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This morning at our daily research meeting, we discussed something that several clients have brought up to us recently: it’s June and the Dow Jones Industrial Average and S&P 500 are barely positive for the year. While it is important to monitor your portfolio’s progress over time, many investors make the mistake of comparing their entire portfolio to these widely recognized market indices. The S&P 500 (and Dow Jones Industrial Average) do not make good portfolio benchmarks for most investors.

We often have to remind investors (and ourselves) that the S&P 500 is simply a basket of 500 US large cap stocks. Likewise, the Dow Jones Industrial Average is a group of 30 US large cap stocks. We sometimes forget this because these two indices are frequently referred to as “the market”. Neither of them are, in fact, “the market” and it’s not even close!

Unless your entire portfolio is invested in US large cap stocks, the S&P 500 is not a good portfolio benchmark. If you’ve diversified your US equity exposure to include mid and small cap stocks, you need a new benchmark. If your portfolio includes international equities, bonds, or commodities, you need a new benchmark.

A really simple way to get a more accurate reading of your portfolio’s performance is to create a better benchmark. Financial professionals like to discuss things like Sharpe Ratios when given this task, and that’s great if you’re a professional or have a strong interest in finance. For the average investor, there are simpler ways to measure your portfolio’s performance though. While no measure is perfect, the following would be an improvement over simply using the S&P 500’s return. During our research meeting today, Tim mentioned using the S&P 1500 as your US equity benchmark instead of just the S&P 500. That would certainly be a step in the right direction for most people. You could even take things a step further by weighting the returns of the S&P 500, S&P 400, and S&P 600 to mirror your portfolio’s weightings. For example:

If your US equity allocation is 25% large cap, 25% mid cap, and 50% small cap, you could take 25% of the S&P 500’s return, 25% of the S&P 400’s return, and 50% of the S&P 600’s return to get a much more accurate picture of how your investments have been performing.

You could do the same to create more accurate benchmarks for the international equity and fixed income allocations in your portfolio as well. Again, these aren’t perfect benchmarks either, but I believe they’re less flawed than measuring your entire portfolio against the S&P 500.

It’s also important to remember that measuring performance over short time periods (like months or quarters) might frustrate you. No strategy works 100% of the time. Ben Carlson put it nicely, explaining that, “Nothing works all the time. The reason most investment strategies work over the long-term is because they don’t always work over the short-term.”

While some people might think of the S&P 500 as “the market”, we wouldn’t recommend using it as a total portfolio benchmark.