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.
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.
Benchmarking words of wisdom…
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.