I ask because I have always measured my portfolio against the FTSE 100. It is the main UK index, and in the past I have said I would instead invest in this index were I to become a passive investor.
In fact, all the new money I invested went into the FTSE during my stint as a share-tipster some years ago.
But the FTSE has been a woeful performer over the last two decades. I just wonder if its main constituents – Unilever, Shell, HSBC, Glaxo, BAT etc – have seen their best days and are becoming market dinosaurs.
I would no longer invest purely in the FTSE 100 today. So I have been thinking about a new benchmark.
I don’t believe in the conventional view of benchmarks – that is, measure yourself against a particular style/sector index that broadly reflects your own portfolio.
For instance, many people have asked me why I do not measure my portfolio against a small-cap index or an AIM index because my shares are mostly small or mostly on AIM.
The answer is simple – I would not invest entirely in a small-cap/AIM index and leave it there untouched for the long term. I don’t think anybody would.
In contrast, I see benchmarks as alternative investments that I could leave untouched for the long term – a passive alternative that would tell me whether my stock-picking has been really worth it (or not).
Rather than plump for one investment, I have created a benchmark blend through four funds that involved minimal thought and research:
- Fundsmith – exposure to quality global large-caps
- Nasdaq 100 – exposure to leading US techs
- Free Spirit – exposure to UK small-caps
- FTSE 100 – exposure to market dinosaurs
I suppose Fundsmith is an automatic choice these days for hands-off investors. I do like US tech for the long run and the Nasdaq seems the best way to ride that.
I considered the Buffettology fund as I like the way Keith Ashworth-Lord invests Should I (or You) Buy The Buffettology IT?, but plumped for Sanford’s much smaller sibling Free Spirit as i) K A-L is a co-manager, ii) its smaller size gives more scope to bet big on the ‘next Games Workshop’ and iii) it has out-performed Buffettology in its four-year lifespan.
I could not face excluding the FTSE completely, so included it as a value/high-yield/contrarian play. A benchmark comprising only of past winners might be asking for trouble.
Here are the five-year performances, starting prices as of the end of 2020, and the price change since:
I will monitor this benchmark’s returns and report back every so often. There will be no changes for the next five years. The performance could create very uncomfortable comparisons with my portfolio. Whether I then give up stock-picking – or put my head in the sand while still hoping to unearth a ten-bagger – is hard to say!
So… what is your portfolio benchmark? I would be interested to know what – if anything – you measure your returns/stock-picking against. And could you beat this four-fund benchmark? I am not sure I will.