| Certified financial planner Scott Leonard has some clients
who've been averaging a 20 percent return a year over the past five years. Sounds pretty
good, huh? Not when you realize that the Standard
& Poor's 500 has been generating an average annual return of 28 percent.
If you had returns like that "you missed 8 percent for
five years," said Leonard, president of Leonard Capital Management in El Segundo,
Calif.
Ouch!
One way to find out how your portfolio is doing is to
benchmark it. One good way to do that is by looking at market indexes, Leonard says.
That's why he's a big proponent of index funds.
You may not have index funds available in your 401(k) plan.
Still, he urges folks to look for funds that closely track known benchmarks and stick with
them.
How can benchmarking help? It allows you to figure out if
your fund is a dog or whether the asset class you've invested in is just going through a
rough patch. Remember, when you created your allocation strategy, you accepted the fact
that some of the asset classes you invested in wouldn't perform as well as others.
"The public is programmed to believe that the results
of the fund are tied to the manager, when in reality 75 percent to 90 percent of the
results depend on the asset class," Leonard said. "What that means is that the
worst large-cap manager will do better than the best small-cap manager, when the large-cap
is beating the small-cap."
Leonard says it's common for his clients to say they were
happy to average a 20 percent return over the past five years. Yet, over the past five
years, the S&P 500 Index, a widely-watched stock market barometer, posted
20-percent-plus returns. In the last five years, fewer than 10 percent of large-cap funds
failed to beat this benchmark, he said.
If you were invested in those funds, sure, your portfolio
did well, but you likely missed a few extra percentage points of return, and that will
hurt your ability to match the market's average return.
The lesson: Benchmark your portfolio in the good years as
well as the bad so you can figure out whether a fund's performance is manager- or
market-related. If it's manager-related, go ahead and get rid of the fund, but "don't
fire an asset class," Leonard said.
|
