Beware of Bias in Benchmarks

Benchmarks are important tools to measure and evaluate performance, but beware of their shortcomings.  Over the years they have changed from "averages" to what many might call "promotional" tools.  Given the recent out-performance of the S&P500 compared to other "world" indexes, one should look carefully into the reasons for the out-performance. It is not just because the US is doing "better".

The S&P500 is a "market value weighted index".  Only 50 (10%) companies (the largest by market cap) comprise 50% of the index.  Apple is enormously dominant with twice the weighting as the next two largest (Microsoft and Exxon) combined. So when Apple does well, the S&P500 is highly affected.

Read more.

Forbes Article on the S&P500 as a Benchmark

When benchmarking, I suggest that comparing performance to indexes is somewhat useful, I find that risk as measured by volatility of the portfolio compared to gains is also an important factor when determining the "real" performance.  In that regard I find the Sharpe Ratio to be extremely valuable when evaluating portfolios.

Still, as the article mentions, indexes have become profitable businesses to the publishers and demand for the "product" is enhanced when the indexes have a bias toward gains.