Investment Benchmarking

Investment benchmarking

Investment benchmarking is the process that appropriately compares and measures investment performance. This is quiet a simple procedure which is done by comparing your own investment return against the return of a benchmark over the same period of time.

One of the most important elements of investment benchmarking is choosing the right benchmark to compare with.  An example of an Australian equity benchmark is the ASX200 Index.  However we encourage investors to benchmark against the ASX200 Accumulation Index as it also includes the affect of dividends.

The importance of Australian dividends is highlighted by comparing the ASX200 Index versus the ASX200 Accumulation Index over long periods of time.  The below table compares the 2 indices from 31 December 1999 to 31 December 2009:

 The accumulation index excludes dividend tax credits, which further highlights the value Australian dividends play in total equity returns.

Additionally investors need to be wary of after-tax investment returns versus pre-tax investment returns.  This is a separate topic which we will dedicate March’s Wealth Pipeline to.

Who Should Benchmark?

Financial planners, investment managers, stockbrokers and private investors need to benchmark. Successful benchmarking entails:

• An accurate measurement; and
• Assessing it on the right time horizon. The most appropriate time horizon should depend on the precise investment strategy and generally short-term performance should not be overly analysed.

It is important we invest well.  It is therefore important to choose an appropriate benchmark and be prepared to be tested.

An example of Investment Benchmarking

An investor puts $500,000 into the stock market on the 31 December 1999.  At 31 December 2009 the amount has grown to $1,000,000 (assuming no taxes and full dividend reinvestment).  While a 100% investment return may seem impressive, however when benchmarked against the ASX200 Accumulation Index over the same period of time the investor has underperformed the market by an overall 34.7% or 1.935% p.a. or $173,500.

We feel too many investors either fail to benchmark their investment performance and/or admit their inability to invest successfully.