Evaluating Your Investment Performance: The Crucial Role of Benchmarks

Evaluating Your Investment Performance: The Crucial Role of Benchmarks

In the world of investing, assessing the performance of your portfolio is a crucial aspect of strategic management. You might be thinking, "Well, it's pretty simple. If I'm making money, I'm doing well. If I'm losing money, I'm doing badly." However, while this approach is fundamentally correct, it is not the most efficient way to gauge the effectiveness of your investment strategy. That's where the concept of "benchmarks" comes in. 

What are Benchmarks?

Benchmarks are standard points of reference against which the performance of an investment portfolio can be measured. They are typically represented by specific financial market indices that encapsulate a broad range of securities in a particular market or sector.

Benchmarks for Different Types of Investments

Different types of investments often require different benchmarks for meaningful comparison. Let's explore some potential benchmarks you might use for different asset classes:

Public Shares

If you invest in Australian public shares, a popular benchmark is the S&P/ASX 200, representing the 200 largest companies listed on the Australian Securities Exchange (ASX).

For US investments, the S&P 500 (for large-cap stocks), the NASDAQ Composite (for a tech-heavy focus), or the Russell 2000 (for small-cap stocks) are standard benchmarks.

Private Venture Capital Investments

Benchmarking private investments can be tricky due to the lack of readily accessible performance data. However, you can:

• Compare to the returns of Venture Capital (VC) funds in your region.
• Use a Public Market Equivalent (PME) analysis, a method comparing a private investment against a comparable public index.

Real Estate Investments

For your real estate investments, consider these benchmarks:

• REIT indices: Real Estate Investment Trust (REIT) indices like the FTSE Nareit All REITs Index (US-focused) or S&P/ASX 200 A-REIT (Australia-focused) provide benchmarks for publicly-traded real estate assets.
• Local housing market indices: If you invest in residential properties, indices like the S&P/Case-Shiller U.S. National Home Price Index or the Australian CoreLogic Home Value Index can be relevant.
• Direct commercial property indices: For commercial real estate, consider indices like the MSCI Australia Annual Property Index.

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Why an ETF makes a great benchmark

While you could benchmark against indices, ETFs, unit trusts, managed funds, or even individual share investments, benchmarking against an ETF (Exchange Traded Fund) rather than a market index might provide a more accurate comparison.

An ETF is similar to a traditional index in that it tracks a market, sector, or country, but it also reflects the cost of investing (management fees) and factors in things like franking credits. Unlike an index, you can directly invest in an ETF. This feature provides a more equitable comparison as you are benchmarking your portfolio against a real, alternative investment option.

Why Benchmarks Matter

Benchmarks provide an objective standard against which you can measure your portfolio's performance. It's not enough to be making money; you want to ensure you're making a reasonable amount given the market conditions and the level of risk you've undertaken.

In conclusion, while investment benchmarks are a crucial tool for assessing your portfolio's performance, remember that the ultimate goal is not merely to beat a particular index but to achieve your specific financial objectives. Investing isn't a one-size-fits-all venture. The best strategy is always the one that suits your unique circumstances, risk tolerance, and long-term goals.

Cubis has over 700 benchmarks available which you can benchmark against, or you can benchmark against any listed ETF or stock. Contact us if you would like to discuss further.

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