Benchmark

A benchmark is a standard you compare your investment returns against. It answers the question: “How did I do relative to what I could have done with a simple, low-cost alternative?” The most common benchmarks are broad market indexes like the S&P 500 (for US stocks) or the S&P/TSX Composite (for Canadian stocks).

How it works

If your portfolio returned 8% last year, that number alone doesn’t tell you much. But if the S&P 500 returned 12% over the same period, you know you underperformed the benchmark by 4%. If it returned 5%, you outperformed by 3%.

Different types of investments should be compared to different benchmarks. A Canadian stock portfolio should be measured against a Canadian index. A bond portfolio should be compared to a bond index. An all-in-one ETF might be compared against a blended benchmark that matches its target allocation.

Why it matters

Without a benchmark, it’s hard to know whether your returns are actually good. A 10% return sounds great until you learn the market did 16%. A 3% return sounds bad until you see the market was down 5%.

This is especially important when evaluating mutual funds or advisors. If you’re paying higher fees for active management, the results should at least match, if not beat, what a low-cost index fund would have delivered. A benchmark gives you that reference point. It turns vague feelings about performance into something concrete and measurable. Our guide on what “I’m up 3%” actually means digs into this further.

Example

Say your Canadian stock portfolio returned 7% last year. The S&P/TSX Composite returned 10% over the same period. You underperformed by 3%. If you’re paying a 1.5% advisory fee on a $50,000 portfolio ($750 per year), that underperformance plus fees means a low-cost index ETF tracking the TSX would have left you roughly $2,250 ahead.