HUNTSVILLE, Ala. (WAFF) – Comparing an investment portfolio’s performance to a benchmark such as the S&P 500 Index can be one of the easiest ways to fall short of financial goals, according to financial adviser Cason Westmoreland of The Welch Group.
Why the S&P 500 comparison can be misleading
The S&P 500 is market-weighted, meaning its performance is not spread evenly across its 500 companies. About 40% of the index is made up of its top 10 stocks, and nine of those 10 are technology companies, Westmoreland said.
“So if tech’s having a really good day or a really good month, it might be outperforming your portfolio, or it might be lagging behind,” Westmoreland said.
Because of that weighting, an investor with a differently structured portfolio may see results that vary widely from the S&P 500 in the short term, even if their investments are performing as intended.
Choosing the right benchmark
Benchmarking a portfolio is not a problem on its own, Westmoreland said, as long as investors choose a benchmark that matches their holdings. An investor whose portfolio consists of dividend stocks and fixed income should not measure results against the S&P 500, which is made up entirely of U.S. large-cap stocks and is 100% invested in equities, he said.
Westmoreland said he advises clients to identify a return figure that meets their long-term financial goals and to select a benchmark tailored to their own portfolio, rather than defaulting to the S&P 500.
“Don’t wake up and say, ‘The S&P is up 1.5%, I’m only up one, I need to make changes,’” Westmoreland said. “That’s where you really start to lose your investment philosophy and really start to mess up your portfolio over time.”
Maintaining a defined investment philosophy, Westmoreland said, helps investors avoid making short-term changes based on comparisons that may not apply to their financial strategy.
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