Are You Comparing Oranges to Tangerines?
One of the most common questions we receive when it comes to performance is “why aren’t the returns on my account the same as those of the stock market?” While it’s helpful to use a benchmark to track your account's performance, it’s important to understand when something is a good benchmark and when it isn’t. The S&P 500 or Dow Jones make good benchmarks for accounts that are 100% invested in the S&P 500 or Dow Jones. They don’t make good benchmarks for accounts invested in any other way.
Let’s say your portfolio has been allocated to 50% stock and 50% bonds. Right off the bat, it’s not going to track the stock market because only half of the portfolio is invested in the stock market. Digging deeper, we find that of the stock portion, 60% is invested in US stocks while the other 40% is invested in international stocks. Now the account performance will deviate even further from the US stock market because a portion of the account is invested in foreign stocks. As we diversify the account to gain access to different types of investments, thereby lowering risk, we also end up looking less and less like the indexes often quoted on the news. When this happens, it makes more sense to compare your portfolio to a benchmark with a similar asset allocation. In doing so you cease to compare oranges to tangerines and start comparing oranges to similar oranges.