Benchmark

A benchmark is the index used to judge investment performance. A domestic equity fund is measured against the local main index, a US large-cap fund against the S&P 500 — an index holding similar assets.

It is needed because a return on its own says nothing. Making 15% in a year when the market rose 25% is underperformance; losing 5% when the market fell 20% is a good defence.

When assessing a fund, check first that the benchmark fits. A small-cap fund measured against a large-cap index can look skilful when the difference is really just the type of asset it holds.

Very few funds beat their benchmark consistently over the long run, which is why index funds that simply track the benchmark became the alternative. They give up trying to win in exchange for far lower costs. The same applies to your own investing. Rather than remembering the few winners, work out how your whole portfolio did against the index over the same period — that is where the real score shows.