The last step is to calculate the performance of the portfolio and compare it to the performance of the benchmark. Bonds can use the Bloomberg Barclays Aggregate index as a benchmark, while real estate can be measured against the S&P US REIT or the S&P Global REIT. However, the S&P 500 may not be ideal for measuring the performance of bonds and real estate that are added to the portfolio as a layer of safety. For example, you can use S&P 500 as a benchmark in a portfolio with a majority of large-cap US stocks. When choosing a benchmark, you should match the asset classes in the portfolio to an appropriate benchmark. The third step involves choosing an appropriate benchmark that will be used to compare the performance of a portfolio. For example, the asset allocation of a college-savings account may include 60% large-cap US stocks, 20% international stocks (developed countries), 10% real estate, and 10% US bonds. The investments may be categorized into large-cap and small-cap US stocks, international stocks (developed and emerging countries), US bonds, real estate, and cash. The next step is to consider the asset allocation in the portfolio or account. For example, an entire investment portfolio may include investment accounts, retirement accounts, and college savings accounts. It can be a single investment account, an entire investment portfolio, or a collection of accounts. The first step is to choose the portfolio or account whose performance is going to be measured. The following are the steps involved when evaluating the performance of a portfolio against a benchmark: 1.
#Benchmark meaning how to#
How to Use a Benchmark to Measure the Performance of Portfolio
An alternative is to use other portfolios to establish benchmarks that will be used to measure the performance of the portfolio. There are other indexes that are specific to the industry, security classes (such as small-cap growth stocks), and other market segments. The most popular benchmarks for measuring the risk and return of a portfolio are market indexes such as the Russell 1000, Russell 2000, the Dow Jones Industrial Average, and the S&P 500.
It is because the benchmark may produce information that is misleading to the investor and the portfolio manager. However, the S&P 500 will not be an appropriate benchmark for measuring a portfolio investing in international stocks in emerging markets. For example, the S&P 500 can be used as a benchmark for a portfolio comprising large-cap US stocks. It means that certain benchmarks will be appropriate for certain portfolios, while, at the same time, being inappropriate for other portfolios. The selected benchmark should correspond to the investment style of an investor and the expected return of a benchmark.Ī good benchmark should correspond to the investment style of an investor and the expected returns from the portfolio.Some of the established benchmarks include the Dow Jones Industrial Average, Russell 2000, and the S&P 500.A benchmark is a measure used to analyze the performance of a portfolio compared to the performance of other market segments.
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