By: AnnaMarie Mock, CFP®
Understanding whether your investments are genuinely working for you requires more than just glancing at your account balance. Markets rise and fall, and your portfolio will naturally move with them. But how do you know if your investments are performing as well as they should be? One of the most effective ways is by comparing your returns to relevant benchmarks—such as market indices or blended metrics that reflect how similar investments are performing.
Evaluating performance against the right benchmarks helps you determine whether your strategy is on track, whether your risk level is appropriate, and where adjustments may be beneficial.
Why Benchmarks Matter
Benchmarks act as a barometer for your investment returns. If your portfolio gained 6% last year, that may sound good—until you learn that the broader market returned 12%. Conversely, if your portfolio was down 3% during a year when the market fell 10%, that relative outperformance suggests your strategy worked well in a tumultuous market environment.
Benchmarks help you answer three fundamental questions:
Is my performance competitive?
You want to understand whether your investments kept up with similar market exposures.Am I being compensated for the risk I’m taking?
A portfolio should not be taking significantly more risk than its benchmark unless the expected return justifies it.Is my strategy doing what it’s supposed to do?
If you hold bonds for stability or international stocks for diversification, they should behave differently from U.S. large-cap stocks and be evaluated accordingly.
Without benchmarks, performance evaluation becomes a matter of guesswork. With them, it becomes a disciplined, informed process.
Choosing the Right Benchmark
Not all benchmarks are created equal, and selecting the wrong one can lead to misleading conclusions. For example, comparing a conservative portfolio with 40% bonds to the S&P 500—an all-equity index—will make the conservative portfolio look weak in strong markets and unusually strong in volatile ones.
Your benchmark should match your portfolio’s composition, style, and risk level. Here are the most commonly used benchmarks and when each is appropriate:
1. S&P 500 Index
Best for: Large-cap U.S. stock exposure
When to use: Evaluating U.S. growth-oriented or broad market equity allocations
2. Russell 2000 Index
Best for: Small-cap U.S. stocks
When to use: Assessing aggressive or high-growth domestic stock positions
3. MSCI EAFE Index
Best for: International developed markets
When to use: Evaluating non-U.S., non-emerging market equity exposure
4. MSCI Emerging Markets Index
Best for: Developing economies
When to use: Comparing global portfolios that include emerging-market stocks
5. Bloomberg U.S. Aggregate Bond Index
Best for: Core bond portfolios
When to use: Evaluating fixed-income performance in diversified portfolios
6. Blended Benchmarks (Custom Benchmarks)
If your portfolio includes multiple asset classes—such as U.S. stocks, international stocks, and bonds—a blended benchmark, weighted to match your allocations, provides the most accurate comparison. For example, a 60/40 portfolio may be measured against:
60% S&P 500
40% Bloomberg U.S. Aggregate Bond Index
When You May Need to Adjust Your Strategy
The key question is not whether every part of your portfolio outperforms every year, but whether each component is behaving as expected based on its purpose in your overall plan. When each part of your strategy is fulfilling its intended role, temporary underperformance is not only typical but expected. What matters most is long-term alignment with your goals, risk tolerance, and financial plan.
If your portfolio consistently underperforms its benchmark over a full market cycle (typically 5–7 years), or if it’s taking more risk while delivering lower returns, it may be time to make adjustments. A few strategic updates can help get you back on track:
• Rebalancing back to your target allocation
Over time, certain investments grow faster than others, causing your portfolio to drift away from your intended mix. Rebalancing restores the proper balance between growth and stability, helping you stay disciplined and focused.
• Assessing fund selection
Some mutual funds or ETFs regularly lag comparable funds or category benchmarks. Replacing chronic underperformers can help improve long-term results.
• Improving diversification
Portfolios heavily concentrated in a single sector, region, or style may experience unnecessary volatility. Expanding exposure across different asset classes and markets can reduce risk and smooth returns.
• Re-evaluating costs
High fees—whether from active funds, advisory costs, or trading expenses—can quietly erode performance over time. Lower-cost alternatives may help improve your net return.
A thoughtful review with your advisor can determine whether underperformance is a structural issue worth addressing or simply short-term noise that resolves as markets shift.
Bringing It All Together
Benchmarking is not about “beating the market” every quarter. It’s about ensuring your investments are aligned with your goals, risk tolerance, and long-term plan. By comparing your returns to the right benchmarks—and understanding the context behind the numbers—you gain clearer insight into the health and effectiveness of your portfolio.
A disciplined evaluation approach helps you stay on track, make better-informed decisions, and maintain confidence in your strategy, even when markets are unpredictable.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
The above article was written with the assistance of artificial intelligence (AI).