Members can now compare both investment strategies and their own custom Model Portfolios to alternative benchmarks like the S&P 500 or Nasdaq 100. Previously, we only benchmarked to the 60/40 (60% US stocks, 40% US bonds), the de facto standard in US asset management.
To try it now, go to Compare Strategies and select up to 5 strategies/portfolios/benchmarks.
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Since launching this platform 7+ years ago, we’ve always resisted adding stock index benchmarks like the S&P 500. We’ve tried to tick everything off members’ wish lists, but we intentionally avoided this one on principle. We’ve finally relented (only half joking).
Why we don’t like the idea of benchmarking to stock indexes:
When designing an investment plan, our goal should always be maximizing return relative to risk – not simply maximizing return. Measures of risk-adjusted return include the Sharpe Ratio, Sortino Ratio, and our personal favorite, the Ulcer Performance Index.
Why? It’s very easy to look at a chart of some high-flying whatever (hodl’ing crypto comes to mind) and think “yeah, I would have traded that”. Big returns are seductive.
It’s a very different matter holding a big position in real-time when the future is unknown. Wild swings and major losses make us question our best laid plans. This isn’t a hypothetical argument. Studies prove conclusively that the average retail investor underperforms (badly) by buying high and selling low for precisely this reason.
Comparing performance to a stock index (or any other single undiversified asset) goes against that basic ethos. For example: the S&P 500 has outperformed the 60/40 benchmark by a little over 1% a year – great – but it has also exhibited 50% higher volatility and a 70% larger max drawdown. On a risk-adjusted basis, it has been inferior.
Benchmarking to stock indexes feels a little like we’re encouraging bad behavior by focusing purely on the “return” part of the risk-adjusted return equation. Having said that, we’re all adults here; the people have spoken, and stock index benchmarks ye shall have =)
Other random thoughts:
- Why do we benchmark to the 60/40 by default? Because (a) it’s the de facto standard in the asset management industry. And (b) it’s been a tough hurdle to beat over the last 40+ years due to an epic once in a lifetime run in US Treasuries.
- You’d be completely justified in believing that the 60/40 is not the most appropriate benchmark for a tactical portfolio. Our only point is that whatever the most appropriate benchmark is, it’s a diversified portfolio, not a stock index.
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If you’re of the mindset that the 60/40 has too much stock exposure because stocks are so much more volatile than bonds (a commonly cited critique), you could also use our platform to benchmark to something like an Equal Risk Contribution (ERC) portfolio.Geek note: The ERC portfolio is also a very rough approximation of how we would expect a Global Market Portfolio to perform.
Available benchmarks:
For the moment, benchmarks are limited to the following:
- 60/40
- S&P 500
- Nasdaq 100
- Dow Jones Industrial Average
- 10-year US Treasuries
- Global stocks (ACWI)
- Global 60/40 (60% ACWI, 20% BWX and 20% IEF, rebalanced monthly)
We’re open to adding more benchmarks in the future based on member feedback. If there are others you’d like to see added, please contact us.
New here?
We invite you to become a member for about a $1 a day, or take our platform for a test drive with a free membership. Put the industry’s best Tactical Asset Allocation strategies to the test, combine them into your own custom portfolio, and follow them in real-time. Learn more about what we do.
