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How does your portfolio measure up?


Benchmarking is a tool that helps answer critical questions with regard to the health of your retirement plan portfolio:

  • Is my account performance reasonable based on my investments? If the performance of your account is significantly different from comparable market indexes, it can be an indication of issues.
    • Under performance can be an indicator of excessive fees
    • Over performance can be an indicator of excessive risk


  • Is my account properly diversified? In mutual fund investing the actual investments we hold may not be what we expected. For example, a small cap value fund that you purchased two years ago, may have evolved into a mid cap growth fund; two completely different sectors of the market. 

Although a simple concept, benchmarking is not always a straightforward process. 

When looking at how your retirement plan account annual performance compares it is important to understand the basics of “benchmarking”.   A benchmark is simply a measure of how a collection of investments performed over the same time period as your account.  Some of the most commonly referenced market indicators or benchmarks include.

  • The Dow Jones Industrial Average (DJIA) - this is one of the most highly publicized and discussed measures found in day-to-day American financial conversations.  

However, it is an extremely limit scope index; taking into account only 30 large-company stocks.  As such it is not a very useful tool when trying to compare with mutual fund investment portfolios which make up the vast majority of qualified retirement plan accounts.

  • The Standard & Poor’s 500 (S&P 500) - includes 500 significant U.S. companies weighted with the larger companies taking up a greater share of the index.  

Based on the additional diversity of covering significantly more companies in a wider range of industries, the S&P 500 is a far better benchmark to look at for a mutual fund portfolio. However, it fails to incorporate the market performance of many smaller domestic companies.

  • The Russell 2000 Index - tracks smaller U.S. companies and provides means of evaluating the small cap domestic market place.

However, in light of the fact that many retirement portfolios incorporate mutual fund investment models such as Target Date or Risk based models that are a balanced blend of both stock and fixed income investments, it is important to also have a bond index to benchmark with.

  • The Barclays Aggregate Bond - provides a reasonable snapshot of the overall bond market.

However, in today’s global economy, most retirement plan portfolios include exposure to international markets.  Thus it is important to also look beyond our borders and incorporate a international tool for evaluation your portfolio if it includes global investments.

  • MSCI EAFE (Large & Mid-Cap) & MSCI EAFE Small Cap Indexes - Provide summary of the performance for the markets of many developed countries around the world (excluding the United States and Canada).

However, despite the wide range of benchmarks outlined above there are still other micro, emerging, or sector markets that may not be covered in the above.  

As you can see from the extensive use of the word “however” above, precise analysis is not a simple task.  But “reasonable benchmarking” is doable and an important task for investors to tackle every year or so.  

How else can you truly evaluate the performance of your account and verify the value of your financial service provider?

As an retirement plan savings advocate. I try to practice what I preach and review my own retirement plan portfolio each year.

I like to do this as of December 31st since this is when it is easiest to find a verifiable annual rate of return for most benchmarks and it is also when most financial institutions provide a year to date portfolio return on their reporting.

My Reasonable Benchmarking Approach:

Step 1:  Track down the basic benchmark returns. At a high level we have come up with 5 market benchmarks.  There are far more categories available to slice and dice up a portfolio, but for our purposes we want to get a reasonable comparison without expending extensive hours.  Below are the 2017 Annual Average published returns for the following:

  • The Standard & Poor’s 500 (S&P 500) ~ 19.4%

  • The Russell 2000 Index ~ 13.1%

  • The Barclays Aggregate Bond ~ 3.7%

  • MSCI EAFE (Large & Mid cap) Index ~ 25.0%

  • MSCI EAFE Small Cap Index ~ 33.5%

Step 2:  Figure out which markets are represented in your investment portfolio and how they are weighted.  This is requires a bit of work.  To tackle this I look at the details via an independant online tool (Morningstar, Bigcharts, etc.) if possible. For accounts held in annuity contracts through insurance companies (John Hancock, The Hartford, Nationwide, etc) you may need to go directly  to the provider’s website and look for a fund fact sheet.  

Once you have the source data it is usually fairly easy to find out what the fund holds. Below are two examples of data charts available from morningstar.com:

Fund 1:

97% US [ 73% Large & 27% Mid-Small Cap]

Fund 1 Pic.PNG

Fund 2:

92% Foreign [21% Large & 79% Mid-Small Cap]

Fund 2 Pic.PNG

Using the above funds, if my example portfolio consists of 65% Fund 1 and 35% Fund 2, I can calculate how much of my overall account aligns with each of my represented indexes.

Large US = 73% x 65% = 47.45%   [S&P 500 Index]

Mid - Small US = 27% x 65% = 17.55%  [Russell 2000 Index]

Large Foreign = 21% x 35% = 7.35%   [MSCI EAFE Index]

Mid-Small Foreign = 79% x 35% = 27.65%   [MSCI EAFE Small Cap Index]

TOTAL:  47.45 + 17.55 + 7.35% + 27.65% = 100% of my account

Step 3: If my funds performed as they should (similar to their index) I can calculate a reasonable target rate of return per category by carving out and determining the reasonable rate of return for each represented market segment.

47.45% x 25.0% = 11.86%

17.55% x 13.1% = 2.30%

7.35% x 25.0% = 1.84%

27.65% x 33.5% = 9.27%

Sum total = 25.27% calculated reasonable return for my portfolio

Step 4: Determine actual weighted annual average return form my account per the information on my statement. Some financial institutions calculate and publish this information directly on their statements. If not, you can calculate it by simply taking the Net Annual Investment Gains (Losses) divided by Beginning Balance + 50% of Net Deposits & Withdrawals.

Step 5: Compare my benchmark reasonable return total in Step 3 [25.27%] to my actual calculated return per my statement [25.10%] in Step 4.  In this case my account is within 0.17% of the benchmarks; that is exactly what I was hoping for.

There are factors such as deposit and withdrawal timing, as well as investment fees that can cause individual returns to differ from market indexes through no fault of the adviser or fund manager. As such I usually factor in a 15% plus or minus margin to account for these factors.

For years in which my account return, including reasonable margin,  is below the benchmark figure I know it is time to drill down review for causes and/or look to make changes.  

Likewise if my account return is significantly higher than my benchmarks it may be an indication that one or more of my funds is taking more risk than anticipated. If so that is another reason to take a deeper dive or schedule a discussion with your adviser (especially if you are within 5 years of your target retirement date).  

Love the idea of benchmarking your portfolio, but hate math?   

Let us  do the heavy lifting for you; call today to discuss our services.

Angie Darby