Fitting in more ways than one, really.

Fitting in more ways than one, really.

Let’s talk a little bit about benchmarks. No, those aren’t benches in the park. COME ON PEOPLE THIS IS IMPORTANT SHIZZZZZZZZZ.

The argument goes something like this. If you’re not beating the S&P 500, or TSX Composite, or The Dow Jones Industrial Average, or whatever easily matched index, then you might as well switch to passive funds and help the investors of Blackrock Investment Management get slightly richer. Those suckers, trying to “actively” invest. Let’s all point our fingers in scornful laughter! Don’t piss yourselves, morons!

Sorry. I am a mean person.

But the more I think about benchmarks, the more I’m convinced measuring investment success is about much more than just comparing your results to an appropriate benchmark.


I don’t care what dividend growth investors tell you, please don’t have 100% of your assets in stocks when retirement age comes. I’d say the ideal split is about 50-50, but conventional wisdom says you should probably have a 30-70 equity to bond split.

Because interest rates are lower than the average single lady on Valentine’s Day, it takes a pretty big nest egg to pull off that percentage of bonds in 2015. So retirees bridge the gap by buying things like REITs, high yield debt, and yes, dividend growth stocks. I’m quite okay with that, provided the whole damn portfolio isn’t made up of dividend growth. Mix in some debt, it’ll be okay.

At that point, what benchmark should a retiree follow? It isn’t just as simple as splitting the difference between the TSX and whatever bond index you choose, since chances are the equities chosen will be less volatile than the index.

The whole point of modern portfolio management is so retirees don’t have to take market risk anymore. So as much as I hate the answer, I’m not exactly sure retirees should really care about an index. A properly constructed portfolio will likely only go up a little each year (if at all) while throwing off income so Grandpa doesn’t have to pawn his shorts that go up to his armpits. There’s probably an index to watch, but I say just allocate the money in the appropriate way and forget about it except for occasional rebalancing.

Picking stocks

If you’re into picking stocks, you gotta be careful while benchmark you’re using to compare results.

Say you’re like me and invest in a lot of Canadian small-cap companies. The S&P 500 is not the index I should be comparing results to, especially after you consider currency conversions. The TSX Composite is better, but it’s dominated by the financial, energy, and precious metal sectors. It’s still not great, especially if you’re like me and have nothing in financials, squat in precious metals, and not a lot in oil.

The same argument could even present itself if you compare my results to the TSX small-cap ETF, which is what I currently use. Take a look at the sector breakdown:

Screen Shot 2015-04-02 at 1.45.01 AM

The Uproar Fund currently has about 30% of its assets in consumer discretionary, with another approximately 5% in energy, and the rest in other sectors. Should I really be comparing it to an index that looks like that? Probably not, but at some point you just gotta shrug and realize the comparison is good enough.

But I could even take it further. Currently, some 45% of my fund is in cash. I’m researching stuff pretty much daily, but I’m not finding much to buy. The comparison ETF is fully invested all the time. Basically, in bull markets, I should be lagging it and beating it in bear markets. It’s flat over the first quarter of 2015, and so am I, with just a few tenths of a percent separating my returns from the benchmark.

Is it silly to take it this far? Yeah, probably. I could have just plunked my money into the small-cap ETF last year and been further ahead, but I’ve decided I’m willing to give it five years of active investing before I pull the plug (assuming I consistently suck, of course).

The solution for most people reading this is simple. Figure out your ideal asset allocation, pick corresponding ETFs, and call it a day. And if you’re active, chances are you’re buying large-caps, so just use the TSX Composite or S&P 500 as a benchmark. Yeah, there are situations where you can do things different, but the whole point of comparing to benchmarks is to see whether you outperform a passive strategy. It’s probably best to not make it terribly complicated.

Tell everyone, yo!