Many investors evaluate their portfolio returns against benchmarks like the S&P 500® Index. But even the broadest index is unlikely to reflect the diversity of many long-term investors’ portfolios, which often include not only domestic stocks but also bonds, cash investments and international equities—to say nothing of more-specialized asset classes.
“If your portfolio holds both stocks and bonds, the S&P 500 wouldn’t be an accurate gauge because it measures only U.S. large-cap stocks,” says David Koenig, vice president and chief investment strategist for Schwab Intelligent Portfolios®. In this case, a blended benchmark—consisting of, say, the S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index—could offer a more accurate comparison point. Just remember to blend the two indexes in direct proportion to your holdings. If your portfolio consists of 60% stocks and 40% bonds, for instance, the index blend should also be 60/40.
Benchmarks can also be useful for evaluating actively managed funds, as the success of such funds is most often measured by how much they outperform their underlying index. That said, “any fund can beat a benchmark over short periods,” David says, “so look for outperformance over a longer period—ideally, three to five years, or even an entire market cycle.”
In the end, however, investing isn’t a competition—it’s about achieving your goals. If your portfolio gains 8% against a benchmark that rose just 4%, for example, you’ll likely be pleased with your outperformance. But will you have enough for a comfortable retirement? No benchmark can tell you that, so work with a financial advisor if you’re unsure.