As a portfolio manager, I've always been evaluated based on outperformance relative to the benchmark, and my incentives are based on performance. My clients frequently ask me about the significance of benchmarking. It is the practice of comparing the performance of an investment, fund, or portfolio to a standard, such as an Index - Nifty 50, BSE 100, Midcap 50, and so on.
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While benchmarking is a useful and widely used tool in the industry, from an investor’s perspective, it must not be taken as the only way to measure your financial success. In fact, relying too much on external benchmarks can be misleading, distracting, and even harmful for your financial well-being. Most of the wealth managers recommend opportunities based on these external benchmarks whereas setting your own benchmarks is equally, essential for your financial interest. In this blog, we'll explore why creating your financial roadmap is key to navigating the complex waters of wealth management and burst the myths of following market Benchmark.
Life Goals Over Fund Performance:
While fund benchmarks are essential, personal financial goals take precedence. Your investments should align with milestones like purchasing a home, funding your child's education, or enjoying a comfortable retirement. These goals become the benchmarks against which the success of your financial life should be measured. Remember, it's not just about beating market indices; it's about surpassing the benchmarks you set for the most significant voyage of all—your life's financial journey.
Wealth Outperformance over Fund Underperformance:
It's not uncommon for a fund to underperform its benchmark. An investor must always look at outperformance of their overall wealth to inflation. An underperforming investment may still be outperforming inflation by miles. This can be achieved by factors like wholistic investment planning, strategic asset allocation, and a long-term perspective, which may differ from the fund's outperformance or underperformance.
Tax Efficiency and Minimizing Churn:
Beyond just returns, tax efficiency and minimizing churn are critical components of to maximise wealth. Setting benchmarks that focus on tax optimization and reducing unnecessary transactions can lead to substantial savings over the long term. Your benchmarks in this realm are not arbitrary metrics; they are the compass guiding you towards a financially efficient route, minimizing turbulence, and maximizing the smooth sailing of your wealth-building journey.
Myth: Market Indices Tell the Whole Story
Setting your benchmarks is about expanding the narrative beyond market indices. Consider the broader picture – factors like inflation, tax efficiency, low churn, and the magic of long-term compounding are vital components that often escape the spotlight. By acknowledging these elements, you're better equipped to sculpt a financial plan that resonates with your unique circumstances.
Myth: One Size Fits All
The financial landscape is diverse, and so are your goals. Tailoring your benchmarks based on individual circumstances fosters a more realistic and achievable approach. Recognize that what works for one investor may not align with your unique financial narrative. Embrace the power of customization.
In conclusion
While benchmarks set by the finance industry are crucial metrics, they don't capture the entirety of your financial journey. Creating a personalized roadmap is not about beating market indices; it's about reaching your unique destination.
As experienced finance professional, I encourage you to reflect on your financial goals and set benchmarks that resonate with your aspirations. Remember, the race is yours, and success is defined by achieving the milestones that matter most to you.
As the famous investor and author Benjamin Graham said, “The investor’s chief problem - and even his worst enemy - is likely to be himself.”
So, don’t let external benchmarks distract you, mislead you, or discourage you. Set your own benchmark, follow your own plan, and enjoy your own success.
Note: The information provided in this article is for educational purposes only and should not be considered as investment advice. Investors should conduct thorough research and seek professional guidance before making investment decisions.
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Sumit Poddar
Chief Investment Officer & Smallcase Portfolio Manager
Tikona Capital
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