Plan Your Prosperity: The Only Retirement Guide You'll Ever Need, Starting Now--Whether You're 22, 52 or 82

Picking a Benchmark

If the benchmark is so important, how do you pick it? Your benchmark is determined by your return expectations and cash flow needs (i.e., the goals we discussed in Chapter 2 and will discuss more in Chapters 5 and 6) but also your time horizon—which is how long you need your assets to work for you (discussed more in Chapter 4).

Then, too, you must consider if you have any particular peculiarities unique to you. For example, many people don’t want to invest in tobacco or other so-called sin stocks like gambling, alcohol, etc. For that, you need a benchmark ex-sin, which is easy to do and very common. Or maybe there’s some other category of stock you just can’t abide—whatever it is, you can have a benchmark that allows for your personal preferences.

Or maybe you’re on the board of directors or a senior manager for a publicly traded firm. Often, those folks have certain rules governing when they can and can’t sell their firm’s stock. If this is you, you may decide to just not hold the stock at all—or maybe hold it and never sell it. That would require a slight benchmark tweak.

Also, you must ultimately be comfortable with your benchmark. For example, if the thought of investing in foreign stocks gives you incurable hives, then fortunately for Americans, we have a very deep and broad stock market—a US-only equity benchmark would be fine. (On the flip side, plenty of US investors fret about America’s direction and the state of America’s economy. If this is you, that’s ...