Personal Wealth Management / Expert Commentary
The Importance of Having a Benchmark
When driving, you usually want some help to stay on the road—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.
You're driving down the road, it's dark.
You're a little bit old, so your eyesight is not as good as when you were 23.
Suddenly, you dip down into a valley and there's a lot of fog.
Hard to know where you are. Hard to know where you're going.
What do most people do? They slow down.
What would help them?
Well, we know what would help them.
Painted lines on the road to keep them in-between,
brightly colored reflectors, lights.
What are all those? Those are benchmarks.
Those are benchmarks to help you stay on track.
The fundamental feature of using a benchmark in investing,
regardless of the type of investing that you're trying to do,
is that it actually helps you focus on where you're supposed to get to
and how you're doing relative to getting there.
So, for example, we could think about benchmarks for the U.S. equity market,
like the S&P 500,
or fixed income,
whether government or corporate or a combination,
or cash management,
or putting together a portfolio that has all of those in-proportional pieces.
The benchmark still helps you see,
"Am I getting where I'm supposed to be going to
based on my plans, or not?"
And then I keep thinking about the benchmark
because I have the benchmark, so it's not just a measurement tool,
it's also a portfolio management tool,
because you keep thinking about the pieces of the benchmark
and not letting yourself vary too darn much
so you don't shoot yourself in the foot
by taking your vehicle in that foggy night
and running it off the side of the road into a ditch,
which is the most important part.
The road will get you where you need to go
if you can just stay in-between the lines.
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