Compare Your Return to a Benchmark

Portfolio cash flows must be identical to compare the returns for your portfolio to a benchmark.

Many investors think that they can compare the return for their portfolios with the published return for a benchmark, such as the S&P 500 index over the same period of time, and conclude that the larger return represents the better investment performance. In many cases, this approximate approach provides an acceptable answer. However, published returns assume a single investment typically at the beginning of the time period. If you contribute to or withdraw from your portfolio, comparing your return to the published benchmark return might not mean as much as you might think. For example, if you were contributing regularly during a recent slump in the market, your return might look worse than the benchmark’s return, until prices recover. Then, your investing during the low periods would make your return outpace the benchmark. In short, to obtain meaningful results from a comparison of two portfolios, you must evaluate the two portfolios using identical cash flows occurring at the same times. If you contribute to or withdraw money from your portfolio, you’ll need historical price and distribution data to properly pit your portfolio against a benchmark return.

Comparing Returns Based Only on Initial Investment

If you created your portfolio with a single investment and haven’t added any money to it (which might happen if you roll over a 401(k) plan into ...

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