“How am I doing?”
It's one of the most basic questions an investor can ask, but answering it isn't always straightforward.
For starters, common yardsticks of market performance, such as the ASX/200 or the Bloomberg Global Aggregate Bond Index, assume that an investor is fully invested in that asset class—all stocks or all bonds. Few investors are. Comparing your performance with that of an ASX/200 index fund, or even a total stock market index fund, is a poor choice unless your portfolio is 100% Australian equities. Instead, it’s better to compare your results with a benchmark that roughly matches your own portfolio’s asset allocation; I’ll talk about where to go for that type of intelligence below.
Yet even as such a bespoke benchmark is an advance over a single-asset-class benchmark like the ASX/200, it serves the single goal of helping you assess your security selection. It makes no judgment about your asset-allocation choices. For example, you may have managed to shred the Bloomberg Global Aggregate Bond Index’s performance with your all-bond retirement portfolio. But if you’re only in your 30s, you may still not meet your goals because you’ve stuck with a portfolio that’s too conservative given your life stage. What you need more than anything is a check on the reasonableness of having so much in bonds in the first place.
No matter what type of “How am I doing?” question you’re attempting to answer (and you’ll probably have more than one at various points in time), here are some benchmarks you can use to help you make a well-considered assessment.
If you want to see whether your security choices have added or subtracted value:
As noted above, one of the best ways to keep tabs on whether you're helping or hurting returns with your stock, managed fund, or exchange-traded fund selections is to create a custom benchmark of inexpensive index funds or ETFs that mirrors your portfolio's asset allocation (or your target allocation). Such a benchmark is not just a worthwhile check of your security-selection acumen but also a lens into whether you could be running a portfolio that's simpler and cheaper than what you have.
