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Principle #8: Reporting & Benchmarking
How you implement your asset mix and construct your investment portfolio is as important as determining the proper asset mix, and proper implementation will greatly impact your overall performance.
Most investors can live with a drop in the value of their portfolio as long as the actual performance is within the range of expected results. Dissatisfaction is most likely to occur for one of two reasons:
- The portfolio has dropped in value outside of the predicted range of returns or
- Investors are unable to properly measure their performance and do not know if they are reaching their relative and absolute benchmarks.
Without a benchmark to measure performance, you won't know if a drop in the value of the portfolio is normal and to be expected, or if the drop signals a serious problem that should be addressed before it gets worse. Furthermore, having a benchmark makes it possible to identify those parts of the portfolio that are performing well and those that are performing poorly. It also allows you to properly rebalance the portfolio on a timely basis.
Having a benchmark for each asset class and for your portfolio as a whole helps to explain its performance and allows you to determine where changes need to be made. Monitoring the overall portfolio performance allows you to see if you are on track to reach your financial goals.
Professional money managers always have a benchmark against which they measure performance. Individual investors rarely have either an absolute or 'range of returns' benchmark against which they can measure performance.
The benchmark you use should show the range of returns that can normally be expected for your portfolio during good years and bad years. A benchmark or benchmarks should be found in your Investment Policy Statement.