benchmark
A standard or index used to measure the performance of an investment portfolio, such as the S&P 500 for US large-cap stocks.
Example
“The fund's 8% return sounded impressive until you saw the benchmark S&P 500 returned 14% that year.”
Memory Tip
A benchmark is the 'mark on the bench' you're trying to beat.
Why It Matters
Benchmarks help you understand whether your investment returns are actually good or just average. Without a benchmark, you cannot objectively assess if your portfolio is performing well compared to similar investments, which is essential for making decisions about whether to keep your current strategy or make changes.
Common Misconception
Many people believe that beating a benchmark by even a small amount means they have a winning strategy. In reality, beating a benchmark by 1 percent in a single year could be due to luck rather than skill, and what matters more is consistent outperformance over many years after accounting for fees and taxes.
In Practice
If you have a portfolio of US large-cap stocks worth $100,000 and the S&P 500 gains 10 percent in a year, your benchmark target is $110,000. If your portfolio only reaches $108,000, you underperformed the benchmark by 2 percent, meaning you should evaluate whether your stock picks or fund choices are as effective as simply investing in an index fund that tracks the S&P 500.
Etymology
From surveying: a 'bench mark' was a notch cut in stone used as a reference point.
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
Other investing terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.