Given the current market environment, many people have been paying more attention to the performance of their portfolio. While monitoring performance is important, measuring the success of your portfolio against the right benchmark is what's most meaningful.

Watch the Hazards of Daily Monitoring

For years, various benchmarks such as the Dow and the TSX have been used to evaluate the performance of portfolios, on a day-to-day and even a second-by-second basis. While they serve a purpose, it's important to make sure that you're using the right benchmark to evaluate your own portfolio:

• Unless you have exactly matched an index or benchmark, it's not indicative of what actually occurred in your portfolio. Using an incorrect measurement tool will inevitably lead to mistakes and in some instances, to unrealistic expectations. 
  
  
• It's extremely difficult for an individual investor to construct an individual benchmark and then mirror it on an ongoing basis. Benchmarks are much more useful for institutional investors because they have the resources to monitor them and to make changes in their portfolio when necessary. 

Develop a Personal Benchmark

The benchmark or measure of success that is right for you must be based on your goals and objectives. By definition then, you need a plan to know the level of performance you require to determine whether you are achieving any level of success.

Suppose you completed a financial plan and that, based on all the assumptions that you used, you required an 8% annual return over the next 20 years to achieve your financial goals. If you actually achieved the plan, you'd be happy because it would allow you to have the standard of living that you wanted and provide for your beneficiaries. Your measure of success is achieving that standard of living, which means that the growth of your assets must occur at 8% per year over those 20 years.

Ignore Short-Term Swings

If you look at what's going on today, we're experiencing some market volatility and, as a result, large swings in performance.

The one thing that should jump out at you is that one-day, one-week, one-month or even one-year performance should not be of great concern to you. Your time horizon, no matter what your age, is probably longer than whatever measures you may be using. Unfortunately, our expectations as investors have risen to the point where we don't expect losses. While nobody likes to have losses, it's very difficult to experience gains at the level that we may like. Having a plan that you monitor relative to your goals and objectives is what's most important.

Take the Long-Term View

If you look at the example above, remember that you're happy to achieve 8% because it gives you the lifestyle you want. Use that 8% as a guide - if you get more than 8% in a particular year, it can help you in a year where you achieve less than 8%. Remember that you're in this for the long haul.

Don't get caught up in the quagmire of daily monitoring, even though human nature makes it difficult. Measurement is important but you want long-term performance - unless of course, you have a crystal ball and can time the market.

For more information on the use of benchmarks, please contact a ScotiaMcLeod advisor.

The information contained on this website is for use by persons resident in Canada only.