Benchmarks, do these make sense?

[MattInAustin]

I know its not always the best approach, but due to my procrastination and dealing with work and other life events, I use a financial analyst and planner to help me with my investments. The analyst I use is very open and straightforward and will be the first to point out his mistakes. We do regular reviews of my portfolio and compare his performance including fees to a bench mark. So far he is beating the benchmark. However, I am wondering if the benchmarks we are using make good sense. I will show them all to you, but I am most concerned with the Growth index. We also compare the risk of my portfolio against the benchmark. We use standard deviation to represent risk.

Here are the indexes used in the benchmark:

Lehman Bro Aggregate Bond (LB)
SP 500
SP 400
Russel 2000 (R2K)
MSCI EAFE (EAFE)

Here are the % based on risk profile:

Growth:
15% LB
35% SP500
14% SP400
17% R2K
19% EAFE

Aggresive Growth:
0 % LB
35% SP500
20% SP400
15% R2K
30% EAFE

Ultra Conservative:
75% LB
11% SP500
7% SP400
3% R2K
4% EAFE

Income with Mod Growth:
50% LB
14% SP500
11% SP400
11% R2K
14% EAFE

Income with Captial Pres:
65% LB
11% SP500
8% SP400
6% R2K
10% EAFE

Growth with Income:
30% LB
36% SP500
9% SP400
10% R2K
15% EAFE

Does anybody see anything wrong with these? Any comments are appreciated.

Thanks,
Biker

 

[Patrick]

What are the requirements for the planner? I.E. does he have to do 5% better than the benchmarks after fees, 10%, whatever? I'd say if he's doing better than the benchmarks after fees, stick with him. If he's doing worse, you're better off putting your money in an index fund and forgetting about it.

Patrick

 

[MattInAustin]

Thanks for the response Patrick.

Yes, we have been beating the benchmark by about 2% (including fees) so far. My question is whether the benchmark we are comparing against is a good one or not?

That actually makes me think of another question, is there an easy way to get an aggregate standard deviation for a collection of indexes like I have in my benchmark? That is, if I can get the standard deviation for each individual one, how would I add them together to get the overall std dev? This is how I would measure risk. Or is there software that can do it for me? I may be completely off on my thinking here.

thanks,
--Biker

 

[preben]

Without knowing more details I would say that he has created an index that reflects growth well (as well as the others). Mostly large/mid cap.

I presume you guys have already decided on your risk profile so will not comment further on that - but 85% equity is certainly aggressive.

If he continues to beat that index with 2% then nothing wrong in staying with him. Promblem is: what if he this year loses out? Will you give him 1 more years chance? or 2? Or 5?

Above said based on your info and the indexes, as well as his hisrotical returns, it does sound like you are in ok hands.

Cheers!