Performance Perspectives Blog

Should retail accounts be shown a benchmark?

by | Aug 21, 2013

Last week, during a talk I was giving to a group of operations folks, someone asked my thoughts on showing benchmarks to retail investors; specifically, those that are non-discretionary.

It’s important to realize that benchmarks serve two purposes: first, as a way to demonstrate skill, where the benchmark is one that aligns with the investment approach, and second, for reference purposes. Since most retail investors won’t be managing in a particular style for which a benchmark will align, we are left with the idea of showing benchmarks for reference purposes. In this case, it’s more of a “by the way, here is how the DJIA, S&P 500, Barclay’s Agg, US CPI did.”

If the client has an objective, such as wanting to have a return of at least four percent, to meet his/her obligations without dipping into principal, then having an “absolute” benchmark (in this case, 4%) would make sense to show.

By including a variety of indexes the client can see how they’re doing relative to various markets, and may decide to invest passively (or perhaps even actively) in one or more.

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