Beating the market is an obsession for a lot of people. I try not to make it my obsession. First, It is difficult to define the market and by defining it, you already make some choices, probably different from others. Secondly, what does it teach you?
What is the market for me? and for you? At a convention, I spoke to someone who considered his benchmark the S&P 500. In sé, not a bad choice. But when I asked why, he had no answer other than it was the biggest market. That is true.
When I told them that my reference market was the global developed markets, he looked strange… For other Belgians, the benchmark might be the BEL20, cause hey, that is our home market.
Each of these 3 benchmarks have a very different performance over time. So, Do I now have 3 choices to compare my results against? Can I cherry pick the one that suits me best?
That brings for me the first issue: what is the market to beat? There are hundreds of answers possible, if not, thousands!
What can it learn me?
Imagine that I have defined my benchmark. and imagine that I measure my portfolio on a yearly basis against this benchmark, what will it teach me?
At first sight, I will see if I did better or worse than the market. It is easy, just compare the full year performance against your own portfolio performance. Is the return of the market higher, then you loose.
Is it that simple? What about other parameters like the volatility of the portfolios, or the maximum paper loss you made. I have made some specific decisions in my portfolio, very personal to me, related to the safety net that I want. A benchmark would need to take that into consideration. I know, there are measures for that, like the risk adjusted return and many others. But still, these do not satisfy me.
What do I need? I need to know that I am on track for my long term personal goals. That is what matters most to me.
That is why each month I track my progress with the amber index. I have a plan mapped out that will lead to freedom in 2029. Each year, I should reach a certain amber index. Do I make that number or not? That is what matters to me.
And I also have non financial goals. What about these? There is no benchmark for this.
Do you care about a benchmark?