The S&P 500 Is (Probably) Not Your Benchmark & Should Not Be Your Entire Investment Strategy

For all investors, it is important to understand how to evaluate your investment performance. A benchmark is essential for measuring investment performance as it provides a standardized yardstick against which the performance of a particular investment or investment portfolio can be evaluated. By comparing the returns of an investment to those of the relevant benchmark, investors can assess how well their investments have performed in relation to the broader market.

Importantly, selecting the right benchmark that represents your risk tolerance and investment objectives is not one-size-fits-all. Too many investors across the country use the S&P 500 as a benchmark and subsequently purchase S&P 500 funds to attain benchmark-like performance. But is a S&P 500 fund the right investment?

Let’s consider this - If the financial crisis were to happen again, would you continue to hold an S&P 500 fund and lose ~55% of your investment in a year and a half? Think about that seriously – Your investment account drops from $100,000 to ~$45,000. Your IRA was $1,000,000 and is now ~$450,000. Are you realistically sticking with that investment strategy and making zero changes? We hazard to guess that most of you are saying, no.

So, why then are so many using the S&P 500 as a benchmark and its associated index funds as a primary investment?

Too many investors are sacrificing control over their investment risk for cost effectiveness and ease. In adverse markets, a lack of risk control (downside protection) can cost investors more than saved on fees, like an index fund.

Different investment strategies have different objectives. Spend time researching or working with an advisor to explore the appropriate solution. Investing IS NOT one size fits all, like index investing would suggest.

The solution?

1. Engage in realistic conversations about your risk appetite and your ability to tolerate losses.
2. Plan! Sound financial planning work helps you understand how ugly markets conditions change your investment projections and time horizon.
3. Implement a risk framework. Loss mitigation techniques, coupled with growth objectives suited to your comfort level are the best way to build sustainable wealth.
4. Ask for help – Partnering with a trusted professional helps remove emotion from investing and build an investment framework that makes sense.

Don’t get us wrong - there is a time and place for index investments. The tax efficiency and low costs benefits are legitimate, especially for new investors looking to get started. But without a defined investment objective and guardrails on risk, the one size fits all index solution misses the mark for too many investors.

-Brett Miller, CFA, CFP®

Any opinions are those of Brett Miller, CFA, CFP® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this material does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.