You created an investment portfolio. Next, you want to review actual performance against predetermined benchmarks. What is a portfolio benchmark? What common benchmarks are used by investors to assess portfolio results?
All that and more in Episode 59 on the Wilson Wealth Management YouTube channel.
“What is a portfolio benchmark?”
Pretty much anything can be a benchmark.
A benchmark is simply something than can be used to compare actual performance. Of an investment. Or the portfolio as a whole.
The more relevant to your investments, the better the comparability. To the extent possible, you should look for “apples to apples” comparisons that reflect your holdings.
“What are some common benchmarks?”
There are a few very simple benchmarks that many investors use.
Zero Return
Any return above 0% is a positive against this benchmark. Useful, in that investors tend to not want to lose money on their portfolios. Regardless of the type of assets or level of risk.
Real Return
If your portfolio earns 2%, that is good versus a zero return benchmark. But what if inflation was 3%? In purchasing power, your 2% actually lost money. Many investors factor in inflation and assess results against the real return.
Given economic forecasts for 2022 and the near future, real return benchmarks may become popular.Risk-Free Return
Most investment portfolios assume some level of risk. Many investors like to compare their portfolio against a riskless investment. The view being that a (even low-risk) risky portfolio should outperform a no-risk one.
Currently, short-term US or Canadian Treasury bills best reflect a risk-free rate of return.
Arbitrary Return
This return can be plucked out of the air. It can be nominal or real.
For example, your current capital and funding plans for the next 20 years require a nominal annual return of 6% to amass $2 million at retirement. Perhaps you wish to annually earn at least the inflation rate plus 3%. Or just beat your brother.
There could be a logical reason for the desired return objective. Or not.“Are these ‘apples to apples’ benchmarks?”
If you are invested in nothing but Guaranteed Investment Certificates or other extremely low-risk investments, possibly.
But more likely, these are used as a ‘sanity check’. Simple, intuitive, easy to find. Then they are combined with other benchmarks that are more specific to your actual target asset allocation and investments.
We will look at more relevant portfolio specific benchmarks in the next episode.
For a little more on this topic, please refer to “Portfolio Reviews: Benchmarks” and “Common Portfolio Benchmarks”.
