April 25, 2011: What's My Benchmark?

“What's your benchmark?"

When my friend Kevin Mooers asked me this simple question months ago, I didn't have a clear answer!

He is a stock picker and a long run equity bull, so he measures himself relative to the S&P 500, but how am I supposed to measure my performance?

I began my search for a benchmark by asking myself what I want from my portfolio.

My ultimate goal with investments is to earn a consistent real return. I always adjust my returns for inflation, because I care about purchasing power. After some time with a financial calculator, I have discerned that a 4.5% real rate of return will satisfy my retirement goals. In addition to this 4.5% rate, I want my returns to be consistent.

This all boils down to my clearly defined benchmark. I now measure my portfolio's performance relative to a consistent 4.5% real rate of return. On a logarithmically scaled chart of portfolio performance, this 4.5% rate of return looks like a straight line. If I could buy this straight line, I would do so in a heart beat. For now, the Permanent Portfolio is the closest I can get.

Let's look at that consistent 4.5% compared to a traditional 60/40 blend of the total stock market and the total bond market respectively.

Yikes! Cross your fingers and pray for real GDP growth!