How is my portfolio doing this year? Am I on track for retirement? Why is the market up big but I’m not? What would my portfolio look like if the market tanked again like it did in 2008? I’m in cash right now because I feel stocks have moved too high but I don’t trust bonds because we all know where they’re headed.
These are some common and very typical questions many investors are asking themselves this year. If any one of these questions applies to you or feels familiar, don’t think you’re alone! One common thread among all these questions or concerns is benchmarking. What exactly is a benchmark and which one is appropriate for you?
Far too often investors compare themselves to other investors, strategies or benchmarks that are completely unrealistic. Investors need to take the time to truly understand who they are and what their goals are before they compare themselves to anyone or anything! Let’s put this in perspective…. Let’s say you decided you wanted to start swimming to get in shape. Would you expect to get in the pool and swim times comparable to Michael Phelps (winner of 22 Olympic medals) within a couple of weeks? Of course not… that would be ludicrous and clearly not the right athlete to try and compare yourself to! As crazy as this sounds many investors have similar expectations with their investment portfolio.
Mr. Market and the media make various performance numbers readily available to investors. While this information is beneficial it needs to be viewed as strictly informational! The only way this information would be applicable to an investor’s portfolio is if they had their entire account invested in only an S&P Index mutual fund or Exchange Traded Fund (ETF). Even if we’ve never met you one thing is more likely than not:
Please read that again or let it digest. Without getting too granular let’s just say if the market is up X % you shouldn’t necessarily be up exactly X % either. The same obviously applies on the downside. If your financial advisor tells you it’s “expected” or “par for the course” to be down roughly the same as the Dow Jones, please raise your eyebrows or better yet…raise your hand and specifically ask them ‘what benchmark are WE following?’
Most investors, whether they manage their own portfolio or work with a financial advisor, ideally have a portfolio that is diversified and modeled to an asset allocation strategy of some sort. With a portfolio that has exposure to different asset classes what benchmark should investors follow? While this question is often very challenging to investors the answer is quite simple. Investors need to clearly understand what percentage of their portfolio is allocated to equities, fixed income, alternative investments, and cash. This breakdown within their portfolio not only dictates over 90% of how the portfolio is performing but it also sets a clear measure (benchmark) for if you’re doing well or not. Your customized benchmark becomes the report card for your portfolio!
Here are the year to date (YTD) performance results of the following major asset classes through 9/30/13:
Large Caps (S&P 500) +19.79%
Mid Caps (Russell Mid Cap) +24.34%
Small Caps (Small Cap 600) +28.66%
International (MSCI EAFE) +16.59%
Emerging Markets (MSCI EM) -4.05%
Bonds (US Aggregate Bond Index) -1.89%
If you are a typical baby boomer or retiree you may have around 60% in Bonds and the remaining 40% spread across several stock assets classes. In a case like this, guess what a decent year of tracking such a benchmark (40/60) might look like?
+6% or more would actually be great!
Keep in mind this same investor might only be down -11% in 2008 when the S&P 500 dropped -37%.
While the performance results this year are somewhat surprising considering an economy that is still limping along, every year brings a different story and twist which must be taken into consideration. A perfect example of this occurred not too long ago in 2011.
Although most of us have fairly short-term memories, 2011 felt like a miserable year! Those that stayed the course and stuck to their disciplined portfolio allocations did fair (all things considered) but it sure didn’t “feel” right! Those who tried to jump in and out of the market several times simply got stung. The domestic market barely eked out a positive year at the very end (+2.11% for the S&P 500) but the majority of investors finished in the red. Why?
Anyone who had an “intelligently” designed portfolio typically had some Small Cap, International, and Emerging Market positions as part of their overall equity exposure.
Large Caps (S&P 500) +2.11%
Mid Caps (Russell Mid Cap) -1.73%
Small Caps (Small Cap 600) -2.43%
International (MSCI EAFE) -11.73%
Emerging Markets (MSCI EM) -18.17%
Bonds (US Aggregate Bond Index) +7.84%
We’ll save some keystrokes by not typing much further but hopefully you now understand how one asset class will almost ALWAYS be down and that figures into the performance of any real benchmark.
Here are three quick take-always with regards to portfolio performance and benchmarking:
(1) Find out what YOUR specific and appropriate benchmark is today.
(2) Never completely abandon an asset class; expect at least one of the pieces to be down each and every year.
(3) At a minimum reallocate quarterly unless your goals change.
By following the above three rules you will be achieving one of the most sought after investing goals without even trying too hard. Aside from tuning out some of the constant noise that Mr. Market is trumpeting, after a full year of doing this you will have “bought low and sold high”.
For more information or help with defining your personal benchmark please contact us. Lastly, if you want to see how some of the most common portfolio benchmarks are doing each quarter, subscribe to a free issue of “the Guide”. My Portfolio Guide, LLC publishes a complimentary and educational newsletter every quarter. On page 2 of every issue of “the Guide” you will see how six common portfolios are doing relative to different parts of the market. If you find yourself not matching or beating one of those six basic benchmarks it’s a red flag or perhaps an opportunity to find a better way!