Help me choose a benchmark

bowlhead99

Linton wrote: »

benbay001 wrote: »

I am after something that I can look at the performance for say the past 3 months, and compare it to my own portfolio to see how much I have under or out performed.

Over the short term different investments will probably behave differently. Your chosen shares may perform better than your chosen benchmark over one 3 month period and worse over the next one. This is telling you nothing about under or over performance, just that the investments being measured are different, which you knew anyway.

I agree. The results in any 3 month period are essentially meaningless. You can't tell if someone is generally a happy person by looking at them once or twice, as they may have been having a good day or a bad day.

benbay001 wrote: »

What I mean, I guess is that more often than not, general market sentiment dictates the direction of travel for everything, with just a few outliers. By choosing a bench mark that I can watch on a 3 month basis I was looking for something I can use as a gauge for market sentiment over that time.
Trade war worries - Brexit - Currency movements etc.


Now I have typed that out, its made me realise, that actually, the FTSE all share is probably what im describing.. shame its so oil heavy which probably prevents it from tracking the market sentiment as well as it could?

Well, as mentioned the FTSE100 is 23% oil and resources companies - they make more revenues when the price of oil and other resources goes up - while the first holding on your list is IAG, an airlines group which incurs more cost when the price of oil goes up. So, one wouldn't expect your set of holdings to do what the index does, in reaction to major economic events.

If you choose to only participate in 5 companies out of tens of thousands of companies around the world which do business in 20+ industry sectors, there is really very little point in checking whether your 5 companies did better or worse than the weighted average performance of the other 10000+ in a three month period.

Sure, some of the ups and downs will be 'general sentiment'. But for example if the market fears a 'bad brexit', the housebuilders and UK-focused banks and retailers get hammered, while the sterling value of the oil and resources and big pharma companies with loads of foreign currency assets and revenues will go through the roof. The effect on an individual company of a major event is intrinsically linked to what the company does versus what the event is. Oil producing country starts shooting down airliners? Not good for passenger airlines groups, but great if you make planes and have military contracts, and mighty fine if you're drilling for oil and gas in Texas or the North Sea.

So if the UK index is being dragged around by oil prices and currency effects because it contains a lot of oil producers and companies with high dollar revenues, and some effects of a US-China trade war are causing people to shift between risk-on and risk-off mode in the types of financial instruments they choose to hold, and the share price of The Works is improving because they released a good half-year report and a positive Christmas trading update, is it really worthwhile to compare your 5-company portfolio to the UK index or the global index to see whether you 'outperformed' the 'general sentiment'?

Next quarter, The Works won't be releasing a half year report or a Christmas trading update, and the UK stock market in general will be doing whatever it wants to do, but you don't hold the constituents of the stock market in general, so what does it matter how you perform vs the index this quarter or next?

What really matters is presumably how your investment portfolio ends up performing (at the end of a long period of running your strategy, rather than on a daily or quaterly snapshot basis) against either (a) some alternative investment you might have bought instead or (b) the goals and objectives you had, such as turning an investment of £10k plus £200 per month into a sum that will buy you a fancy new car in ten years or a retirement fund in thirty.

As you have said that the UK FTSE All Share "probably isn't what I would otherwise be holding", it won't be a useful comparator as 'some alternative investment you might have bought instead', and measuring your performance against the FTSE doesn't tell you anything about whether you are meeting the objective of being able to afford a car in ten years or will have sufficient money in your portfolio to retire in thirty.

So, 'benchmarking' against the UK FTSE every 3 months is an exercise in futility that doesn't indicate your success or failure at doing what you are doing.

AnotherJoe

benbay001 wrote: »

IAG
SOM
TIFS
IDP
WRKS
Simply put, I hold them all because I believe they trade significantly below their true value.
Sorry that's 5 - Bad maths.

Then what Boston said, comparing with any index is meaningless.
But if you must , my view is that comparing with FTSEA is a very low benchmark and if you looked back in say ten years and found you'd outperformed the FTSEA BY 10% you might be feeling smug until you look wider and see that a global tracker was 20 or 30% up on that.
So, if you want an index to compare with don't use FTSEA because that's like measuring your performance in the egg and spoon race against an overweight asthmatic schoolmate and feeling good about beating him, whilst coming second to last.
Instead compare your performance against the middle of the pack, acknowledging you'll never beat the kid that goes on to compete at county level (which in this analogy is someone who got early into Apple and Tesla or Amazon).
Which would be a global index something like HMWO or VLS100. And not the FTSEA wheezing along behind you.