-
Benchmarking in financial analysis is a way to compare portfolio performance. To benchmark your portfolio, compare your portfolio against another portfolio of the same industry or portfolio mix.
Function
Benchmarking usually is done to evaluate the portfolio's return, or growth expressed as a percentage. For example, if your portfolio earns a 10 percent return this year, but your benchmark portfolio earns a 12 percent return, you would determine that your portfolio is not providing as much of a return as it should.
Time Frame
Benchmarking serves you best when you can compare your portfolio performance over time. For example, if your portfolio earns 8 percent, 10 percent and 12 percent in years 1, 2 and 3, respectively, and the benchmark portfolio earns 10 percent, 11 percent and 12 percent in those years, the pattern shows that your portfolio is likely to outperform the benchmark in year 4.
Theories/Speculation
The theory behind benchmarking is that you can best identify an under- or over- performing portfolio by comparing it to a portfolio that closely resembles yours. For example, if your portfolio contains only stock of Fortune 500 companies, your benchmark should contain only Fortune 500 companies.
Considerations
Financial advisers or consultants can help you choose a benchmark to use. Financial professionals are educated about commonly used benchmarks and often have these resources readily available. Some financial service companies offer customized benchmarking.
Benefits
If you find that your portfolio is underperforming, you can make changes to your portfolio mix to improve its performance, and your benchmark can serve as a model for those changes.
Source:
More Information:
Copyright 2023, Wired Ivy, LLC