The Importance of Having a Benchmark

Transcript

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