Whether we want to believe it or not, investment markets are optimistic. During times of volatility and swings in the market prices it’s hard to remember. But markets generally go up. Dating back to the very beginning market prices have gone up. It hasn’t been a flat line of course – there have been recessions and corrections and crashes – but here we are near all-time highs. We can’t get there without going up.
Benchmarking
Benchmarking is defined as evaluating or checking something by comparison with a standard. When we think about investments, the benchmark is usually (right or wrong) the S&P 500 index. The trick to benchmarking is picking the right one. Investors with a lower risk tolerance with investments mostly in bonds and cash would likely be confused comparing the performance of their portfolios to the performance of the S&P 500. The same way an investor solely holding international stocks wouldn’t be wise to benchmark against the S&P 500. With the right comparison selected, we can better manage our expectations. I was catching up with a friend recently and he brought this up with interest rates. The idea is that, since interest rates were at or near 0% since mid-2009, 0% is the benchmark many are using now. Thinking that rates will eventually be cut from the current 5.25% down to 0% again. Bringing with it the idea that mortgages could move back down to the 3%’s and car loans to the same territory. But 0% may be the wrong benchmark. The average Fed Funds rate since 1955 is 4.61%, while the Fed has stated their long-run projection is 2.80%. Perhaps expectations for mortgage rates and bond price growth need to be tempered when a more realistic benchmark is used.
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