Our thesis is that a benchmark’s performance isn’t what a typical investor is trying to achieve. The risk is simply too high.

Benchmark indices combine relevant securities to represent a measure of “market performance” for various asset classes. The performance of investment portfolios can then be compared against them.

Currently, if your portfolio is not concentrated in the “Magnificent Seven” tech stocks, most notably Nvidia, it is unlikely that you are beating the most common benchmarks – whether you’re comparing yourself to the S&P500 or the MSCI World Indices.

If you decide to simply own the index, to achieve the benchmark’s return, you would own Nvidia, and your return would be heavily influenced by that one stock. This would entail a significant amount of concentration risk, not to mention valuation or future business risk. In our experience, for the typical investor, this is not in alignment with their investment objectives.

When speaking with the portfolio management team of one of the active investment strategies we hold in high-regard, they shared that their benchmark will never be an ideal fit for their investment strategy. They have to include it, but they don’t consider it when making decisions for the risk-adjusted long-term growth of their clients’ assets.

Why? Take high-yielding Canadian dividend paying equities for example. A long-term investor in a basket of these companies would likely look to compare themselves to the S&P/TSX Composite High Dividend Index. However, between 2015-2020, annual turnover of that index ranged between 33% and 82%. It has also been consistently concentrated in the energy sector. While on paper it looks like it can be compared to a long-term investor portfolio in high-yield Canadian equities, if that portfolio looks completely different (whether it be the number of underlying holdings, weighting of those holdings, or turnover), it is not a valuable indication of how the portfolio is performing.

A Financial Plan, based on an investor’s unique goals, risk tolerance, resources and assumptions, creates a forecast which is realistic and attainable. Ensuring an investor’s performance is in line with their long-term goals, is what makes a Financial Plan a more appropriate measure, when compared to a benchmark.