It’s human nature to compare yourself to others. The grass is always greener on the other side as they say, and many of us measure our own success by looking at how our lives compare with those around us.
However, when it comes to your investments, you may need to think carefully about how you quantify your performance. After all, everybody has their own unique financial goals, so a “successful” portfolio looks different depending on the person.
As such, it is important to find the most suitable benchmark to measure your investment performance against.
Read on to learn about some of the most common benchmarks that clients use.
1. Measuring against cash
Measuring your investment returns against the interest you could generate on cash savings is a simple benchmark to use.
You assume little risk with your initial capital when you place money in a cash savings account. So, you may believe that taking on risk by investing your money may only be worthwhile if you see growth that exceeds the interest you are likely to get from cash savings.
As such, some investors may want to check that their investment portfolio is growing faster than the returns offered from cash deposit accounts. This view has been gaining popularity recently as cash savings interest rates have grown significantly.
However, the growth on cash savings is a simplified benchmark that doesn’t take inflation into account. Consequently, it may not give an accurate reflection of real-term performance, especially over the long term.
Moreover, this is a short-term view. Cash deposits – regardless of whether they are instant access or fixed-rate – are a suitable option for funds that are required for meeting near-term financial goals and expenditure, such as a deposit on a house, but not as an alternative to longer term investing.
Comparing the one year returns of cash savings against the one year returns of a diversified investment portfolio as a basis for making decisions on capital that is available for investment over a 30+ year time horizon is just as inappropriate as it would be to look at the long-term annualised returns of the US stock market of around10+% against current cash rates of 5% for capital needed for an item of significant expense expected in just six months’ time.
2. Measuring against inflation
Inflation has been another particularly relevant benchmark in recent years. This is because, unless your wealth grows faster than the rate of inflation, it could lose purchasing power over time.
Unfortunately, this is more likely right now as inflation remains high at 6.7% (in the year to August 2023) in the UK according to the Office for National Statistics and, according to Statista, 3.7% in the US.
As a result, some clients may compare their investment performance with inflation and consider their portfolio successful if it grows at a better rate.
The main drawback of this is that, current inflationary issues aside, inflation is generally much less volatile than stock market investments, so comparisons should be based on long-term periods rather than on the short-term data.
3. The 40-85% IA Mixed Shares benchmark
Measuring your portfolio performance against other investors may be a useful way to gauge your success.
The 40-85% IA Mixed Shares benchmark is one that pops up on fund fact sheets provided by various investment houses. It’s an index that is compiled using data from funds with between 40% and 85% invested in equities. Some investors may consider this a suitable average balanced portfolio index to measure their own performance against. Sadly, it isn’t.
In reality, it’s an incredibly broad benchmark because 40% to 85% is a large range to consider. This means that, on some measures, it could indicate a risk rating of between 4 and 8 on a scale of 1 to 10. Of course, if you drive a Ferrari and prefer to compare your speed to that of a Supercar, a Ford and a horse and cart, you’re going to keep yourself feeling happy!
The point I’m trying the make here is that you could be measuring your performance against a benchmark with parameters that are very different from your own portfolio.
4. A particular market index (FTSE 100, Dow Jones, S&P 500)
Some investors measure their own portfolio against a certain index and hope to outperform it. You may have choose your “home” stock market such as the Dow Jones, the S&P500, the FTSE100 or even the Hang Seng. Or it could be a popular worldwide index such as the FTSE All World or one of the MSCI iterations.
Why is this commonly done? Probably because of the many news media outlets that highlight, on a daily basis, the drama of the insignificant and mundane short-term movements of the stock markets. Â As a result, investors – and most of the industry for that matter – have succumbed to having some misplaced reverence for their relevance.
Regardless, using any such index may be an unrealistic benchmark because as long as you have a professionally managed investment portfolio that is truly diversified, especially if it has a mix of equities and bonds, Â the index will just not be representative of what you are actually invested in.
It would be difficult to compare the qualities of Thai fusion food with fine French cuisine, so best not to make a similar comparison with your investments and the wrong benchmark.
5. “Flavour of the month” investments
“Flavour of the month” investments come and go, and there will always be those who insist that they offer the best place to put your wealth.
Some investors may use these types of investments as a benchmark to measure their own portfolio against.
While I’ve not seen so much about cryptocurrency in the news recently, artificial intelligence (AI) stocks have been flying high this year driving in particular Nvidia alongside the other established tech stocks, such as Amazon, Apple, Microsoft, and Tesla.
Whether the latest thing is investing in non-technology, some pharmaceutical niche or even holding “moon rocks”, comparing portfolio performance to such high risk stocks at the very least ignores the principle of holding a diversified investment portfolio. At worst it leads to poor investment decisions such as ditching laggard holdings for the next hot things when you have already missed the opportunity.
Making such comparisons would be to overlook that these kinds of investments tend to produce short-term periods of exceptional growth that cannot be sustained. In some cases, particularly with investments such as cryptocurrency towards the end of 2021, big losses follow significant gains.
That’s why it may be sensible to focus on more appropriate benchmarks that help you measure long-term growth.
6. “My mate down the pub”
I’ve put this one in for a bit of fun, but still it isn’t uncommon. Comparing your investment performance with that of a friend is typically one of the least reliable measures of success. Over the years I’ve had investors ask me why they are not seeing the same returns that their friend is experiencing.
There are all kinds of reasons for this, including the level of risk you both adopt, the time that you have held investments for, and the specific investments you hold.
In short, you are normally comparing two totally different portfolios, and you may have different goals. As a result, this comparison is not normally rational or useful for either of you.
It is also important to consider whether your “mate” is being entirely truthful about their investment performance in the first place. It could be conceivable that they are simply cherry-picking the best performer in their portfolio and claiming this applies to their entire portfolio.
The index Charlton House actually benchmark against
At Charlton House, we feel that benchmarking your portfolio is appropriate because we, and the discretionary fund manager (DFM) that we use, are accountable to our clients. However, we do not use any of the methods listed above.
Instead, we measure your portfolio against the Asset Risk Consultants Private Clients Index (ARC PCI).
This index takes data from around 120 fund managers and over 300,000 portfolios every month, giving our clients and ourselves a comprehensive and reliable benchmark to measure your performance against based on investment currency and risk taken.
That said, when considering how successful your investment portfolio is, it is crucial to take your own personal goals into account too.
How Charlton House recommend clients actually benchmark
While a benchmark can show you how your investments perform in relation to external factors, it is often more important to make an internal comparison.
To achieve this, you may want to measure your portfolio in terms of progress towards your personal goals. These could include:
- Peace of mind
- Being able to live a comfortable retirement
- Passing a legacy to your children.
Provided the strategy that you have in place still shows that you are on track for meeting your goals, we can block out the short-term noise from the plethora of sources, which only serve as a distraction, and focus on achieving sustainable investment returns. .
Get in touch
If you need help developing an investment strategy that aligns with your financial goals, we are here to help.
Please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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