Listen Now
Welcome back. Today I want to talk about benchmarks—and why a perfectly sensible portfolio can feel like a failure when you measure it against the wrong thing.
Benchmarks measure performance and shape what performance feels like. When the benchmark doesn’t align with what you own—or what you are trying to achieve—regret can become the default reaction even when the plan is working.
Sign up for my newsletter so you can easily reply to my emails with your thoughts or questions for the podcast:
How Hindsight Bias and the Wrong Benchmark Create Investment Regret
Many summers, my family makes the same trip to Michigan. We spend long days by the water, eat slow dinners, then walk to the corner market for ice cream every night.
One year I was on a strict diet and limited myself to one ice-cream night for the week. By the time it arrived, I had already decided on Cookie Dough. Then everyone around me started campaigning for Mackinaw Island Fudge.
“You have to get it,” they said. “It’s the best.”
I changed my order at the last second.
The cone was fine. I spent most of it thinking about Cookie Dough.
For the rest of the week, I watched everyone else order exactly what they wanted, including Cookie Dough more than once. The regret was small, yet it lingered longer than the chocolate flavor.
With investing, the stakes are higher, but regret shows up as that same sinking feeling tied to the road you didn’t take—the choice that looks better after the fact.
Hindsight bias edits the past. After an outcome is known, the earlier uncertainty fades, and reasonable decisions start to look like obvious mistakes.
You can see exactly what the S&P 500 did over the last decade. You can pull up the fund you didn’t buy or the strategy you dropped right before it recovered. Every line on a graph becomes a version of Cookie Dough you passed up. Every “what if” has a data series.
When the S&P 500 Is–and Isn’t–the Right Portfolio Benchmark
Many investors never choose a benchmark on purpose. They end up absorbing one like the S&P 500 because it appears everywhere—from news coverage and phone apps to conversations with friends and coworkers. Over time, it becomes the yardstick for everything, even when it doesn’t match the strategy they own.
There is nothing wrong with the S&P 500 as a benchmark for U.S. large-cap stocks. The problem begins when it is used to judge a portfolio it doesn’t represent.
Many diversified portfolios include international stocks, small-cap stocks, bonds, and cash. A narrow U.S. large-cap index doesn’t measure that whole picture.
Short-term comparisons add another problem. Over six months or one year, results are heavily influenced by noise and events no investor could reliably anticipate. Judging a long-term plan by a short-term gap against a headline index turns investing into chronic dissatisfaction.
A well-chosen benchmark keeps you from changing a portfolio that’s working simply because it trails an index built to measure something else.
How to Choose a Global Equity Benchmark: The SAMURAI Framework and MSCI ACWI
So what makes a good performance-based benchmark?
CFA Institute describes a seven-part test for a valid benchmark that can be remembered using the acronym SAMURAI. Let’s take the traits one at a time and apply each to a real example: the net-return version of the MSCI ACWI Index, measured in U.S. dollars.
ACWI stands for All Country World Index. It includes large- and mid-cap stocks from developed and emerging markets, covering about 85% of the investable global stock market.
We are evaluating ACWI as a benchmark for the global-equity portion of a portfolio—not for an entire balanced portfolio that also contains bonds and cash.
Specified in advance
A benchmark works when it’s chosen before the outcome is known. Investors often do the opposite: they look back and grab whichever comparison looks most attractive.
Appropriate
An appropriate benchmark reflects the portfolio’s intended assignment.
MSCI ACWI represents broad global large- and mid-cap equities rather than one country or investment style, making it a sensible benchmark for a diversified global stock allocation.
If the portfolio includes a meaningful small-cap allocation, MSCI ACWI IMI—the Investable Market Index version—may be more appropriate because it extends coverage to small companies and roughly 99% of the global equity opportunity set.
Measurable
A benchmark must produce a return that can be consistently calculated and tracked over time.
MSCI ACWI meets that standard because its returns and factsheets are publicly available and regularly reported.
Unambiguous
An unambiguous benchmark is explicit about what it holds and how it’s built. It should also identify the currency and return convention being used.
MSCI publishes the index methodology, including what qualifies for inclusion, how securities are weighted, and when the index is reviewed.
One quick technical note: in this example, we’re using the net-return version measured in U.S. dollars. “Net return” means dividends are reinvested after withholding taxes assumed under MSCI’s methodology. It does not mean the return is net of fund expenses, advisory fees, or every tax an individual investor might owe.
Measurable asks whether you can observe the result. Unambiguous asks whether everyone is measuring the same thing.
Reflective of current investment opinions
Appropriate asks whether a benchmark fits the portfolio’s assignment. Reflective asks whether the benchmark’s securities and factor exposures are familiar enough that you can form a view about them.
For an individual investor, I’d translate that as understanding the benchmark’s major exposures and how it is constructed—not knowing every company it owns. With MSCI ACWI, those exposures include market-cap-weighted large- and mid-cap stocks across developed and emerging markets.
Accountable
Accountable means accepting the benchmark as a fair test and taking responsibility for explaining the portfolio’s departures from it. If you only like the comparison when you’re winning, it isn’t a benchmark—it’s a mood ring.
Specified in advance is about when you choose the benchmark. Accountable is about continuing to accept it after the results arrive.
With MSCI ACWI, accountability means being able to explain intentional departures—such as country, size, or factor tilts—and continuing to accept ACWI as the standard even when those departures underperform.
Investable
Investable means the benchmark represents a feasible alternative an investor could reasonably have pursued.
You cannot buy an index directly, but investors can own index funds and ETFs that seek to track MSCI ACWI. That makes it a realistic alternative rather than a hypothetical portfolio no one could have owned.
When a benchmark passes the SAMURAI test, the conversation changes.
How to Benchmark Individual Funds, Asset Classes, and Your Whole Portfolio
The question “Why didn’t I beat the S&P 500?” gives way to questions that fit the portfolio:
“Given the strategy I chose, is this result reasonable?”
“Does my performance reflect choices I made on purpose?”
“How much risk did I take relative to this benchmark?”
Those questions shift the focus from ego to process. A performance gap becomes a prompt to identify its source—intentional allocation choices, cash, fees, implementation, or drift—before deciding whether anything needs to change. Outperformance deserves the same scrutiny: Did it come from skill, luck, or taking more risk than planned?
This kind of review reduces performance chasing. But comparisons also need to be made at the right level. One common trap is judging an individual holding as though it were the entire portfolio.
You open your account, spot the laggard, and wonder why you still own it. This happens often with small-cap, value, international, and bond funds.
The problem is role confusion. A small-cap fund gives you exposure to small companies. A value fund tilts toward cheaper stocks. An international fund diversifies beyond one country. A bond fund provides stability, income, and dry powder for rebalancing. None was hired to behave like the S&P 500.
A calmer approach is to group holdings by job. Evaluate a fund or sleeve against a benchmark appropriate to its role. Then evaluate the combined global-equity allocation against a global stock benchmark such as MSCI ACWI. Finally, evaluate the entire stock-and-bond portfolio against a blended benchmark reflecting its strategic allocation.
That framing makes it easier to tolerate an out-of-favor sleeve that is doing its job—and to identify one that is not. Those comparisons can tell you whether each component and the whole portfolio behaved as intended. But even the right performance benchmark cannot answer the question investors ultimately care about most:
Are we still on track to meet our goals?
Goals-Based Measurement: Is Your Financial Plan Still on Track?
Which is really another way of asking:
“Am I still going to be okay?”
A performance benchmark can’t answer that. It tells you whether the portfolio behaved as designed. A goals-based measure—though not a benchmark in the same technical sense—helps assess, under the assumptions being modeled, whether the plan remains on track to fund the life you want.
Goals-based measurement deserves a separate episode. For now, remember that the perfect portfolio earns what it needs to earn and gives you enough clarity to stay invested—even when a mismatched yardstick makes the plan feel like a failure.
Pick your flavor before standing at the counter. Measure success against a life you recognize as your own—not someone else’s scoreboard.
The Long Term Investor audio is edited by the team at The Podcast Consultant
Submit Your Question For the Podcast
Do you have a financial or investing question you want answered? Submit your question through the “Ask Me Anything” form at the bottom of my podcast page.
Support the Show
Thank you for being a listener to The Long Term Investor Podcast. If you’d like to help spread the word and help other listeners find the show, please click here to leave a review.
I read every single one and appreciate you taking the time to let me know what you think.
Free Financial Assessment
Do you want to make smart decisions with your money? Discover your biggest opportunities in just a few questions with my Financial Wellness Assessment.
Disclosure: This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Plancorp LLC employees providing such comments, and should not be regarded the views of Plancorp LLC. or its respective affiliates or as a description of advisory services provided by Plancorp LLC or performance returns of any Plancorp LLC client.
References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.
Please see disclosures here.
