know it doesn’t sound sexy and exciting, but many times, prudent financial planning and investment management are admittedly pretty boring.

But they’re also pretty reliable. So, make sure you’re focused on the right things with your investments. That may or may not be a popular benchmark that everyone else is talking about, and that’s OK. Your portfolio should be set up for you and your needs and priorities, and should track to achieve your goals.

Successful investors know this and it’s why they’re the ones who, in the long run, come out on top with the money they need to live the life they want.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser
Founder, Beyond Your Hammock

Eric Roberge, CFP®, is the founder of Beyond Your Hammock, a financial planning firm working in Boston, Massachusetts and virtually across the country. BYH specializes in helping professionals in their 30s and 40s use their money as a tool to enjoy life today while planning responsibly for tomorrow.

Eric has been named one of Investopedia's Top 100 most influential financial advisers since 2017 and is a member of Investment News' 40 Under 40 class of 2016 and Think Advisor's Luminaries class of 2021.