The Benchmark Wellness Cleanse

Humans have a bizarre relationship with benchmarking.

We misuse benchmarks all the time often due to vanity or insecurity.

Keeping up with the Joneses.

The $1 Million Magic Number to retire without worry.

Hell, I’m a few months removed from launching my own firm and find myself making irrational comparisons to advisors that have been running their practice for years.

Benchmarking can be a powerful tool to track progress and inform decision making. If used improperly, it can serve little to no value.

So… when to use it? When to lose it?

Investment Performance - USE IT

Often an investor’s reaction to performance is based on positive or negative returns.

Portfolio is up? I’m happy. Portfolio is down? I’m bummed.

But relative to what? Say you’re invested in a 60% stock, 40% bond portfolio that is up 7%.

The benchmark for the portfolio is comprised of 60% S&P 500 and 40% Barclay’s Aggregate Index for bonds. The benchmark is up 12%. I don’t know about you but I’m feeling bummed about my positive return in that context.

Conversely, if the same portfolio is down 10% and the benchmark is down 15%, I’m feeling pretty good.

Relative performance benchmarking is especially important if you are invested in active funds, which are most mutual funds and some ETFs. You typically pay more in fees for active management as the fund’s goal is to outperform its benchmark over long periods.

If you are paying more in fees to an active manager, you should expect outperformance.

ETF funds, lower-cost and generally more tax efficient alternatives to mutual funds, are designed to mirror the performance of an investment category. ETFs should also be measured against their benchmarks if only because you want to make sure it continues to hug said benchmark.

Investment Performance – BUT ALSO LOSE IT

Lose the investment performance benchmarking at cocktail parties.

Cocktail fodder is filled with incomplete information and cherry-picked results. Often those conversations lead to bad decisions.

I’m not saying remove yourself entirely from those situations. But treat it for what it is: performative not insightful or actionable.

Comparing Skills - USE IT

During my MBA program, I spent two years with classmates from around the world with different skill sets.

Programmers, consultants, lawyers, doctors, marketers, accountants, HR professionals.

One of the most valuable lessons I learned during my MBA program was discovering my natural talents and glaring inherent weaknesses.

Pay attention to others around you not to compare results but to better understand your unique talents in relation to others.

Comparing Wealth - LOSE IT

The sweet siren of wanting more of what others have.

I do it. We all do it. Remember Teddy Roosevelt’s famous quote, “Comparison is the thief of joy.”

If you can’t resist comparing yourself to others’ wealth, shift your attention to what inspires them and what motivates them.

If you find yourself unsatisfied with what you find, how “wealthy” are they?

Business Financials - USE IT

Benchmarking is critical to driving results in your business. Benchmarking not only informs decisions. It can help you make decisions with confidence.

Are you growing revenue at a rate comparable to your peers but your margins are below the industry average for a company of your size?

Review your pricing strategy. Dissect your cost structure.

Are your clients not paying invoices on time?

What’s the industry standard for payment terms? Is your firm’s policy aligned with the industry benchmarks? If not, confidently negotiate better terms with a clear point of reference.

Magic Numbers for Retirement – LOSE IT

There is plenty of advice online about how much of your salary you should save into a 401(k) or IRA.

“Save at least 10% of your paycheck into your retirement account” or “you must have at least $1 million to live a comfortable retirement.”

I LOVE the idea of erring on the side of a too-high retirement contribution. I love it much more than the TikTok crowd that decries 401(k)’s as scams.

But there’s not an absolute dollar amount that will make your retirement less stressful if you aren’t disciplined with your cash flow. Ditch the superficial Million Dollar Milestone chatter.

Comparison can be a healthy and effective tool when used in the proper context.

Use the benchmarks that can grow your business, enhance your skills and increase your qualify of life.

Purge the ones that don’t.