How should you evaluate your investments? Compare to the US S&P 500 or, how much your account balance has lost or gained? Gain insights to these methods as well as alternatives.
People often ask me about their investment returns. During the height of COVID, some of these conversations involved people hearing on the news that the market was down. They then looked at their statements and saw the same. “Should I do something?” they would ask. Before I answered, I always asked, “What’s making you think about doing something?” These were the most common answers:
· “The S&P 500”
· “The change in my account balance since the last time I looked”
· “The shock of how much I’ve lost”
Someone I know told me that news of the S&P 500 affected his nerves regarding his portfolio. (The S&P 500 is an index run by Standard & Poor’s that represents the 500 largest U. S. stocks.) I asked him what his portfolio had in it. He did not know. Subsequently, he brought his statements to me, and I noticed that his portfolio was invested 60% in US bonds. The 40% that was in stocks was not all in companies that should be benchmarked against the US S&P 500. Some were companies based in other countries.
Since 60% of this man’s investments were in United States corporate bonds, he should have been comparing that portion of his portfolio to a comparable index, such as the Barclays US Aggregate Bond. In fact, when you look at the fact sheets or disclosure information from mutual funds, they tell you what the mutual fund’s portfolio manager is benchmarking returns against. As I said to him, I have yet to hear on the 6 o’clock news any mention of what the bond index equivalent to the S&P 500 achieved. Ideally, but not always, the bond portion of his portfolio would move in opposition to the stocks. So, when the stocks were down, the bonds would be up and vice versa. (Even with bonds, of course, there’s no one-size-fits-all benchmark. For example, if you’re invested in US government bonds, a better index would be the Barclays US Government TR USD (1973–2018).)
Further, since 20% of his portfolio was in international companies, an international benchmark, such as the MSCI EAFE® Index, would be more representative of international return expectations. (The MSCI EAFE® Index (Morgan Stanley Capital International Europe, Australasia and Far East Index) is composed of more than 1,000 companies representing the stock markets of Europe, Australia, New Zealand, and the Far East and is an unmanaged index.
