Benchmark
Definition
A standard index or reference point used to measure an investment's performance. The S&P 500 is the most common benchmark for US stock portfolios.
A benchmark is the yardstick against which you measure investment performance. Without a benchmark, a 10% return sounds great — but if the market returned 15%, you actually underperformed. Benchmarks provide context that raw returns cannot.
The most common benchmarks include: S&P 500 (US large-cap stocks), Russell 2000 (US small-cap stocks), MSCI EAFE (international developed stocks), Bloomberg Aggregate Bond Index (US bonds), and MSCI Emerging Markets (emerging market stocks). The appropriate benchmark depends on what your portfolio invests in.
Proper benchmarking requires matching the benchmark to the investment. Comparing a bond fund to the S&P 500 is meaningless. Comparing a small-cap value fund to the S&P 500 (which is large-cap blend) is also misleading. Each investment should be compared to the most relevant index for its asset class and style.
For diversified portfolios, a blended benchmark works best. If your portfolio is 60% US stocks and 40% bonds, your benchmark might be 60% S&P 500 and 40% Bloomberg Aggregate. This gives a fair comparison that reflects your chosen allocation rather than a single index.
Outperforming your benchmark consistently is extremely difficult and should not be the primary goal for most investors. Matching your benchmark with low-cost index funds is a more achievable and appropriate objective. The primary value of benchmarking is ensuring your investments are working as expected.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
What benchmark should I use for my portfolio?
Use a blended benchmark matching your asset allocation. For a 60/40 stock/bond portfolio, use 60% S&P 500 and 40% Bloomberg Aggregate Bond Index. For a crypto-heavy portfolio, include a crypto benchmark. Your portfolio tracker should let you set a custom benchmark.
Should I try to beat my benchmark?
For most investors, matching the benchmark with low-cost index funds is the right goal. Trying to beat it usually means taking more risk, paying higher fees, or market timing — all of which tend to hurt long-term returns. Focus on matching the benchmark at minimum cost.