Personal Wealth Management / Expert Commentary

The Importance of Having a Benchmark

When driving, you usually want some help to stay on the roadβ€”for example, proper road lines and lighting. Without something guiding you, how can you know if you are on track to get to your destination? The same goes for investing. A benchmark provides a way for you to evaluate if you are on target to meet your goals.

Transcript

0:02
You're driving down the road, it's dark.
0:05
You're a little bit old, so your eyesight is not as good as when you were 23.
0:10
Suddenly, you dip down into a valley and there's a lot of fog.
0:14
Hard to know where you are. Hard to know where you're going.
0:16
What do most people do? They slow down.
0:20
What would help them?
0:21
Well, we know what would help them.
0:23
Painted lines on the road to keep them in-between,
0:26
brightly colored reflectors, lights.
0:29
What are all those? Those are benchmarks.
0:31
Those are benchmarks to help you stay on track.
0:34
The fundamental feature of using a benchmark in investing,
0:37
regardless of the type of investing that you're trying to do,
0:40
is that it actually helps you focus on where you're supposed to get to
0:46
and how you're doing relative to getting there.
0:48
So, for example, we could think about benchmarks for the U.S. equity market,
0:53
like the S&P 500,
0:55
or fixed income,
0:58
whether government or corporate or a combination,
1:02
or cash management,
1:05
or putting together a portfolio that has all of those in-proportional pieces.
1:10
The benchmark still helps you see,
1:12
"Am I getting where I'm supposed to be going to
1:15
based on my plans, or not?"
1:17
And then I keep thinking about the benchmark
1:21
because I have the benchmark, so it's not just a measurement tool,
1:24
it's also a portfolio management tool,
1:27
because you keep thinking about the pieces of the benchmark
1:30
and not letting yourself vary too darn much
1:33
so you don't shoot yourself in the foot
1:35
by taking your vehicle in that foggy night
1:38
and running it off the side of the road into a ditch,
1:41
which is the most important part.
1:43
The road will get you where you need to go
1:45
if you can just stay in-between the lines.

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