In finance, a benchmark is "a standard against which the performance of a security, mutual fund or investment manager can be measured".  For single asset classes, such as stocks and bonds, the relevant benchmark is typically a broad market index. For portfolios with multiple asset classes, the benchmark could be composed of several indices in the appropriate proportions. Examples of portfolio benchmarks appropriate for Canadians are the FPX Indexes.
The FPX Indexes
The three Financial Post Indexes ("FPX Indexes") constructed by Richard Croft and Eric Kirzner were designed to provide investable benchmarks for measuring portfolio performance. The three indexes are the FPX Growth, FPX Balanced, and FPX Income, and are designed to for Growth, Balanced and Income (Conservative) investors, respectively. These provide starting points for possible asset allocations for Canadian investors.
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Being investable indexes, any investor can buy the investments that make up the index. Daily values can be obtained from the Financial Post. Historical returns are available on this calculator from Croftgroup.
Your personalized benchmark
Suppose that your investments returned 6.3% in 2016. Is this good or bad? To find out, you ideally need to compare your results to a personalized benchmark that reflects your asset allocation.
Return for each asset class
Suppose your portfolio contains 40% Canadian bonds, 20% Canadian equities, 20% US equities, 15% international equities and 5% real estate investment trusts (REITs). You need to find out the total return of the relevant index for each asset class, in Canadian dollars.
You can consult the Periodic table of annual returns for the major asset classes: for calendar year 2016 this shows +1.7% for bonds (All bonds), +21.1% for Canadian Equities (TSX), +8.6% for US equities (S&P500), and -1.5% for international equities (EAFE).
If an asset class is missing from the periodic table, you can find out the index return on the website of an exchange-traded fund (ETF) provider: here for REITs you find out that the 2016 return for the S&P/TSX Capped REIT Index, which the ETF XRE tracks, was +17.6%.
You then calculate a weighted average index return, using the asset class weights and their yearly returns. In our example we have:
40%(Can Bonds)*1.7% + 20%(Can stocks)*21.1% + 20%(US stocks)*8.6% + 15%(Intl stocks)*(-1.5%) + 5%(REITs)*17.6% = 7.3%.
So you underperformed your personalized benchmark by 1.0% for 2016. Time to start thinking about why!
- Investopedia, benchmark definition, viewed January 16, 2015.
- Richard Croft and Eric Kirzner. Financial Post Indexes, viewed January 16, 2015.