As investors it is important that we benchmark. In fact, benchmarking is an essential "tool" in an investor's toolkit.
Why?
When you analyse a company and determine its value how can you know if the stock in question is worth buying unless you have some form of benchmark to compare with? Without a benchmark it is impossible to weigh up the pros and cons or the risks and the rewards of an investment.
Investing in most respects is a relative game in the sense that you always have alternative options for your money. For example, you can hold cash, you can buy property, you can invest overseas, or you can buy a huge array of equities on the ASX.
For this reason, many investors often choose to compare any potential stock investment opportunity against an index such as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). This is a sound comparison and allows an investor to judge a potential investment opportunity against the lower risk option of simply owning "the market".
Benchmark yourself too!
While many investors will benchmark their individual investment opportunities, less common is benchmarking your overall portfolio returns. Once again an index ("the market") makes for a good benchmark, however, an alternative is to benchmark yourself against an alternative actively managed portfolio.
One portfolio which you could choose to benchmark against is the $6.5 billion listed investment company (LIC) Australian Foundation Investment Co.Ltd. (ASX: AFI), which has been running for many years and has a solid track record.
Over the past 10 years to 31 December 2014, AFIC has produced a total shareholder return of 8.4% per annum (pa) compared with 7.6% pa from the S&P/ASX 200 Accumulation index. Hence benchmarking against an outperforming fund manager raises the bar even higher!
Whether you choose to benchmark yourself against a top performing portfolio or not, there can be another advantage in being aware of how others portfolio managers are performing. That advantage is, having knowledge of what they are doing to position their portfolio to outperform.
In AFIC's case in the half year to December that has included increasing already established positions in major blue-chips CSL Limited (ASX: CSL), AGL Energy Ltd (ASX: AGL) and Asciano Ltd (ASX: AIO).
While a topping up of these three stocks within the portfolio may generally go unnoticed by the market, given the experience and knowledge AFIC's portfolio managers have of these companies it certainly appears a vote of confidence in the long-term outlook.
