What is Benchmark?
Typically, investors may select a market index or a mix of indexes to serve as the portfolio benchmark. An index measures the performance of a large asset class, such as all listed equities, or a more specific segment of the market, such as stocks of technology companies. Because indexes are unmanaged, they track returns on a buy-and-hold basis, with no trades to reallocate to securities that may be more appealing during different market cycles or market occurrences. Indexes reflect a “passive” investment method and can serve as a decent benchmark against which to assess the performance of an actively managed portfolio.An index can be used to determine how much value an active manager adds and where that value comes from, or through what investments.
Benchmarks are indexes that are designed to contain multiple securities that represent some aspect of the overall market. Benchmark indexes have been developed for all asset classes. The S&P 500 and Dow Jones Industrial Average are two of the most prominent large-cap stock benchmarks in the equities market.
Top benchmarks in fixed income include the Barclays Capital United States Aggregate Bond Index, the Barclays Capital United States Corporate High Yield Bond Index, and the Barclays Capital United States Treasury Bond Index. Lipper indexes, which employ the 30 largest mutual funds in a certain sector, are popular among mutual fund investors, whereas MSCI indexes are popular among international investors. The Wilshire 5000 is another prominent benchmark that represents all publicly traded equities in the United States.
When assessing the performance of any investment, it is critical to compare it to an appropriate benchmark.
Individual investors may find identifying and creating a benchmark to be a crucial component of investing. In addition to standard market characteristics such as large-cap, mid-cap, small-cap, growth, and value. Indexes based on fundamental qualities, sectors, dividends, market movements, and other factors are also available to investors. Understanding or having an interest in a specific form of investment will assist an investor in identifying relevant investment funds as well as better communicating their investment goals and expectations to a financial advisor.
An investor should consider risk when looking for investing benchmarks. The degree of risk that an investor is willing to take should be reflected in their benchmark. Other investment concerns related to benchmarks may include the amount to be invested and the cost the investor is willing to pay.
Read related articles: