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

To Benchmark or Not to Benchmark

To increase the likelihood of reaching your retirement investing goals, you need a benchmark—picking an appropriate one is critical and the very aim of this book.

A good benchmark is :

• A well-constructed index (like the S&P 500, MSCI World Index, MSCI ACWI, a bond index, etc.) or a blended index (70% MSCI World/30% your choice of an appropriate bond index).
• A road map for portfolio construction.
• A measuring stick for performance. In general, if you can perform similar to an appropriate benchmark, over time, it should get you where you need to go.
• A way to set reasonable expectations for future performance. If you’ve selected a benchmark with a long-term history of annualizing 5% returns, but your goals require higher returns on average going forward, you’re likely starting down the wrong path.
• A way to help you manage risk. The more your portfolio resembles your benchmark, the higher the odds you get similar returns. The more you deviate, the more your returns can deviate—for good or bad.
• Effectively, your long-term asset allocation.

A good benchmark is not :

• A poorly constructed index, like any price-weighted index (e.g., the popular but very faulty Dow).
• A guarantee of future returns.
• An inflexible framework.

The benchmark is the backbone of your long-term investing strategy. Every decision you make should be relative to it. The first decision is whether you want to be active or passive. (The questions later in this chapter can help you answer ...