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?
The market
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?
amber tree leaves 
Ciao ATL,
At first I had the same issues, with benchmarks and so on. Not having something to “beat” is bad in a mathematical environment, like the stock market, as the metric is common (money) and very easy to compare. Another point that I had to fight against is the fact that the common “retail” financial products come with a variety of benchmarks that are all beaten by this fund or this other hedge fund, to show that a product is better than the broad market…. Truth is that very often these benchmarks are either made up or too narrow to really tell a good story. I won’t get too much into details because it might be boring, but this is part of the cause that got me investing “by myself” rather than loose money with these so called “experts”…
I decided to set my benchmark to the nominal inflation in the Eurozone, the average over the years has been 2%, so I need to beat that at least. This is only with the “sure returns” (i.e. dividend+bond payments), the rest is monitored (in terms of stock price) but I do not care too much how it goes, the aim is to eventually sell everything off in the distant future.
Recently I have added some “Take Profit” rules to the portfolio, but this is only to avoid loosing all the gains when a stock comes down, the idea there is to buy back anyhow as I am interested in the business and no so much in the stock price gain…
Ciao ciao
Stal
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Interesting question since when I log into one of my brokerage accounts it always prominently displays my one year returns compared to the S&P and serval other benchmarks including Treasury Bonds etc. This leads me to believe it’s important for people or the brokerage would like to promote their funds at least.
Personally … I don’t care about that benchmarks because I have my own plan and last I checked, the S&P dividend yield was only 2.07% so why would I compare my dividend portfolio to the S&P and I wouldn’t want to try to incorporate premiums received from options to try to compare my progress to a benchmark either.
I agree with you, I want to know that I’m on track for my personal goals.
Best,
Devin
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The argument of option premium did not even come to my mind…
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This is a good question! We care much more about beating inflation than we do about beating the market. In fact, beating the market — however you define “the market” — is irrelevant if the market is outpacing inflation enough for your investments to grow over time. So that’s the most important piece for us. For that reason, we are currently avoiding U.S. savings accounts, past “safe” instruments like CDs, and money market funds (aside from our cash cushion in a savings account), because all of those are currently doing worse than inflation.
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Hi Ambertreeleaves,
I don’t really look to the benchmarks since I’m focused on the dividend income my portfolio generates and there are a lots of sectors that influence the benchmark in which i’m not invested( like biotech). If my memory serves well the average dividend yield in the S&P 500 is around 2% while my portfolio yields 3.2% after taxes.
But as far i’m aware of I have beaten the s&p500 since I started investing.
Cheers,
Geblin
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that is a nice return on your portfolio. In the back of my mind, DGI is present. I will look at your portfolio to see what you have
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