« Rich Dad Wants to Coach Me! | Main | How Many Indexes do we Need? »
Checking Your Portfolio’s Performance
By JLP | May 3, 2006
Today’s Getting Going column by Jonathan Clements warns against using the S&P 500 Index as the benchmark (free) for portfolios. I agree especially since other indexes have been outperforming the S&P for the last several years, which when used as a benchmark, makes the portfolio look like it performed better than it actually did.
Using the S&P 500 as the benchmark over the last five years sure made actively managed mutual funds look better than they actually were. According to the article, 68% of actively managed mutual funds outperformed the S&P 500 Index over the last five years. But, when those same mutual funds were compared to the index that fit them the best, the majority (Clements doesn’t give a specific number) lagged the index.
Anyway, it is an interesting article. The next time you look at your portfolio’s performance, make sure you compare it with the appropriate index.
Topics: Getting Going, Index Funds, Investing, Jonathan Clements, Mutual Funds | 2 Comments »
May 3rd, 2006 at 3:54 pm
This trend bugged me quite a bit when I was doing research on funds for our IRAs. Quite a few funds that initially looked promising soon lost their shine when I looked at ‘em and noticed they were, say, comparing their smallcap emerging market fund to the S&P.
I didn’t see many this poorly compared, but I did see a few. And immediately removed them from my ‘maybe’ list…
May 3rd, 2006 at 8:35 pm
I read that too, and I am conflicted on the issue. At the end of the article he recommends Morningstar’s X-Ray feature, which comes with a Premium Membership (bling). I think it is okay to compare the US stock portion of your portfolio to the S&P 500. Creating a ‘shadow’ portfolio of the indexes that match all of your investments (forget being a stock picker) creates a level of complexity. Maybe it is worthwhile. You would have to update your shadow portfolio every year as you adjust your allocation. And you could not talk to anyone about your portfolio’s performance because it would require analysis of your portfolio as well as your shadow portfolio. If I say, “I am beating the S&P 500 by 3% points” you have an instant frame of reference. You know that my portfolio is constructed in a way to out perform the broad US Market. All of the best financial planning books, at some point reference the historical performance of the S&P 500. I don’t think comparing performance to the S&P 500 should be dismissed outright.
Also, why was Clements not complaining about this when the S&P was trouncing everyone at the end of the 90s?