My Benchmark

If you are a do-it-yourself investor who buys individual stocks and/or bonds, then we are slaves to our investment returns. But how do we know how we are performing? If we earned 12% last three years, that may seem like a pretty good return. However, if the overall market provided a return of 23% (like from March 2009 to March 2012) then you didn't do so hot. It would have been much better for you to have bought the market through an index fund or ETF. It is therefore important for investors to set up a benchmark that we can compare our performance to to gauge how we are performing.

The most common benchmark that investors track their performance to is the S&P 500.  Because of what I do with options, I believe that tracking my performance to the S&P 500 or Dow Jones Industrial Average or Russell 2000 is great.  However, I do not completely agree with that it is necessarily good for many other investors if they don't actually hold a portfolio that is 100% equities. It would make more sense to find a tracking mechanism that better matched the makeup of a true portfolio.  However, for me, I believe that I should be able to track the S&P 500, Dow Jones Industrial Average, Russell 2000, and/or Nasdaq Composite.  I don't believe that I should settle for less than that.  The question is what do I compare myself during a stock market downturn.  I use risk-free interest rate of 4.25%, which is equal to my mortgage plus my giving plus my tax bracket.

I also use Sharpe Ratio, Sortino Ratio, and M2 to measure how good my portfolio is.  I will talk about those ratios in the near future.