Meaningful Feedback - What's your benchmark?

Analysing information without an appropriate comparison is pointless. This is true in all walks of life but even more so in investing, where feedback must be relative to be meaningful.

Imagine being told that your investments returned 10% in a year. Would you be pleased or disappointed? If other investors had gained 15%, you might be disappointed; if others had only achieved 5%, you might be pleased.  Without a relative comparison (i.e., a benchmark), it is impossible to determine whether the information you have is good or bad and what you should do with it. But you cannot use just any benchmark; the comparison has to be relevant.

Twenty years ago, it was common for pension funds to measure their performance against that of other pension funds, and a whole industry existed to calculate and aggregate pension fund performance. The funds themselves might have been satisfied if they had outperformed most others, even if the absolute performance was poor.

Most investments these days are measured against market indices, which is fine up to a point, but this convention still falls short because it is fairly meaningless to you, the investor.  Sadly, the majority of investors chase returns without understanding the risk or what they saving towards.

Set Realistic Goals and Link them to your Investments

A more sensible approach to benchmarking is to set realistic goals, such as a level of long-term income in retirement or saving for a specific event, and to regularly measure progress towards those goals. You may ask, how do I measure my progress?  A financial planner will help you identify the Compound Rate of Return (IRR) needed from your portfolio to achieve now and in the future, in order for you to meet your regular and irregular commitments and have the future lifestyle you want. And how does he do that? Please have a look at this video.

Whatever the goal, the question to ask yourself when reviewing the performance of your investment portfolio is not whether it was good compared to a market index, but whether you are likely to be able to live the life you planned for!

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100