Benchmarking

What an S&P 500 benchmark tool has to get right

An S&P 500 benchmark tool answers one question. Is your portfolio doing better than the index, or worse? Most tools that appear to answer it answer a slightly different question, and the difference is almost always in the flattering direction.

This article describes the three ingredients a fair comparison needs, the four traps that make most comparisons wrong, and a ten-minute test you can run on any tool, including ours.

The manual method, for anyone who would rather do it in a spreadsheet, is laid out step by step in how to check whether you are beating the S&P 500.

What the comparison needs

The comparison needs three ingredients, and a tool is only as good as the weakest of the three.

Your complete history. Every deposit and withdrawal with its date, every trade with its price and costs, every dividend and every corporate action. Current holdings are not enough. A return is calculated from the sequence, and a snapshot has no sequence in it.

Index levels including dividends. The S&P 500 exists in a price version and a total-return version. The first ignores dividends, and the second assumes they are reinvested. Your own portfolio keeps its dividends, so the total-return version is the fair comparison.

Exchange rates for every relevant day. The index is priced in dollars. If you invest in euros, the comparison has to happen in one currency, converted at the rate of each day, or it drifts by whatever the currency did.

The price index trap

The index level quoted in the news is the price version. Comparing your portfolio, dividends included, against a benchmark with its dividends removed gives you a head start you did not earn. The size of that head start is roughly the index's dividend yield, every year, compounding in your favor.

A tool that names its benchmark in full, gross or net total return, has thought about this. A tool that shows the S&P 500 with no further explanation may be using the price index, and the label alone does not say which.

The currency trap

A euro portfolio next to a dollar index is two lines in two currencies. Over a few months the difference is noise. Over five years, the currency effect alone has been large enough to reverse the result for many portfolios, in both directions.

The fix is to convert the benchmark into your base currency at the rate of each day, in the same way your own holdings are converted, so that both sides see the same exchange rate at the same time. That is what makes the remaining difference attributable to your decisions. The broader problem is examined in multi-currency portfolio tracking.

The deposits trap

This is the largest of the four, and it is the reason a chart overlay is not a benchmark. The index's own return assumes a single lump sum held for the full period. Your money arrived in installments, some of it last month. The two percentages share a start date and an end date, and nothing else.

A benchmark that deserves the name replays your cash flows. Every time you put money in, a simulated index portfolio buys the index tracker with the same amount on the same day. Every time you took money out, it sells.

At the end you compare two portfolios that received the same money at the same times. Whatever luck was in your timing appears on both sides and cancels out, and what remains is the part you control.

Some tools compare your return with the index's return over the same window. That is better than nothing, but it still mixes your timing into one side only. The question to ask is whether the tool's benchmark number changes when you add a large deposit at an unusual moment. If it does not change, the tool is not replaying anything.

The trap in your own records

The last trap is in the data you feed the tool. Positions you sold at a loss tend to vanish from personal records, along with fees and withheld tax. A benchmark run on the survivors compares the index with your best ideas, which is a different and more flattering exercise than the one you meant to run.

Whatever tool you use, it needs your complete history, including the parts you would rather not revisit. Without them the result describes a portfolio you never had.

A ten-minute test for any tool

You do not need to trust a description, including this one. Load two years of your own history into the tool you are evaluating and check five things.

Does it report a time-weighted return, and does it label it as such?
Does the benchmark figure change if you add a deposit at a different date, or is it fixed for the period?
Does it say whether the index is price or total return?
Can you switch the dashboard, benchmark included, to your own currency?
Are closed positions, fees and dividends visibly part of the calculation?

The second and the third are enough to separate a benchmark from a chart with two lines on it. The five together are the specification for a benchmark tool.

The index to compare with

The right benchmark is the index you would have bought instead. For most people that is a broad index such as the S&P 500 or a world tracker. For a portfolio that is mostly American technology, the S&P 500 is the easier comparison and the Nasdaq 100 the closer one.

The choice is worked out in S&P 500 or Nasdaq 100. What matters more than the choice is that you do not change it after a bad year. A benchmark that is switched when it stops flattering you no longer measures anything.

How often to look

Quarterly at most, and yearly is enough. A gap over three months is noise. Any diversified portfolio wanders a few percent around its index in both directions for no particular reason. A gap that survives three to five years is a result.

The cost of never looking, compounded over an investing lifetime, is the subject of what it costs to never benchmark your portfolio.

What we built

BullBenchmark reads the export file from your broker and does the four things above. It calculates a time-weighted return, replays your own cash flows into a total-return index, converts everything to the currency you choose, and includes closed positions, fees and dividends.

Both the S&P 500 and the Nasdaq 100 are shown, next to a third line for your raw deposits. No broker login is involved, only a file. The live demo shows the same screens on a sample portfolio, if you want to see the output before uploading anything.

In short

A fair comparison needs your complete history, index levels including dividends, and exchange rates for each day.
The four traps are the price index, the currency, your deposits and your own records. Each one moves the result in the flattering direction.
A benchmark that replays your own deposits changes when your deposit dates change. A fixed index return for the period does not.
Whether the benchmark moves with your deposits and whether the index is price or total return are the two questions that separate a benchmark tool from a chart overlay.

BullBenchmark reads the transaction export from your broker and shows your return next to the S&P 500 and the Nasdaq 100, fed with the same deposits on the same dates, in your own currency. The first two weeks are free and no card is needed.