If you’ve ever checked your investment portfolio performance and wondered, “Is this good?” — you’re not alone. One of the most common ways investors try to answer that question is by comparing their returns to benchmarks, like the TSX Composite Index or the S&P 500 Index. But which benchmark is right for you?
What is a Benchmark?
A benchmark is a standard or point of reference against which your investment performance can be measured. Think of it like a report card: it helps you understand how well your investments are doing relative to the broader market or a specific segment of it.
The TSX Composite Index and the S&P 500 are two common benchmarks. The TSX Composite Index tracks the performance of about 200 of the largest publicly-traded companies in Canada. The S&P 500 tracks the performance of 500 of the largest publicly-traded companies in the U.S. These indices are often considered proxies for the broad equity markets in Canada and the U.S., respectively.
What is a Good Benchmark for My Portfolio?
It depends on what you’re invested in.
Investment funds, including mutual funds and exchange-traded funds (ETFs), are required to report on performance compared to one or more broad securities market indices (like those noted above) and may also report on performance compared to one or more narrower indices that reflect the market sectors in which the fund invests. Read your semi-annual performance report, called a management report of fund performance, to track how your fund is performing versus relevant benchmarks. You will find these reports on your fund’s website and on SEDAR+.
If your portfolio is mostly made up of equities (a.k.a. stocks), consider comparing your portfolio returns to benchmark returns for the markets you’re invested in. For example, if you’ve invested globally, comparing your return to a global benchmark would give you a quick sense of whether your investments are keeping pace with market returns on a globally diversified equity portfolio.
Other Common Benchmarks
If your portfolio includes bonds, small-cap companies, or alternative assets like real estate or commodities, then you will need to blend together relevant benchmark results in order to estimate benchmark performance for the mix of assets you hold.
Many benchmarks exist. Beyond the indices we’ve already mentioned, other widely followed ones include the MSCI World, Nasdaq Composite, the FTSE 100, the Nikkei 225, and the EURO STOXX 50.
- MSCI World includes over 1,300 stocks across 23 developed countries, representing about 85% of market capitalization across those countries. If your aim is to track globally diversified equity returns, this index might be a relevant benchmark.
- Nasdaq Composite includes over 3,000 companies listed on the Nasdaq stock exchange, which has a heavy emphasis on technology and growth-oriented companies. If your portfolio is tech-heavy, the Nasdaq might be a relevant benchmark.
- FTSE 100 includes the 100 most valuable listings on the London Stock Exchange.
- Nikkei includes 225 stocks on the Tokyo Stock exchange.
- EURO STOXX 50 includes 50 stocks from 11 countries, representing leading Eurozone companies.
Why Having a Benchmark Matters
If you don’t benchmark, you might not know how well your investment strategy is working.
A benchmark helps you:
- Evaluate performance objectively.
- Identify strengths and weaknesses in your portfolio.
- Stay focused on long-term goals instead of short-term market news or commentary.
Comparing your portfolio returns to relevant benchmarks can be helpful, but don’t chase those numbers mindlessly. Remember:
- The best investment strategy for you is one that reflects your goals, risk tolerance, and time horizon.
- Investing early is one of the best ways to build wealth, because your portfolio will benefit from the power of compounding.
- Diversifying (owning a variety of investments) is known to increase returns and to lower risk.
- Being patient and calm (i.e. taking a long-term view) is crucial, especially during uncertain times.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre at 604-899-6854 or 1-800-373-6393, or through email at [email protected]. You can also file a complaint or submit a tip using the BCSC’s online complaint form.
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