During client reviews, we often discuss how are we doing in relationship to the market. In addition, when our clients look at their monthly reports, they are looking to see how their accounts have changed compared to the market.
The big question is “What is the Market”? What is mainly reported in the financial media is the US large companies represented by the Dow Jones or the S&P 500. For most people, that is how you compare your returns.
Fortunately, or unfortunately, the market is made up of many asset classes, Large, Medium, Small, International and Fixed Income. Depending on your risk tolerance, you will have some combination of these asset classes. The allocation among different classes is meant to diversify risk as well as return.
The US equity market has been doing very well lately. However, not all asset classes have done as well. Fixed Income, International and Real Estate have all seen a decline, especially since the election. Your portfolio return will reflect the favorable return of the US market but it will also be offset by other categories.
I have attached a nice summary from LPL that discusses both appropriate benchmarks as well as diversification benefits and penalties.
I encourage you to read it to help understand your portfolio performance. However, if you don’t have a chance to read it, we will review it at our next review.