or actually just lucky? 🤔 That's exactly why benchmarks exist. Well, not exactly, but one really good reason. A benchmark is simply a measuring stick. It's the standard you compare your portfolio against to see whether you're adding value... or just catching the same market wave as everyone else. So why bother using a benchmark? Firstly, performance... Are you beating the market or just enjoying the bull run with everyone else? Or worse yet, are you TRAILING your benchmark? Secondly, the RISK you're taking (this is more important in my opinion than performance) .... Did you EARn those returns... or did you white knuckle your way there with twice the volatility of your benchmark? Or worse yet, do you have twice the volatility for worse than market returns??? 😬 And thirdly, benchmarks are great for some accountability.... If you're paying someone to manage your money(which is very unlikely on blossom), are the managers earning their fees or just buying expensive versions of the index? For us DIYers, this encourages us to be accountable to ourselves for our active decisions and portfolio construction. Here's an analogy I've used before. Think of benchmarking like a track and field race. A sprinter doesn't finish a race and say "I felt pretty fast today, I did great." The sprinter would compare their time to their personal best, the world record, the qualifying standard of some sort... Something like that, right? Otherwise, that number is meaningless. Investors must do the same. One of the best known pieces of benchmarking comes from the SPIVA Scorecard, which has repeatedly found that most active fund managers fail to beat their benchmark over the long term after fees. That's why benchmarks matter. They help separate skill from luck, from a well built portfolio to a buffet of low quality holdings and in some cases low quality high risk!! Now for the fun part... We all have to have some fun with this like of topic. Vanguard's S&P 500 fund $VFV has returned about 86% over the last three years in CAD... roughly 23.1% per year, compounding and a standard deviation of 12.1 over 3 years 🤯 That's an INCREDIBLE run. Anyone with that return should be so happy. The FTSE World Index had a return of about 79% over the last 3 years or .... 21.1% per year, compounding and a standard deviation of 12.7 over 3 years 💥 That's still phenomenal growth! And that's similar to some all in ones in Canada like Vanguard's $VEQT and iShares $XEQT So before celebrating that one stock that doubled or all that covered call ETF 'income' you received, ask yourself ... Do I have a benchmark to know how I'm doing? If I do, did my portfolio beat, match or trail my benchmark? And... what extra risks (ie higher beta and volatility) did I take to get there? Because beating your market is impressive, especially ones like the S&P 500. And if you don't have a benchmark, maybe now is the time to have one 😁 Happy investing guys!
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44 Comments
Mr Financial@mr.financial · 1mo
I personally use the MSCI ACWI IMI Index as my benchmark for my 60/40 portfolio of mcap to factor tilted global indices. I'm not active, with annual rebalancing, so I expect to get very close to my benchmark returns.
Max Wealth@maximumwealth · 1mo
Fraser McGuire@frasermcguire · 1mo
Great post! Absolutely choosing a benchmark that is reflective of your asset allocation, etc is so important! I think if we go one layer deeper then it becomes clear that even if you beat your benchmark, you can still underperform an investor who trailed the same benchmark simply due to timing. I shared this chart in a post about 6 months ago and it’s the most important and humbling graph in investing. If you made a $1 million off simply indexing these last 15 years, congrats! You did half the work. The same investor who started indexing in 1999 would have half the success with the same strategy. Obviously you can only play the hand in front of you but we have to admit when the rising tide of a historically strong bull market has lifted our boat. For me, this was true of my real estate investments. Same moves in a different era would not have worked out.
DM @dmomo · 1mo
I've lived a very fortunate life. I can count privilege and a handful of instances in my life that have blessed me with good luck. Stubbornness, OCD, and a high tolerance for volatility are my other weapons.
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