Measuring Performance
Benchmarks
1
A big concern for investors is that they are compensated for building their own portfolio, rather than by simply investing in the market as a whole via an index fund.
2
In order to ensure that the performance of their portfolio has remained competitive, investors need to use a benchmark. A benchmark is essentially a group of stocks that an investor is trying to outperform.
3
If an investor fails to beat their benchmark, it can often be a call to change stock selections. It may have been the case that they did not beat their benchmark due to a few stocks that can be replaced.
4
If an investor beats their benchmark, then nothing should be changed as their portfolio is delivering above-average returns. When investors beat their benchmark, it is referred to as achieving ‘alpha’.
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