This is a term you'll come across in all aspects of investing, not just in the fund realm. A benchmark is a reference point that allows investors to correctly judge the performance of a fund or portfolio of stocks. Typically, benchmarks are widely recognized stock and bond indexes.
Maybe you own a Canadian equity fund and you're becoming more and more convinced it's a complete washout. You keep reading about how the stock markets are soaring, but your fund barely moves. How can you accurately judge your fund? Find the appropriate benchmark and compare returns over various time frames. For a broadly based Canadian equity fund with virtually all of its assets in Canada, the S&P/TSX composite is the correct benchmark (even better is the S&P/TSX composite total return index, which includes dividends). For U.S. equity funds focusing on big blue-chips, use the S&P 500 stock index. For global equity funds, use the MSCI World Index. For international equity funds, use the MSCI Europe Australasia Far East (EAFE) Index. The fund profiles available on Globeinvestor.com handily provide all the benchmark data you need to get the lowdown on the funds you own.
Don't give up on your fund because it has lagged on the market over a year or so. A much better way to use benchmarks is to compare them to your fund's returns over a period of five or ten years. Any fund at all can have a bad year. What matters is how it compares to the benchmark over longer periods.
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Excerpted from Rob Carrick's Guide to What's Good, Bad, and Downright Awful in Canadian Investments Today. Copyright © 2009 by Rob Carrick. Published by Doubleday Canada. Reproduced by arrangement with the Publisher. All rights reserved.
