Benchmarking - How to Achieve Spectacular Mediocrity

Benchmarking is the ultimate admission that most mutual funds aren't true investments, they're marketing tools. If you believe in benchmarking, then you need to read this article, for benchmarking is not in your money's best interest.

There's a most dangerous game that's played at the mutual funds. It's something called benchmarking, or relative returns. And it is very dangerous to your wealth. Let me explain this game that is being played. Let me tell you what benchmarking is. A benchmark is something like the S&P 500 or the NASDAQ. And what fund companies or financial advisors ask is, "Well, what's the benchmark?"

Let's just use the S&P to figure this out.

An advisor may not tell you this, but this is really what's happening: He'll say, "I'm going to make sure your money grows or falls within 1% or 2% of what the S&P benchmark does." So if the S&P benchmark goes up 25% in a year, the money that the fund family or financial advisor manages will grow anywhere between 23% and 27%. You may say to yourself, "Hey, that's not that bad. I don't mind if someone can grow my money plus or minus 2% when the market grows 25%." But you should mind, because this makes their job limited to staying close to the benchmark so their relative returns look good. Relative to what the benchmark is doing, their returns will look either not bad or a little bit better. But 85% of mutual funds are actively managed mutual funds, and they're all doing this benchmarking.

That means that you could buy an index mutual fund, pay 1/8th or 1/10th the fees, and get either the exact same returns or a much better return by simply buying the index. At the very least, you're wasting money in fees. The fee may sound small, only 1% of assets under management. But if you're investing hundreds of thousands or millions of dollars, this quickly costs tens of thousands of dollars a year that aren't growing for you. If you take that number and grow it out over 30 years, it's easily worth $500,000 if you don't pay those fees and invest them in the same index mutual fund.

This benchmarking is a standard formula for avoiding failure, but not for achieving success. The mutual fund industry, financial planners, JP Morgan, Morgan Stanley, Raymond James, Edward Jones, Ameritrade, they create that structure: "Oh, look; we've stayed next to the benchmark." And most investors go, "Oh, that's great. You stayed next to the benchmark."

Now, when the benchmark goes up 25%, that's one thing; but what if the benchmark falls 38.5 %, like the S&P did in 2008? Well, they're going to do the same thing; they're going to stay, plus or minus a couple of percent, alongside the benchmark and charge their management fees and expenses. Again, why would you want to stick with a benchmark that's falling?

Because of relative returns or benchmarking, you may say to yourself, "Well, what can I do? The benchmark fell" or "the market fell." And the answer to that is, you don't have to stick with the benchmark when the market is falling.

There are periods of times when owning stock is not prudent. That's right, I'm saying you should not always own stocks, you shouldn't always necessarily own stock.

Conventional wisdom says that if you're not in the stock market, you don't win. That's garbage. There are periods of time when you should not be in the stock market. Wall Street "experts" tell you investing is a highly complex business and you had better act like a lemming and do what your trusted financial expert tells you to do. But this strategy only works in long-term secular bull markets. What about the other 50% of the time?

Thi wonderfull post on Tips-for-woman.blogspot.com from By Ronal Peck