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  • Writer's pictureIshfaaq Peerally

Are you Beating the Market?

If there are two investors, Investor A returned 10% per year while Investor B returned 2%. Which one is better? You would think that the one with the highest return is the best. But what if A invested in stocks and the S&P 500 $SPX500 returned 15%, while B invested in a money market fund where returns of 2% are higher than the 0.5% return of the Federal Money Market Fund Index.

If you're going to invest in bonds, you should not measure your returns relative to the S&P 500. Therefore, it is important to know which benchmark to use. Why would anyone invest in bonds in such a low-interest rates environment? Maybe they are looking for lower risk.

Which benchmark is the best for you to use? We need first to understand Absolute Returns and Relative Returns. If your benchmark is down 10% and your portfolio is down only 5%, you've done better than someone whose benchmark is up 10% but they are down 5%. Besides, you need to compare returns over the long-term. This year, I made 150% in a month mainly because of GameStop $GME but it translates to only 56% per year over the last 5 years.

Warren Buffett used to use the Dow Jones Industrial Average $DJ30 as a benchmark when managing his partnership even though he was investing in small companies. As CEO of Berkshire Hathaway $BRK.B, he used the S&P 500. I prefer to use the S&P 500 too even if I have mostly small companies in my portfolio since my aim is not really to invest in small companies but to invest mostly in US equity. It just happens that the smaller companies are attractive right now. Besides, I'm thinking about the long-term.

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