In last week’s Wall Street Journal Voices column, Steve discussed benchmarks and how to have a conversation with your client that sets proper expectations for portfolio returns relative to benchmarks.
Excerpt: As human beings we’re competitive and we want what’s best. So when clients see the S&P outperforming their portfolio they want to know what they can change to keep up. But as advisers we have to explain to them that the S&P is not a good benchmark for a broadly diversified portfolio that combines a lot of different risks.
One piece of the problem is that, for the most part, we as an industry use the S&P as a benchmark for the investments we make for clients. So it’s become the standard benchmark–but that’s a mistake. It’s fair to benchmark large cap equity funds to the S&P, but it wouldn’t be fair, for example, to compare an emerging markets fund in a client’s portfolio to the S&P.
What I like to do is talk to clients in terms of three distinct buckets containing three types of investments. I show clients how it makes sense to use a different benchmark for each.
For the full piece, click here. (WSJ subscription needed)