Stop obsessing over benchmarking your portfolio
Benchmarking certainly has its virtues but by no means is this work essential.
In fact, I would suggest you stop obsessing over benchmarking – that includes benchmarking your portfolio.
Same goes about obsessing over net worth. That’s not value added in my opinion.
I still don’t post detailed net worth updates for a few reasons.
Benchmarking theory
As a project manager, I’m quite familiar with benchmarking techniques and theory. I won’t bore you with the details but it’s important to have some context on why I feel the way I do.
Distilled, benchmarking is the process of measuring key metrics and comparing them. That could be comparisons within a business, against a competing business, amongst industry peers, or beyond.
Benchmarking from a process or systems-perspective helps people understand how and potentially where organizations could focus to help change performance. That’s good of course. Change can be good.
There can be internal benchmarking, external benchmarking and performance benchmarking to name a few methodologies.
The point here is that benchmarking can provide some objective information/data into your current state, which can allow you to set initiatives for future improvements. Essentially, benchmarking is a bit of navel-gazing. It’s about being diligent about taking some time to be reflective. Hold on to that idea.
Benchmarking for investment purposes
When it comes to benchmarking for investment purposes, similar principles apply. That process is to measure individual or institutional performance vis-à-vis others – to compare the performance of a security or a set of securities.
Generally speaking, broad equity market and bond indices are used for this purpose. There are dozens upon dozens of benchmarks investors can use.
I’ve discussed some popular, established benchmarks before on my site and I’ve recapped a couple of them below for information purposes:
S&P/TSX Composite Index – Canada
This is likely 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.
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.
There are certainly many others to use and those could be specific to securities (such as small-cap stocks) or industries (as in the financial sector). Regardless of the benchmark you use, it should relate to your investment style. Otherwise, you are comparing apples to oranges. And herein begins just some of the challenges with benchmarking for me.
Problems with benchmarking your portfolio
A well thought-out benchmark should correspond to the investment style of the investor. That means some benchmarks will be appropriate for certain portfolios, other benchmarks will be dismal.
For example, I have long since unbundled one of my favourite Canadian ETFs (iShares XIU) for passive income. XIU is a reasonable benchmark for my Canadian stock selections. Instead of owning XIU, I’ve decided to select the stocks within XIU that I think will deliver meaningful dividend income (and growth over time), own those stocks directly, and skip paying any ongoing XIU money management fee.
That approach certainly has some risks because my selections could underperform XIU. Then again, my picks might outperform XIU for some time periods. But it doesn’t matter that much.
This brings me to a few key problems when it comes to benchmarking your portfolio.
1. Benchmarking does little to determine your personal risk appetite or personal goal setting.
- Is your objective to reduce financial risk?
- Is your objective focused on income or growth, or both?
- Is your objective to match Canadian market or other market returns?
- Do you have any small speculation aspirations? Should you even speculate with your retirement portfolio?
While there is some value in benchmarking the outcomes will do little to help you set your own personal goals. Those goals are things you need to come up with on your own, measure, and see them through.
2. Benchmarking is a lagging indicator.
Whether your benchmarking data is after 5-years, 10-years, or more, this is hindsight. Last time I checked, nobody can predict the future with any accuracy – nobody. The sooner you embrace that, the better an investor you will become. You will learn to stay the course with more conviction over time.
If you (or I) have found out we’ve underperformed our Canadian or U.S. or international markets significantly over any selected time period, say 10-years, well, it’s too late! What’s done is done. You can’t go back in time to make changes. You can only make changes going forward.
Benchmarking provides little information in the way of what’s occurring real time or any reliable indicators about the future. As we should all know by now, past performance is never any guarantee of any future results!
My advice: set personal goals and tune out everything else
My suggestion is if you want to get better, at anything, while benchmarking might add some value you’re far better off to focus on you.
- Focus on your goals and those of your family.
- Focus on your health.
- Focus on your plan.
- Focus on your behaviour and finding any money management system that works for you.
- And the list goes on….
I tend to yawn when I hear investors, advisors or other so called experts speak of benchmarking and touting its merits on end. I feel it’s an important measurement process but benchmarking your portfolio is not worth obsessing over.
Most often, there are simply too many variables that may or may not apply to you.
So, focus on your goals, reflect, and then make your improvements from there. At the end of the day, that’s all that matters.
Stop obsessing over benchmarking your portfolio summary
I’ve leave you with a few remarks from an excellent management guru (Robert Kaplan) who I enjoy reading content from, from time to time. His quotes are framed in a business context but they have everything to do with your plan as your own CEO or CFO as part of your financial journey.
Thanks for reading.
“Reaching your potential is not simply about dreaming or being idealistic. It is a process that involves specific actions, exercises, discipline, and hard work. It is challenging, rewarding, and unending.”
“you follow your own path, I don’t know how much money you will accumulate, how much stature you will achieve, or how many titles you will garner. But if you’re true to your convictions and principles, I know you’re far more likely to feel like a big success. In the end, that feeling will make all the difference.”
–Robert S. Kaplan, What You’re Really Meant to Do: A Road Map for Reaching Your Unique Potential. He is an American accounting academic, and Emeritus Professor of Leadership Development at the Harvard Business School, and one of leading management consultants in the world for the last 50 years.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Newbie to investing since last year. Kick myself for not investing more when I started in March/ April of 2020. Great article, but then I read this, stock-picking scenario. See the link below…
https://ofdollarsanddata.com/why-you-shouldnt-pick-individual-stocks/
Thanks for reading Malcolm. Definitely owning individual stocks is not for everyone nor should folks really aspire to do that, just that, I feel owning a mix of dividend paying stocks and low-cost ETFs works for me.
Even with indexing, investor behaviour matters big. Thoughts?
Hi Malcolm,
While picking individual stock is indeed not for everyone, I wouldn’t care too much about that guy’s blog. I got three pet peeves reading the article in your link and the About section of the blog:
– He mentions the performance of professional managers over a five years period (75% of them not beating their benchmark). Five years is nothing when considering a long term investment strategy! Anything under 20-25 years is irrelevant according to me. Ten years can give a (very) rough idea of how things are going, but is still not enough to jump to a conclusion.
– He mentions his experience buying two (very) speculative stocks and bases his conclusion about individual stocks on that experience.
– In the About section of his blog, he mentions that he will teach you how to time investment purchases. It has been proven on multiple occasions that market timing is not a winning strategy (time in the market is more important than timing the market). This one is a big red flag to me.
As you mention, you are beginning your journey. I invite you to diversify your sources of information and not close any door to different styles of investing.
Have a nice day and nice investments!
I really liked those comments, especially the speculative plays and the last point – diversify your sources of information.
While some folks might get lucky (and I know many bloggers, investors, others that have in some picks which is great), basing any conclusions on 1 or 2 stock picks cannot be overly relevant. It’s just probability and math 🙂
This article I agree 100% with. The only benchmark that really matters is the one you create for yourself.
I hear ya! Thanks for your comment 🙂
Bang On!!
Ha, great stuff Gavin.
A very sensible argument. I don’t know how our investments compare to the indexes and don’t really care. If dividends and growth keep up with the mandatory RIF withdrawal, I am content. A more aggressive, involved investing plan could well gain more but then I would probably come up against that OAS clawback thar Ricardo mentioned.
Maybe there is a place for watching indexes if you have no clear investing objectives and just blindly invest in shares (or etfs come to that), it makes sense to validate your choices against the norm. At least then if returns are below the index it would be a signal to switch to an index etf.
Thanks Richard. Nice to hear from you. I suspect some argue for benchmarking all the time and that’s fine – I’m not against it entirely. I simply think knowing and focusing on your own goals is important. Best make more time to focus on that stuff vs. what other people think you should be doing. 🙂
Hi Richard;
You would have to be exceedingly lucky to stay ahead of the minimal withdrawals even up to 80 yrs.
I figure the principal drawdown will start sometime around 75 for myself if things go right.
Still, if you are in the boat of having possible OAS clawbacks, you more than most likely will be maxing out the TFSA and probably will be able to establish a non-registered portfolio for dividends, Once these are building up you would actually have a more tax efficient income as the dividends are at a lesser tax base and presumably the LIF/RIF withdrawals will diminish as you age (principal degradation). The markets have their ups and downs. I was so to say happy with the diminished portfolio value as of Dec31st, 2020 as it enabled me to withdraw less. As the cash was available in the accounts I did not have to sell anything. Since then the portfolio values have increased significantly and next year will be a bit more touchy to avoid the clawback unless there is another market decline.
You have all year to make withdrawals from the RIF/LIF so you could wait till the end of the year to built a cash base for withdrawals if the portfolios are generating sufficient dividends to cover the minimum withdrawals.
Your TFSA will probably eventually be your greatest asset so build that up as much as you can.
Hopefully you will not have to rely on it.
RICARDO
Hi Ricardo, I am only early 70s so it is easy now. Give it a few years when the withdrawal reaches twenty percent and I doubt that I have a chance to keep up.
Hopefully by then my tfsa will be enough to keep me supplied with gin (and Depends).
Can’t agree more Mark. Benchmark your portfolio again the index ETFs is can provide you with an idea how you’re doing, but definitely don’t get obsessed. It is far better to track your portfolio’s performance overtime to make sure things are growing and doing what you expected.
For example, our portfolio returned over 13% so far in 2021. Is it better than other benchmarks? I have no idea. All I know is I’ll take 13% gain over 3 months over no gains at all. 🙂
Well done!
Great column Mark. Some really good points.
I think bench marking has a place in causing you to review your progress and your process against your own needs and goals, as a priority rather than versus other market metrics.
I think it has merit but I suspect if you compared your running prowess to every other person your age you wouldn’t be as far along as you are! The only (running) goals that matter are your own.
Benchmarking has merit but I would never overthink it in life or in finances.
Well with running I have learned to love the process rather than focus on the goal. That makes all of the discipline of planning, physical, mental and cross training, adapting to weather & injury easier and creates desire to always keep going and adjusting goals as needed. For racing I mostly compete against myself but do use others around to motivate me more. I’ve long been an age group competitor in our Provincial Running race series and finished usually in 4th or 5th place at year end. Since moving into my 60’s I’ve been able to move up a little more. 2 years ago before Covid when I managed to come back from a long injury hiatus I did 2 races finishing 2nd, then 1st in my age group. This made me hungrier. Last year I ran one “virtual event” (15k) that had 43 competitors all running their own routes verified by their GPS watches uploaded to organizer. I actually won overall. There are also sophisticated scientific calculators for age grading that I use. So I can compare performances I did before at a younger age to the equivalency of what I do now at an older age and vice versa. That is very motivating too because I work to be the same equivalent fitness or better. And I am. So its a mix of bench marking with others and myself. I train and compete heavily both ways and the limiting factor is what my body can take. Am excited for 2021 and am aiming for top 3 age grouper in 2 Atlantic regional events.
With investing its less about trying to maximize things (too much risk for us) within our asset allocation/investment choices and focusing on meeting or exceeding our needs with a small eye to benchmarks. Overall with both running and investing its more about me vs. the market or other competitors.
That’s a very long way of explaining I agree with you that if I only concentrated on others in running its very doubtful I would accomplish as much. Same is likely true with investing.
It’s really impressive your running discipline. I strained my shoulder a bit recently at the golf range so it’s a another big reminder for me to stretch more and take care of my body. I simply can’t run to the driving range and hit balls like I did in my 20s. Sadly!
Oh no! Best wishes you get that better. I know how you like golf! If you don’t already maybe check with a good physiotherapist to speed recovery and give you more stretches and strength training actions to help.
Thanks. Its a passion. I feel lucky to be able to do this again seriously after about 10 years where I just couldn’t find the solution to get over my chronic hamstrings injury. Still have issues but I can usually work around them now with help from physio and massage (my lady fixers!) and lots of strength training. Sometimes feels like a full time job!
It will get better. Just need to stretch more every day. Working on that later today!!
Excellent.
I don’t benchmark, I just set an objective which has been to increase dividends by 10% per annum.
Last year was not conducive to my objectives and with the div cuts it was actually a significant shortfall.
The biggest trouble I had last year was sufficient cash to buy more equities. Oh well, just keep on soldiering on.
So far this year I should easily surpass the 10% gain on divs but obviously the benchmark (did I say that) is lower because of the cuts last year,
It is a losing game in my case as I have now fully converted to a LIF and RIF and I can not hold to that 4% rule that is always talked about. CRA just won’t let me no matter how much I try to cajole them.
However the TFSA keeps on growing (>$800 divs mth) as I am able to contribute to the max and as well extra cash from the LIF/RIF is funnelled in to a non-registered investment account, So hopefully that account will also grow and provide some income which is unfortunately taxable.
Nest year will be interesting tax wise as I am wondering if I will avoid the OAS clawback. Trying to cut it as close as possible without going over with the withdrawals this year Next year’s withdrawals will depend a lot on the market as the LIF/RIF have appreciated significantly from Dec 31st 2020 so even pulling the minimum may put me over the OAS limit.
Such troubles to have, I just can’t complain enough. LOL
RICARDO
Yes, a shame right – LIF and RIF minimums?? I wish they would get rid of those things.
If you’re trying to avoid any OAS clawback you have some good income in retirement – a great problem to have 🙂
Good article, comparing your performance to the market, does little to inform one of how they are doing personally. It works when your portfolio and the market is rising, but little when the market drops.