Benchmark
A standard or reference point, typically a market index, against which the performance of an investment portfolio is measured. Common benchmarks include the S&P 500 for U.S. stocks and the Bloomberg Aggregate for U.S. bonds.
A benchmark provides context for evaluating investment returns. Without a benchmark, knowing that a portfolio returned 8% is meaningless—was the market up 15% (poor) or down 5% (excellent)? The right benchmark reflects the investment's opportunity set and risk profile.
Selecting the Right Benchmark
Choosing an appropriate benchmark is critical:
- U.S. large-cap stocks — S&P 500 or Russell 1000
- U.S. bonds — Bloomberg U.S. Aggregate Bond Index
- International stocks — MSCI EAFE or MSCI ACWI ex-USA
- Balanced portfolios — A blended benchmark (e.g., 60% S&P 500 / 40% Bloomberg Agg)
A misleading benchmark can make poor performance look acceptable or strong performance look ordinary. For example, comparing a small-cap value fund to the S&P 500 (a large-cap blend index) is an apples-to-oranges comparison. When backtesting your portfolio, always select a benchmark that matches your strategy's investable universe.