Help me choose a benchmark

If you are restricting your share purchases to the UK main market then the most obvious benchmark is the FTSE All-Share which tracks the performance of the £2.375 trillion of market cap in free float which has sufficient liquidity to qualify for the index. In building your portfolio you have made active selections to include or exclude each of the 629 companies which feature in the All-Share and by how much to 'overweight' or 'underweight' each of them compared to how much investor capital value was allocated to each of them by the market at a given date.

However, you mention the companies are of varying market cap and on selecting your companies you won't have necessarily followed the profile of the All-Share constituents. Different parts of the all share have different company profiles and if the FTSE100 is 23% international oil and resources companies and 9% construction/industrials while FTSE250 is 4% oil/materials and 22% industrials while generally being much smaller companies, it may not be much of a benchmark to measure the returns of the FTSE All-Share (which is 79.5% FTSE100 companies, 16.9% FTSE250 companies and 3.6% FTSE Small cap).

So, you might like to make a custom UK benchmark out of three different indexes - e.g. 40% FTSE100, 35% FTSE250, 35% FTSE Small.

However, as you have such a tiny concentrated set of investments and not a broad portfolio with a target modelled profile - because you are presumably not following a specific asset allocation strategy, simply buying 6 companies you like - there is perhaps limited usefulness in constructing your own blended index that 'looks a bit like my portfolio'. It is much more useful to instead think of it from an opportunity cost perspective, and see what you quite easily could have done by following a different approach if you didn't bother to pick the individual shares yourself.

So perhaps:

a) if I didn't pick my own concentrated portfolio of UK listed companies, perhaps I would have paid someone else to do that for me based on their 'expert' research and personal convictions. So, how did my return after costs compare to the net return of a UK focused actively managed fund like those from Lindsell Train, Liontrust, Marlborough or Unicorn - or a blend of all of them. Sites like trustnet.com allow you to build a virtual portfolio of accumulation funds to see how you would have done, or just plot the return of the IA UK All Companies sector generally.

b) if I wasn't having to buy the shares myself off a local stock market I wouldn't stick just to the UK (though I might have a UK bias because I live there); I would cast my net globally for exposure into all types of company equities all over developed and emerging markets. By using a tracker fund which aims to approximate the returns of the FTSE Global All-Cap index I'd have exposure to $57 trillion of free float market cap, weighted towards the biggest companies invested around the world. Though I would then have 95% of the underlying investments in foreign stockmarkets which sounds a bit gung-ho for me sitting here in the UK, so maybe 85% Global All Cap and 15% FTSE 250 would be a good benchmark for the risk/return profile I would take.

Having decided what would be a good benchmark index or blend of indexes, it is perhaps more useful to use an index fund as your benchmark rather than the raw index, because in practice if you were investing globally you would incur transaction fees and management costs - you are doing yourself a disservice if you worry about being 'beaten' by the raw index, because nobody can practically invest in 'the index' without some fraction of a percent of costs every year.

Apodemus wrote: »

I would suggest that you benchmark against your own goals and relieve yourself of any stress about how well or badly other people are doing.

My own goal is for any cash invested to retain its value when judged against local inflation, plus 2.5% to 3% annual return, either through dividends or capital growth.

This is very sensible because the ultimate way of judging whether you have set out what you intend to achieve, is to see what you would like to achieve and then measure whether you did. That is the heart of the whole concept of having a benchmark or comparator for how you have performed.

If a global index drops 50% will you be happy that you dropped 49% and 'beat the objective' of equalling or exceeding that benchmark? Or actually is your objective to grow your assets over time without dropping more than 30% from a high point, in which case you shouldn't be happy to lose 49%, because with hindsight you should have built yourself a less volatile portfolio than you actually did..