Portfolio Versus Benchmark Returns

Measuring investment performance without a benchmark is like judging the results of a football game when you only know one team’s score.  To get the real story, there must be a “measuring stick.”  Obviously, in football you also need to know the opponent’s score.  In the case of investment performance, results should be compared to an overall market with similar risk characteristics.

Here at Rockbridge, we structure clients’ portfolios to maximize the probability of meeting long-term financial goals.  In doing so, we are committed to the idea that a portfolio’s asset allocation (mix of stocks and bonds) determines its risk profile.  Asset allocation is also what explains a portfolio’s long-term results, and the best way to implement these portfolios is through the use of market-tracking funds/ETFs.  The philosophy hasn’t changed, going back to the firm’s roots in 1991.  The use of benchmarks helps us measure if portfolios are delivering on their long-term objectives.

The following indices are generally used to construct our portfolios’ benchmarks:

S&P 500/Russell 2000 – Domestic Stocks

MSCI EAFE – International Stocks

Barclays Government/Credit Index – Bonds

In our benchmark construction, the amount allocated to each of the above markets mimics the risk profile it is designed to measure.  By design, many portfolios are diversified beyond the above benchmarks and include exposure to emerging markets and real estate.  Over the past quarter, this exposure has not helped overall portfolio performance when compared to benchmark results.  However, we continue to believe this diversification is appropriate and will bring incremental value in the future, as it has in the past.