Benchmarking my portfolio

Benchmarking my portfolio

Investors tend to gravitate to financial products before financial plans.  I believe that is a mistake.  I believe regardless of whether you own mutual funds, Exchange Traded Funds (ETFs) or invest in some individual stocks for passive dividends like I do, what you own in your portfolio is less important than ensuring you have a diversified portfolio, which is integrated with a plan you can stick with over time.  I believe it’s not the investment products that necessarily kill your financial plan over time it’s your behaviour – bad decisions, biases and more.

Even if you have a plan you’ve been sticking to, it remains important as an investor to understand “how you’re doing” when it comes your portfolio performance.

Today’s post will highlight how my portfolio has performed over the last few years compared to a few indexed products and my thoughts about benchmarking in general.

What is a benchmark?

Simply put, a benchmark is a standard against the performance of a security or set of securities can be measured.  Generally speaking, broad equity market and bond indices are used for this purpose.  There are dozens (if not more) benchmarks investors can use.  Here are a few popular ones:

S&P/TSX Composite Index – Canada
This is probably Canada’s best-known benchmark index. This index tracks about 250 companies listed on the Toronto Stock Exchange, with financial, energy and materials companies making up the bulk of the equity market.

The S&P/TSX 60 – Canada is another index used to benchmark against Canadian large cap companies; it holds 60 large cap companies.

Dow Jones Industrial Average (DJIA) – U.S.
This index is one of the oldest around, created in 1896 by the founder of Dow Jones & Company and the Wall Street Journal. The index follows the stock performance of 30 large American companies.

S&P 500 – U.S.
This index is made up of 500 large-cap U.S. companies; this index is one of the most widely used benchmarks of U.S. equity performance.

MSCI World Index – Global

This index tracks large and mid-size company stocks in developed markets from around the world.  This index is most often use to benchmark against Global equities (including Canada and US).  At the time of this post the composition is roughly 60% U.S. market, 9% Japan, 7% United Kingdom and the rest of the developed countries from around the world (including Canada) comprise a lower percentage from there.

MSCI EAFE Index – Global

Like the World Index, this index was created by Morgan Stanley Capital International (MSCI) however this one tracks major international equity markets in different compositions, for example there is more weight in the index from Japan, Europe and Southeast Asia.

What about bonds?

There are also bond indices, and for Canadian bonds in particular, there are a few indices to benchmark against – the main one being the Universe Bond Index.  A quick Google search will show you that the iShares product XBB – seeks to provide income by replicating, to the extent possible, the performance of the FTSE TMX Canada Universe Bond Index, net of expenses.

What does all this mean to you and me?  It means you have a number of choices or combinations of choices to benchmark your portfolio against.

My benchmark

When it comes to benchmarking my Canadian dividend stock portfolio, I think a decent benchmark for me is one of the oldest ETFs around:  ETF XIU.

This ETF holds Canadian banks, telcos, utilities, energy and industrial stocks, similar to my individual stock holdings – companies that have paid and raised their dividend consistently over the recent years.

  • The last time I checked (in preparation for this post) the 5-year total return for IXU was about 6.5%.
  • My performance: over the same period my portfolio performed close to 8%.

My thoughts about benchmarking

At the end of the day, I think monitoring your portfolio against a benchmark can help you understand if the portfolio you’ve designed will meet your long-term investment objectives, but more importantly call out any major market underperformance for the financial advice you’re paying for. 

The challenges in using any benchmark data against your portfolio is accuracy and timing. 

  1. Benchmarking will not accurately account for your risks taken (to earn investment returns to date).  It’s just a performance tool for a point in time. 
  2. Benchmarking is a lagging indicator.  Some critics of this post will likely point out five years is too short to suggest any meaningful success for my portfolio.  That’s fine.  However with 20 years of benchmarking data, that’s a longer period, but if I find out I’ve significantly underperformed the Canadian market over that period, then it’s too late really for my portfolio. I’ll be in retirement.

When it comes to investing, investors need to remember they are playing a zero-sum game. 

That is, half of the investor dollars will outperform and the other half will underperform the market average. Many investors do themselves a huge disservice by paying steep commissions, paying high money management fees, succumbing to administrative costs and so on.  Investors need to know all of these costs work against them to reduce their investment returns over time.

This is why a passive investing approach using indexed funds is so widely touted. This approach minimizes portfolio turnover and costs, to deliver portfolio returns close to the market average.  

What’s your take on using a benchmark?  Do you know how your DIY portfolio is doing?

37 Responses to "Benchmarking my portfolio"

  1. Mark, I agree it’s very important to benchmark, particuarly if you are owning individual stocks, as a check that your strategy is at least equaling the benchmark. Otherwise why spend the time and effort deciding which stocks to by if you could just buy an ETF that tracks your benchmark? I think the reason many people don’t benchmark is that they don’t want to deal with the likely fact that they are underperforming the market over the long term.

    It’s also important to use appropriate risk adjusted benchmarks. Otherwise you are comparing apples to oranges. Eg. if you are focusing on small cap stocks, you should use a a small cap benchmark in the market you are in. For your Canadian dividend stocks, CDZ is a reasonably good benchmark to use as it’s focus is Canadian dividend stocks. DGI is essentially a large cap value strategy, so you could make a case for using iShares Canadian Value ETF, XCV as benchmark for a Canadian dividend stock portfolio, but I agree CDZ is probably more accurate and therefore a better one to use.

    1. Good to hear from you Grant on this.

      CDZ is very close to my portfolio, as is XIU and XCV. In the end, it’s just good to know my approach has some alpha. Otherwise, why bother right and just index invest 🙂

  2. To be honest, I do not bencmark. Partly because I am too lazy to calculate my yearly returns (I might actually do this this year), partly for the reasons you give (does not benchmark the risk you took) and mainly because the only thing I care about is being on track with my own plan. I guess that is my benchmark.
    What is the purpose to beat the S&P by 1pct when it drops 10 pct in a given year? It will clearly not help me to reach my FIRE goal by 2029.

    1. I’m lazy as well Amber but I do it just for fun. As you have read, there are a few issues with benchmarking although like a net worth calculation, at a point in time, it’s good to know where you stand.

      2029 FIRE eh? I like your thinking. What’s your “magic” number for income to cover expenses?

      1. Our number is based on the 4 pct rule. That is what I use now to see how we are doing. The monthly expenses are the average expenses of the year before (full expenses/12). I tried to guesstimate the expenses in retirement… Too fluffy for me… For now, it is a number well above the 1 Million EURO. It i quite high due to the mortgage component still in there. I could remove it I guess. It feels wrong as I want to see if I am FI now. and no, I pay a mortgage
        As we get closer to the FIRE date, I will be able to better see what the expenses will be and what alternative income is possible. The end goal is to have about 50pct of the income out of dividends and maybe option premium. The other half would be selling assets. All of this assumes no state pension…

  3. I use to benchmark my portfolio against a very simple tool at my brokerage (RBC Direct Investing) where you can choose single indexes or “standard profile”. Since my portfolio is 100% stocks (30% Can, 45% US and 25% other Int’l) I benchmark with “Standard Dynamic Growth Profile” wich is about 35% S&P TSX, 35% S&P 500, 20% MSCI EAFE and 10% MSCI EM.

    After 48 months managing my own money (read: ditched the 1.7% fees mutual funds in may 2012) my returns are now 2% better than this profile (0.5%/year on average). At the begining (the learning period), I was lagging because a lot of trading fees and currency exchange WHITOUT NORBERT-GAMBIT!!! Then, I get 1%/year more on average over the 3 next years (always within 0.5% and 1.5%) wich is pretty much explained by the lower fees.

    1. I have no concerns with investors who are 100% stocks…if they are diversified. Sounds like you are!

      No doubt ditching the mutual funds was likely the best investing decision you ever made. 🙂

  4. “The last time I checked (in preparation for this post) the five year total return for the ETF was about 6.5%. The benchmark was 7.36%.”

    How was the above calculated? Was that one etf, compared to a specific benchmark? How would one calculate return if they were adding money to buy more shares of the etf over the five years?

    If ones portfolio is receiving 5% or 6% annually in dividends (and the percentage has been constant over the years) does that mean they they are almost matching the return of the benchmark with just dividends?

    1. Yup, just one ETF (CDZ) against the performance of my CDN stocks held non-reg. and TFSA. I didn’t include my RRSP in the calculation since it’s mostly U.S. stocks and VTI – so my benchmark is probably the S&P 500 for that one.

      My calculation is not yield on cost. My portfolio earns ~4-5% in dividends per year, the other 4-3% is from capital gains, forming total return of 8% for the last five years.

      Hope that helps!

  5. Benchmarking can be a tricky business. There are many ways to do it ineffectively, and different approaches are suitable for different investing styles. I see the main value of benchmarking as being a check on whether your efforts are worthwhile. Let’s take dividend investing as an example. Suppose an investor runs a screen that gives a set of 100 dividend stocks and chooses 20 of them with deeper analysis. One form of benchmarking would be to see how the investor’s returns compare to those of the entire 100-stock portfolio. If the chosen 20 (that may change over time) perform worse over a decade than the full list of 100 stocks, that investor might consider giving up on stock selection and just own the whole list. On a more meta level, the investor might check how the 100 stocks produced by the screen compare to a larger list of stocks.

    The primary goal is to check whether the discretionary choices you make have any value. Many types of benchmarking are useless for such a check. And it’s always possible to shop for a benchmark to protect your ego. The question I seek to answer is whether there is a simpler investment strategy that worked better in the past and is it likely to work better for me in the future. If some type of benchmarking can’t answer these questions, then it isn’t serving a useful purpose. But in cases I’ve examined, there has always been some form of benchmarking that gave useful feedback.

    1. To your point “the primary goal is to check whether the discretionary choices you make have any value” – I believe mine do but it’s not the be all, end all. It’s just a metric. It’s also a lagging indicator. Leading indicators are better but difficult to find in the financial industry, at least ones that have any meaningful accuracy.

      5-year results aren’t too bad but we’ll see how my story unfolds 🙂

    2. The potential problem with an indexing approach ( say 50% VTI + 50% VXUS) is that you may do as well as your benchmarks, but that doesn’t mean you will make money in the long run because you may have picked the wrong asset classes at the wrong times. Just because the past performance of stocks has been higher than bonds, doesn’t mean that should always be the case or should be the case during the time you need those returns.

      An aggressive allocation that excludes bonds, or REITs, or frontier markets, may work against you if global equities deliver low real returns or no returns for the next 20 years, but REITS, bonds, frontier markets do. This has happened before. So while you will match the return of VTI & VXUS, you may have done better by using some BND instead.

      1. To elaborate a little more on Michaels example above & my thoughts on active asset picking– a dividend investor whose portfolio underperformed VTI by 1% – 2% per year over the past decade still could have done better than the index investor who wanted to own the world – 50% VTI and 50% VXUS. And since dividend growth stocks did very well over the past decade, dividend investors have had a very successful past decade. Whether this holds true in the future or not – no one knows yet.

        1. “And since dividend growth stocks did very well over the past decade, dividend investors have had a very successful past decade. Whether this holds true in the future or not – no one knows yet.”

          And this is the challenge with benchmarks and investing. The past is really only a decent predictor of future results.

      2. First time on a PF site I’ve seen someone (besides myself) mention frontier markets!

        What’s your take on them? Any suggested plays, benchmarked or otherwise (just to keep it on topic)?

        1. Hi SST,

          Frontier markets are challenging, because they don’t have the liquidity that developed markets investors are taking for granted. In one market I have looked at, I may be able to move their index by a lot if I just bought $100,000 worth of stock. (bid ask spreads could be huge) But you can find interesting companies in certain sectors like agricultural land, which wasn’t available in the US for a while.

          Share prices are very unpredictable in frontier markets. I would say that a company paying a dividend and doing so for years is a sign of good corporate management. Value situations are possible there – like liquidation, buyouts etc. I have observed a small tobacco company just pay super high dividends for years, before getting bought out for a multiple of original price.

          You also have currency issues – frontier currencies usually go down against dollar over time ( some are pegged to USD or EUR, and then the peg is broken)

          The major shareholders might be involved in self-dealing, or they may be abusing rights of minority shareowners. For example, a major shareholder might issue shares “at par” to increase the capital – but not everyone would have the right to buy shares so you would lose out.

          Investment costs are high. Some taxation systems could be opaque – you may sell at a gain, but your whole proceeds could be taxable ( or at least it used to be the case in some)

          Based on my research, VXUS or VWO do not own any Argentina etc. So an investor who thinks they own “the world” don’t own Argentina, Nigeria, Romania, Jordan, Vietnam. Who knows, one of these countries could be the next big thing. Or not. But most investors don’t own those countries.

          I have lived in one frontier market for a long period of time. And may retire there one day ( living expenses are super cheap, and country is much more stable and safe than others that most people on the interwebs talk about). You may email me at my name at gmail dot com for more information.

      3. DGI, I think you are missing the point of the philosophy behind the strategy of owning a globally diversified portfolio of stocks and bonds. You are not trying to pick which asset class or classes are going to do better in the next 20 years or more. You are, instead, acknowledging that you cannot predict the future, and settling on owning everything in an allocation that suits your risk tolerance (yes, as Cullen Roche correctly points out, you are making some active decisions here, it is not totally passive), and accepting whatever the market gives you. If you think you can do better than that, good luck to you, but the evidence on this if that you probably won’t.

        1. Hi Grant,

          I think you are missing my point.

          As I mentioned above, the problem is that the index person acknowledges they do not know anything about the future. This sounds humble on the surface.

          But then they go ahead and state that they will pick certain asset classes because they think they would do better than the other asset class ( this is arrogance that directly contradicts with what you claim the philosophy behind a globally diversified portfolio should be)

          I mean, why don’t many index investors own bonds? Because they think that bonds would do worse than stocks.

          So on one hand, they state they are humble and don’t know what the future holds. But in reality, those index investors are chasing past performance of stocks and avoiding bonds by betting heavily on stocks. Their actions are directly contradicting to what they claim their beliefs to be.

          If you still do not understand what I am trying to say, please refer to the portfolio of Michael James. Or the portfolio of Robb Engen. They claim they don’t know what they future holds, but then make concentrated equities portfolios based on their beliefs that stocks do better than bonds. So they are making a prediction that stocks will do better than bonds. US index blogger Jim Collins also believes in 100% equities portfolio that is mostly of VTI/VTSMX, until you retire, when you should go 25% bonds. So these people are making decisions, where they try to predict the future.

          At the same time you are telling me that indexing means that you are not making a prediction. Which one should I believe?

          1. DGI, I understand what you are saying, but a couple of points.

            1. Most indexers do not own 100% equity portfolios. The reason that some do is that historically, stocks do, in fact outperform bonds, so it is certainly a rational thing to do. Of course, no one knows the future, stocks may not continue to outperform bonds, but given that history, and the fact that equities are the only asset class that fully captures human ingenuity, it would be irrational to bet otherwise. So, yes, they are predicting that equities as an asset class will do better than bonds. That is quite different to predicting that certain stocks will do better than the market of stocks – something that the research shows is exceedingly difficult to so.

            2. Most indexers do own bonds, and do so mainly for behavioural reasons – to reduce volatility so that they do not panic sell in a crash, converting a temporary loss into a permanent loss of capital. If you don’t mind the volatility of an all equity portfolio (and most people cannot handle that), you do not need to own bonds, at least in the accumulation stage.

            3. Michael James and Rob Engen do not have concentrated equity portfolios. They have highly diversified global equity portfolios holding thousands of stocks from all over the world. This is is very different from owning a concentrated portfolio of 30-60 stocks in one country. Jim Collins recommends switching to 25% bonds at retirement. This is because you need on-going liquidity when you are living off your portfolio, and he does not want to be in the position of having to sell equities in a crash, or not reinvesting stock dividends (which is the same thing as selling the same $ amount of equities) – you want to be reinvesting dividends in a crash to be buying at depressed prices in order to get the full long term returns of equites.

            4. Cullen Roche correctly points out that passive indexers are kidding themselves if they think they are not making some active decisions. They are, unless they own the Global Asset Portfolio, which I think currently is about 60% bonds and 40% stocks with a few other things thrown in. They will change the ratio of stocks and bonds based on their willingness, ability and need to take risk, and likely overweight their home country stocks because they spend in their home country $s. Those are the reasons these changes are made, not because indexers are making predictions about the future. Making a few decisions about asset allocation of a globally diversified portfolio is very different level of “being active”, than deciding what stocks to buy, predicting which ones will do better than the others, in a portfolio of only 30-60 stocks in only one country

  6. Wow, more agreements than difference.
    I’ve always had problems with benchmarks because it seems one is comparing two different things. The Index’s compare the change from the previous year. If the market drops 15% one year, and next year is up 20% what does that really mean and how does one compare it to their portfolio?

    For the average investor they will be adding new purchases, maybe selling and possibly reinvesting their dividends. How do those transactions relate to the Index which has no transactions?

    For me and as others have mentioned, its the income for the year. Has it increased and is it up from the previous year. If yes to both than I’m happy.

    1. Yes, the average investor will have new purchase, and the indexer will do the same. Depending upon how much you “trade” though, those fees add up over time and that means you have more chances to underperform the market.

      Investing should really embrace your inner sloth 🙂

  7. I don’t even look at benchmarks. I’m not nearly sophisticated nor smart enough to pretend to understand everything in the financial world. As far as investing goes, for the most part I am looking to continually increase the overall income of the portfolio.

    1. I also have a bias to income because that’s the money I need to live from. In the end, do I have enough money to cover my expenses today and going forward? If yes, then not much else matters 🙂

      1. Yup, Cullen has that rare gift to simplify the complex.

        Other reads? A mixed bag, mostly ‘thought process’ sites, none which are overly practical regarding personal finance (My Own Advisor the being the exception, of course!):

        A Wealth of Common Sense



        These last two are Canadian and really only for super intelligent finance nerds (I’m not one, I just play one on the internet!)


        Worthwhile Canadian Initiative

        Farnham Street
        (Non-financial but Munger influenced; also Canuck)

        Happy surfing!

  8. re: “I don’t benchmark my portfolio. I see no reason to do it, because all information that benchmarking provides is in the past.”

    Agree and disagree. I don’t use any index to gauge performance either; I benchmark my total return portfolio to the return I require and desire to provide for my future needs and wants. Yes, all info is historical but what it does is provide a loose trend of the general market (and you have to tie that to probabilities).

    re: “When it comes to investing…half of the investor dollars will outperform and the other half will underperform the market average.”

    I don’t think this is correct, by a long shot. I would say 80% underperform the average and 20% really outperform (e.g. the average is 8%/yr, 80% take 6%, 20% take 16%).

    “In many respects, indexers or dividend investors or other styles, we’re all hoping for the same thing – the past will continue to be the future in some form meaning positive results will prevail.”

    That’s the big handicap with the average retail investor, they have one macro strategy — long. When you’re only buying “up”, that leaves a lot of “down” on the table. Remember, the markets are going down about half of the time, and this causes people great stress simply because half the time their strategy isn’t working, it’s making them more poor not more wealthy. Those who utilize a whole market strategy don’t really care (or stress) if the market goes to 100,000 or 10, it’s all fair game and doesn’t require a benchmark.

    1. I agree that you want to earn some returns. Earning a return is important. It is more important to earn a decent return and fail to beat a benchmark, than to beat a benchmark but have a poor return.

      If I had bought VXUS/VGTSX a decade ago, I would have earned a low return of 1.96%/year. If I had picked VTSMX, I would have returned 7.40%/year. A decade ago, CD rates were close to 4% – 5%/year in the US of A. (these are all in US dollars)

      So in my case, if I invest $1,000,000 today, I expect to earn anywhere between $30,000 – $40,000 in annual dividend income, that keeps up with inflation over time. Today, the starting number would be close to $30,000. So if I spend around $30K/year, and my dividend is adequately covered from earnings (which hopefully grow over time), I will be a happy camper. Though, having some interest income from a government issued bond would be helpful – a deflationary scenario can wreak havoc on an equity heavy portfolio. The future is unknown, unfortunately. Remember how everyone has been forecasting a lot of inflation since 2008 – and we have had low inflation/deflation instead.

  9. Nice article. I don’t benchmark my portfolio. I see no reason to do it, because all information that benchmarking provides is in the past. And as we know, past performance is not a guarantee for future performance. I see it is more important to stick to a plan, than compare yourself to a benchmark.

    The more I think about it, the more I have come to see that investors are asset pickers, no matter what they claim to be. So the reality is that you do not know whether the assets you picks ( a mix of index funds) will do better or worse than the mix of individual dividend stocks I pick. (And so does Cullen Roche from PragCap in a much more eloquent way )

    Let’s think about alternate universe DGI’s.

    The first one is pure DGI me, holding say ~ 100 individual US dividend stocks. Let’s say they return 10%/year. Do that mean they will return 10%/year going forward? We don’t know. But the regular dividend payments let me hold through thick and thin, and not jump ship.

    The second one is my tax-deferred 401K plan (for a portion of my assets = RRSP equivalent for my Canadian friends). I own US stocks ( extended mkt and large cap), Foreign Stocks, and also some small amount in total bonds/stable value. In the past this mix has done worse than portfolio one listed above. If I had not picked foreign stocks, the second portfolio would have done quite dandy. But what does that mean for the future? We don’t know. Since that money is locked in for me and I can’t touch it easily, I can hold tight.

    The third case is grandma, whose checking account has beaten the S&P 500 since 2000. Wallstreet isn’t calling..yet 😉

    So to summarize – everyone is an asset (stock) picker, whether you will pick AAPL, JNJ etc or VTI, VXUS, VCN etc. The past doesn’t tell you much about the future. So then I see no use of benchmarking ( though it would have told me to sell MCD when it did worse than the benchmark for a few years)

    1. Thanks DGI.

      You are totally correct about the future. We simply don’t know. In many respects, indexers or dividend investors or other styles, we’re all hoping for the same thing – the past will continue to be the future in some form meaning positive results will prevail. I need to read your blog now, missed a few articles.


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