Business
According to the Oxford dictionary, benchmarking is defined as “a standard or point of reference against which things may be compared or assessed.”Larry Swedroe: “An appropriate standard against which mutual funds and other investment vehicles can be judged. Domestic large cap growth funds should be judged against a domestic large cap growth index, such as the S&P 500 Growth Index, while small-cap managers should be judged against a small-cap index, such as the Russell 2000 index.” (The Incredible Shrinking Alpha)Benchmarks are often tied to funds or portfolio strategies. Unlike Larry’s quote above, fund and portfolio managers will still attempt to use the S&P 500 as a benchmark for a 60/40 portfolio, which will more often than not lead to frustrating disappointment. Most often, people will use the S&P 500, the NASDAQ or the Dow, regardless of their investment allocation or strategy… why? Because unfortunately it’s the only thing reported on the nightly news. This can lead to behavioral issues:Overconfidence - we think we are smarter than we areNegativity effect - bad things impacting our risk-perceptionPicking the wrong benchmark which could result in massive under or over performance, and all around confusion and frustrationIf you were giving a reward for the best new hip-hop album, would it make sense for you to judge it based on heavy metal standards?