Personal benchmarks

by Jerry Wagner

It’s that time of year again—time for a benchmark, a point of reference that helps you see where you are and how far you’ve come.

For me, that point of reference started at a doorway. I can still feel the doorjamb pressed against the back of my head as my dad balanced a ruler on top and penciled a line where it met the molding. I stretched upward, resisting the urge to stand on tiptoes. My sister and brothers followed in order by age, each leaving behind a line, a date, and a name. When we were finished, we crowded around the doorway and compared this year’s line with last year’s—our personal benchmark. How much had we grown? The answer was right there.

Most families have some version of this ritual. It’s a simple way to measure progress—to see where you’ve been and whether you’re moving in the right direction. That same instinct shows up every quarter when investors open their account statements and look for answers.

The problem with traditional market benchmarks

For many firms, benchmarking is straightforward. Investment returns are printed next to the S&P 500 Index return and left for comparison. Some firms go a step further and include additional indexes—maybe a bond index, the NASDAQ, or an international measure—for added context.

The problem is that these comparisons are often unrealistic. Not only is the S&P 500 a poor benchmark for most investors, but for many individual portfolios, it is simply inappropriate. A benchmark should have real relevance to the person using it.

What indexes don’t tell you

While indexes can show the direction of the stock or bond market, they say nothing about whether an investment has fulfilled its intended purpose for an investor. An index is simply a collection of stocks chosen by a committee to be used by the media. It does not measure success in meeting an investor’s goal. They are not the personal benchmark that every investor needs.

Indexes are also often used in a one-dimensional way. Quoting only the return of the S&P 500 is like citing the payoff of a winning lottery ticket—it’s meaningless without understanding the risk involved. Yes, a lottery ticket can deliver an extraordinary return, but the odds of winning are vanishingly small. The risk is nearly total.

The same principle applies to market indexes. You may know that the S&P 500 gained 10% in a quarter, but that number alone ignores the fact that the index has, at times, declined by more than 50%. If you knew an investment could lose more than half its value, would you choose it? And if not, why compare your portfolio to a risk profile you could not tolerate?

How we create a personal benchmark

We make all of this standard information available to financial advisers through our research, illustrations, composite performance reports, and firmwide GIPS-verified information. Our composite performance and GIPS reports show how strategies have performed historically.

But when you engage an investment advisory firm, you are also engaging its research capabilities—and its ability to adapt and refine even well-established strategies as market conditions change. That ongoing work matters just as much as the historical numbers.

On our account statements, we use current research report benchmarks and fund rules to prepare a personal benchmark for each client account. We call this our OnTarget Investing process. You can visit the OnTarget Investing website to learn more, but here is a brief overview.

The process starts with the suitability questionnaire clients complete as part of their investment management agreement with us. By pairing each client’s answers with the strategy or portfolio of strategies chosen by each client and their financial adviser, we can establish a personal benchmark aligned with the client’s stated investment time horizon.

This personal benchmark is provided to clients in the initial proposal and then delivered with each subsequent account statement. The goal is simple: to give clients a customized, relevant measure for evaluating how their account is performing over time.

How the OnTarget Monitor works

Each client’s personal benchmark is best illustrated by the OnTarget Monitor (see the sample below).

The OnTarget Monitor uses hundreds of Monte Carlo simulations to compare a client’s portfolio’s performance with the strategy’s benchmark. The portfolio value (the black line) is plotted against a color-coded range of possible investment outcomes over the client’s stated time horizon.

The multicolored background represents the probability that the client’s account will reach the forecast composite benchmark values shown on the right side of the chart, based on the strategies currently used. The composite benchmark reflects the benchmarks of each strategy in the client’s account, weighted by allocation.

The black line shows the account’s monthly percentage change, after advisory fees, ending with the current balance. The time period shown matches the investment time horizon indicated in the client’s suitability questionnaire.

What “OnTarget” performance means

We refer to “OnTarget” performance as periods when the portfolio’s value remains within the blue and green zones.

A bear market can briefly push even the best strategies or diversified portfolios into the red or yellow zones. That alone is not unusual. However, prolonged time in the red zone may indicate that the current mix of strategies no longer aligns well with the client’s objectives or risk tolerance, or that a portion of the portfolio may be out of sync with the current market environment. In those cases, it may be appropriate for the client and their financial adviser to review the strategy mix and consider adjustments.

Why personal benchmarks matter

My parents lived in their home for almost 50 years. My father, who was a builder, had been the contractor. Leaving that house was not easy.

Before we did, each of us returned to the doorway. We ran our fingers over the many notches, and bent down and squinted at the faded writing. Those marks told a story—where we had been, and how we had grown.

That is the power of a personal benchmark. May yours be OnTarget, not some media-inspired number that fails to reflect your risk profile and investment time horizon.