Benchmark
A reference index against which a portfolio's return and risk are measured, the yardstick that says whether a result is good in context.
Also called: reference index
A benchmark is a standard of comparison: a broad index, or blend of indices, that represents the market or strategy a portfolio is trying to match or exceed. Returns mean little in isolation; set against a benchmark they take on meaning.
Choosing a fair benchmark matters: one that reflects the same assets and the same risk. A result that looks strong can turn out ordinary once compared to a simple index, which is why honest reporting always states what it is measured against.
Related terms
- Total returnThe full return of an investment including both price change and income (dividends or interest) reinvested. It is the honest measure of what an investor actually earned.
- Tactical Asset Allocation (TAA)Adjusting a portfolio's mix of broad asset classes over time in response to the market environment, instead of holding fixed weights regardless of conditions.
- DrawdownThe decline from an investment's most recent peak to its subsequent trough, in percent. It is a direct measure of pain endured, and of the gain needed to recover.
Read it in context
- What a world equity ETF actually holds"World" on a fund is not a description of the planet. It names an index, and the major world indices cover very different universes. Some exclude emerging markets entirely, and most weight by market value, which concentrates them wherever prices have risen most.
- What a drawdown isA drawdown is the fall from a previous high down to the low that follows it, measured as a percentage. A second measure is its duration: the time spent below that high before it is regained. The two are read together to understand what holding the investment involved.