To know if an investment is doing well, you can look at how much it went up or down in value over a certain period. Some investors look at growth in peso terms, while others in percentage terms.
However, growth in value or in percentage alone won’t tell you whether your investment is performing better or worse than other investments or the broader market.
This is where benchmarks come in handy. Learn all about them and why they matter to investors in this article.
What are benchmarks?
In general, a benchmark is a standard against which something is measured or compared. In investing, a benchmark is an index that tracks the performance of certain groups of assets.
Locally, there’s the Philippine Stock Exchange Index (PSEi), which contains the 30 biggest and most actively traded stocks listed in the PSE.
The PSEi is widely used as the benchmark for stock market investments and investment funds that mostly contain the same stocks.
There are many stock indices locally and globally as well as indices for other types of investments like bonds and commodities.
These can serve as measuring sticks for how well a portfolio or certain assets, sectors, or markets are performing.
How are benchmarks used?
Benchmarks are used by both fund managers and individual investors. Here’s how:
- By investment funds and fund managers
When you look at the fact sheet of an investment fund, you’ll find a section that shows the fund’s benchmark. This is the index that the fund aims to match or beat.
You’ll also see a comparison between the fund and the benchmark’s returns over time. These numbers can tell you whether the fund is doing well or underperforming relative to its benchmark.
A fund may track its benchmark by investing in the same assets within it, or simply use it as a measure of performance. Funds may also have more than 1 benchmark.
Note that investment funds can freely change their benchmark/s. However, they are required by law to announce such changes and the reason for replacement.
- By individual investors
If you’re a do-it-yourself investor and are handpicking investments for your portfolio, a benchmark can help you assess whether you’re on the right track.
When choosing a benchmark, it’s ideal to pick 1 that matches your portfolio, time horizon, and objectives the best.
For example, if you want to invest in top local companies across different industries, the PSEi might be a good benchmark.
However, it may not be the right gauge if you’re mainly investing in specific industries and sectors, like property or financial institutions. You can instead look at other indexes that track the industry or sector you’re invested in.
You can also use benchmarks to compare investment options or get an idea about the kind of returns you might expect from a certain market or sector. Just keep in mind that past performance doesn’t guarantee future results.
Further, outperforming a benchmark – also called “beating the market” – doesn’t have to be your only measure of success when investing.
It might be good enough to have investments that match your preferences and risk tolerance and can help you reach your own goals.
