Morgan Stanley
Wealth Management

What’s Your Benchmark for Investing Success?

Aug 15, 2024

Measuring your portfolio against a broad market benchmark like the S&P 500 may steer you off track. Discover how a custom approach can be key to achieving your financial goals.

Author
Lisa Shalett
Lisa Shalett

Key Takeaways

  • Comparing your portfolio to a popular index like the S&P 500 may provide an incomplete view of your investment performance.
  • Some investors use multiple indices to gauge performance for different parts of their portfolio, but this line-item approach may not provide a holistic picture.
  • Importantly, traditional index benchmarks rarely tell you how you are tracking toward your personal financial goals.
  • As an alternative, you may want to consider using a “custom benchmark,” based on a personalized financial plan and asset mix that reflects your unique needs and goals.

Every investor wants their portfolio to do well. But what does “well” mean? Many investors judge success by whether their portfolio is outperforming “the market,” which usually refers to a popular U.S. equity index like the S&P 500 or the Nasdaq Composite. After all, if your investments are beating the wisdom of the crowd, you must be doing well, right?

 

Not necessarily. Using a popular stock index like the S&P 500 tells you little more than how your portfolio compares with 500 of the largest companies listed on U.S. stock exchanges. It does not provide useful information about the other assets you own, whether bonds, alternative investments or even other types of equities, like international stocks.

 

Just as a GPA doesn’t fully capture your academic achievements or a body mass index doesn’t represent your physical health, popular indices won’t necessarily give you a complete picture against which to view your financial health or progress toward goals. Instead, a “custom benchmark” for each investor, based on a thoughtful financial plan and personalized asset allocation, is a more likely key to success. 

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The Problem With Traditional Index Benchmarks

Because even a broad index only captures a sliver of the overall investment universe, some investors may avoid using a single index and instead look at different indices for different parts of their portfolio—for example, the S&P 500 for large U.S. stocks, the MSCI Europe Index for European equity exposure, the Bloomberg US Aggregate Index for U.S. bonds, and so on. The challenge with this approach is that measuring performance on such a granular, line-item basis quickly becomes complex and may fail to provide a coherent, holistic picture.

 

To solve for this, some investors opt for a “blended benchmark,” which combines multiple indices into a single composite standard meant to approximate your asset mix—a common approach among institutional investors like pension funds. But these, too, have drawbacks. The various components and weightings can be difficult to understand and may require explanation or caveats. Ultimately, individual investors get a snapshot of performance that is neither as clear nor as intuitive as it should be.

 

Perhaps most importantly, these benchmarks rarely tell investors the one thing many of us really want to know: “Am I on track to meet my goals?”

The Case for ‘Custom Benchmarks’

There’s no denying that beating the S&P 500 can make you feel like a savvy investor, but most people are investing for more important reasons—to secure a comfortable retirement, to help put a child or grandchild through college, to leave a meaningful legacy for future generations or any number of life goals, rather than investment goals.

 

That’s where a “custom benchmark” comes in. By taking the time to understand and define your unique life goals, cash-flow needs and expectations, your Financial Advisor can help create a plan with a personalized portfolio and benchmark that gauges success based on what’s important to you.

 

As part of this planning process, your advisor will use robust modeling tools to show you different scenarios of your financial future and “pressure test” how your portfolio might fare across a range of potential situations, from a deep recession to a powerful bull market. The choices you make together—about how much to save, your asset allocation and your future spending levels—will revolve in large part around your probability of goal achievement, or “probability of success.”

 

From there, your custom benchmark offers a straightforward approach to evaluate your progress along the way. It seeks to answer a critical question: What is the optimal portfolio return that meets my needs and helps me achieve my goals with reasonably high odds of success, assuming I can save at a certain rate over a certain timeframe? For example, your custom benchmark might be a 9% annual return target, on average, for at least an 85% probability of successfully funding your post-retirement living expenses, assuming you can save $100,000 a year while holding no more than 20% of your assets in illiquid investments.

 

By taking this highly tailored approach, you can have more confidence that your portfolio is optimized to achieve your unique goals—not simply beat an index—and that you can get there without necessarily having to make overly cautious investment, savings or spending decisions.

 

Just as important, your plan can serve as a North Star when the market turns volatile, helping you avoid panic selling and stay focused on what truly matters in the long run.

What’s Your Custom Benchmark?

By using a goals-based custom benchmark, you measure what matters. With Morgan Stanley’s Goals Planning System and other innovative planning tools, your Financial Advisor can help you quantify your goals, implement an effective investment strategy and help you track progress.

 

Connect with your Morgan Stanley Financial Advisor to discuss how you’re tracking toward your goals and measuring success. To learn more about custom benchmarks, ask your Financial Advisor for a copy of the Global Investment Committee special report, What’s Your Investment Benchmark? You can also listen an audiocast based on this report.

Questions you can ask your Financial Advisor:

  • Is my portfolio structured in line with my risk tolerance and also with what I’m hoping to accomplish with my money?
  • How would you go about setting a custom benchmark that aligns with my personal financial goals?
  • How might my investment strategy change if we shift to a custom benchmark?

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

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Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Alternative investments may be either traditional alternative investment vehicles, such as hedge funds, fund of hedge funds, private equity, private real estate and managed futures or, non-traditional products such as mutual funds and exchange-traded funds that also seek alternative-like exposure but have significant differences from traditional alternative investments. The risks of traditional alternative investments may include: can be highly illiquid, speculative and not appropriate for all investors, loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than open-end mutual funds, and risks associated with the operations, personnel and processes of the manager. Non-traditional alternative strategy products may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. These investments are subject to the risks normally associated with debt instruments and also carry substantial additional risks. Investors could lose all or a substantial amount of their investment. These investments typically have higher fees or expenses than traditional investments.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

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