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Last week my Short & Simple Investing lesson explained how to use benchmarks to evaluate your investment choices. This week I want to expand on that hugely important topic a little more. If you invest your money anywhere, in any way, you must understand investment benchmarks.
Now that you know about the benchmark from last week’s investing lesson, you can be on the lookout for the benchmark that applies to your specific investments to help you monitor them. Don’t feel like this is a huge task; there are usually a just few very common benchmarks that are used for most stock and bond funds. For example, for most large company stock funds, the benchmark is simply a stock index, or group of stocks called the S&P 500, that may be familiar to you. By simply comparing how this index performed against your stock fund or investment account, you have some extremely valuable information.
Understanding the benchmark concept is a big step toward financial empowerment.
Using the benchmark to measure investment performance is simple because the benchmark is not hard to find. This information is almost always in the marketing material for both mutual funds and privately managed funds. It’s also easy to find online for free. Because of this, when you are reviewing information about a fund you already own, or are thinking of buying, you can look at the material and easily see how the investment performed in comparison to the related benchmark.
The goal is to beat the benchmark after investment fees without additional risk.
Monitoring and evaluating the performance of your investments is key to growing your money and the benchmark makes this simple.