What Is a Benchmark in Investing? How to Compare Your Portfolio
Your portfolio grew 8% this year. Is that good or bad? A benchmark answers that: it's the yardstick you compare your results against. Here's how to choose one and compare fairly.
What it is
A benchmark is a reference point for comparison. Usually it's an index: if you buy US stocks, your benchmark is the S&P 500 index; if you buy Russian stocks, it's the MOEX Russia Index (Moscow Exchange). The idea is simple: if you spent months picking stocks and still lagged the index, it would have been easier to buy an index fund.
How to choose a benchmark
| What's in the portfolio | Possible benchmark |
|---|---|
| US stocks | S&P 500 |
| Russian stocks | MOEX Russia Index |
| Bonds | A bond index or a bank deposit rate |
| Crypto | Bitcoin |
| Mixed portfolio | A blend of indexes in the same proportions |
A benchmark should resemble your portfolio in composition and risk. Comparing a bond portfolio with bitcoin makes no sense.
How to compare fairly
- Over the same period and in the same currency.
- Accounting for contributions, otherwise your return looks inflated. How to calculate it is covered in the article how to calculate portfolio returns.
- After fees and taxes.
- Over a long stretch: a year or more. One month tells you nothing.
Aspiro Invest — a medium-term portfolio: what to hold, when to review it, and where the protective levels are.
- A benchmark is a yardstick for comparing your results.
- It should resemble your portfolio in composition.
- Compare over the same period, in the same currency and accounting for contributions.
Frequently Asked Questions
Why does an individual investor need a benchmark?
To see whether picking individual securities makes sense. If you lag the index for years, it may be easier to hold an index fund.
Can I use a bank deposit as a benchmark?
Yes, for the conservative part of your portfolio. If your bonds earn less than a deposit at comparable risk, it's worth reconsidering your choice.
What if my portfolio lagged the benchmark for a month?
That's normal. Short periods tell you nothing. Look at results over at least a year.
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