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Benchmark Versus Asset Allocation—What’s the Difference?

You may read this chapter and think, “What’s the big difference between benchmark and asset allocation? Aren’t they the same thing?”

Depends on which kind of asset allocation you mean! Effectively, your benchmark is your long-term asset allocation. You can think of them interchangeably if you like. But whereas your benchmark (and long-term asset allocation) shouldn’t change much (if at all), your tactical asset allocation can be more flexible.

Why doesn’t benchmark change much? The primary determinants of your benchmark are, of course, your return expectations, cash flow needs, time horizon and any other additional personal preference. These things likely won’t change very much or very often.

They can change, of course. You might discover later on you need more (or less) income than you previously thought. A 70-year-old widower might remarry a 50-year-old—that would likely change the time horizon. Every year, you should review your goals and time horizon to make sure your benchmark remains the right one for you. But it should take a fairly material change in your circumstances to alter your benchmark.

Why is sticking with your benchmark so critical? Changing it too often could be simple heat chasing—and heat chasing isn’t a great way to run a disciplined investment strategy.

Suppose your benchmark is the global MSCI World Index. Maybe you go through a few years where US stocks hugely outperform foreign, so your global index ...