Your 9% Return Means Nothing Without a Benchmark
Not enough retail investors compare their results against a benchmark.
Well, how do you know if your investments are doing well?
You might feel happy that your portfolio grew by 9% last year, because that is the long-term average return of the $S&P 500(.SPX)$ . However, that is the long-term average.
That means that there are years when the index returns are weak, and there are years when the index returns are supreme. So you can’t compare your yearly returns against the long-term average.
Maybe the S&P 500 grew 15% last year, meaning that your 9% return significantly underperformed the index.
That’s not necessarily a disaster, as nobody, even Warren Buffett, can beat the index each year. You just need to analyse the causes. If you are confident in your holdings, and the underperformance was driven by market mood, not deteriorating business fundamentals, then there is no reason to change strategy. There is a chance that your current holdings will outperform the index next year.
However, if the S&P 500 fell by 2% last year, that means your 9% return significantly outperformed the index.
Without a benchmark, investors have no idea if their strategy actually works.
A person making a 9% return feels like a genius until they realize the overall market returned 15% during the exact same period. Meanwhile, a person being disappointed after a 9% gain when the market lost 2% is at risk of making unnecessary portfolio changes.
So track your returns over time and compare your gains against the S&P 500 index returns.
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