Weekend Reading – Stop obsessing over benchmarking

Weekend Reading – Stop obsessing over benchmarking

Hi Folks!

Welcome to a new Weekend Reading edition, suggesting you should stop obsessing over benchmarking.

Before a quick hit on that theme….a few recent posts:

We surpassed a new milestone related to our passive, projected annual dividend income this year:

February 2024 Dividend Income Update

….and last weekend, I highlighted some of the stocks we own that recently raised their dividends to support reaching this new milestone. 

Of course, part of my portfolio barely pays any dividends or distributions at all. That number would be much, much higher if we only owned high-paying dividend stocks.

I invest the way I do on purpose though, some growth matters too – the challenge is from the market, you don’t always know if/when growth will happen and by how much. Drawing down your portfolio at the wrong time could be absolutely disasterous to your financial health. So, I won’t do that. I will also hold some cash to buffer poor markets. 

For the record though, here is one ETF I continue to own for some hopeful growth…

Then and Now – QQQ

Weekend Reading – Stop obsessing over benchmarking

A few weeks ago, I highlighted the stock market remains a tough place to beat the index but that may or may not be your investing objective anyhow.

It probably isn’t as you get older.

It probably shouldn’t be all along…

Benchmarking certainly has its virtues but by no means is this work essential for your financial success. 

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 on this site 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 continue to feel the way I do.

In short: 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. In the business world, benchmarking is fairly analytical work that explores what competitors who are best at and identifies the gap between what they are doing and what the benchmarker is now doing. Sometimes the effort defines a single competitor as ‘the benchmark’ but more often it involves the identification of the common best practices of the lead group.

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 including the NASDAQ index I referenced above via QQQ.

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 – that’s a big part of where that $45,000 per year comes from now. 

Not all of it. 😉

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?

While there is some value in benchmarking, they have nothing to do with your own goals.

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 – whether that’s with the individual stocks you own, the ETFs you own or any strategy in between. 

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, monitor them, 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.

Benchmarking your portfolio

Image Source: Pexels.

  • Focus on your goals and those of your family.
  • Focus on your health.
  • Focus on your behaviour and finding any money management system that works for you.

I continue to yawn when I hear investors, advisors or other so called experts speak of benchmarking and touting its merits on end. It is not as though learning what others do or checking in on some index returns has zero value… I just think it’s not worth obsessing over. 

Weekend Reading – Stop obsessing over benchmarking

Borrowed from one of my favourite sites: 

“The most powerful productivity tool ever invented is simply the word no.” – Farnam Street. @farnamstreet

Friend and past guest of the site Peter Hodson, CFA, founder and head of Research at 5i Research Inc. shared 5 reasons why comparing your portfolio against an index doesn’t work, his summary:

  1. The index may not be right for you.
  2. An index is often an incomplete picture.
  3. You can’t spend your index. 
  4. An index does not reveal or include taxes or commissions.
  5. Some index structures just don’t make sense. 

From the article:

“At the end of the day, any investment plan must be right for you. Who cares if you beat the index if your financial goals aren’t being met?”

CMHC ends the first-time homebuyer incentive – a flawed program from the start. 

“The CMHC program wasn’t useful since it didn’t help buyers put together a minimum down payment, and the restrictions meant some borrowers qualified for smaller amounts than they otherwise would, said James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender.”

Funny comment from Morgan Housel this week on interest rates and higher taxation:

I also found his post related to the dumber side of smart people very interesting. 

“If you become famous for your smart ideas, but that idea turns out to be either wrong or outdated, it’s extremely difficult to move on. The result is a lot of very smart people clinging to very bad ideas.”

Kanwal Sarai looked at the long-term upside of owning some U.S. Dividend Kings.

Rob Carrick wrote about the OAS clawback (subscription): How many people are affected, and how much does it cost them?

Well, for rich seniors, this is an issue but for 90%+ of the retirement population don’t worry about it. 

“The Old Age Security recovery tax, known widely as the OAS clawback, starts to kick in when a recipient makes more than $90,997 in 2024. A little more than 500,000 seniors were affected by the clawback, or 8.3 per cent of total OAS recipients,according to the most recent data from Statistics Canada.”

I found some data on X/Twitter, sharing some big-6 Canadian bank earnings recently – not too bad overall:

GenY Money invests her money in many Canadian bank stocks. Nice tweet. Love it. 

Like GenY, I’m not beating the S&P 500 every year (since all my money is not in the U.S. market) but am still beating the S&P/TSX consistently. I agree with her:

“This is why you shouldn’t have 100% in Canadian equities which is called “home bias”.”

And since a reader recently wondered what the “floor might be” when it comes to retirement, I pointed them to this free case study I did for someone else:

“Quick background – I’m 43, separated, 2 kids (one is 19 and in university now, the other is 14). I work full-time making less than $45,000 per year. I’ve had financial issues in the past. I have around $30,000 invested, in mostly my RRSP. I am way behind at my age (for retirement planning). I don’t have a lot of disposable income, so I’m trying to put aside $300/month now.”
 

Save, Invest, Prosper!

As always, be sure to check out my Deals page – partnerships and discounts I continue to maintain to help you make the most out of your money – some of them you can’t find anywhere else!

Even better 🙂 – you can also consider reaching out here for some low-cost financial projections services – anytime.

Cashflows & Portfolios

In fact, there are now two (2) low-cost services to choose from:

  • Done-For-You – we do the work and data entry, and provide your reports OR 
  • DIY – whereby you do all the work, you do your own data entries, and you get your own results in the software – we essentially open up some professional financial software for you to use to be your own retirement income planner!

As a My Own Advisor reader, you always get a discount off either service. Just mention my site. That’s it.  

I launched this service with my DIY investor good friend – a service founded by DIY investors for DIY investors without the conflict of any advice.

Have a great weekend! 

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. 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.

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