In the previous post, I say that I'm going to benchmark my trading performance to the S&P 500.  In the current environment, this is kind of lame, or at least lazy.

The point of benchmarking is to measure one's performance against a standard, so that one's performance can be evaluated.  If a money manager makes a 10% return in a given year, it might sound great, but if the broad market has gone up 20% at the same time, his performance is actually crap.  He's effectively lost 10% against the mindless strategy of just buying the broad market.

The key to benchmarking is to select a benchmark that is appropriate to one's goals.  If you're a stock-picking money manager who is supposed to be fully invested at all times, then the S&P 500 is an appropriate benchmark.  If your goal is to preserve capital in an uncertain environment, then the S&P 500 is a mediocre benchmark at best.

If the Fed decides to print dollars like mad, then the S&P 500 is a terrible benchmark, because the stock market is bound to go up relative to dollars.  It reality, the stock market hasn't gone up; the value of the dollar has gone down.  If the value of one's stock holdings double, but the prices of consumer goods quadruple, then an investor in stocks is screwed -- not as screwed as a holder of cash, but still screwed.

In today's crazy economic environment, the best benchmark is probably a basket of consumable commodities.  Our goal should be to preserve our purchasing power, which is broadly related to our wealth, which is what we are truly trying to maximize.  Ideally, I should be benchmarking to a consumption-weighted basket of things like oil, corn, wheat, soybeans, copper, etc.  This, however, is a pain in the ass (and I'm a lazy bastard), so I'll just leave it for now.

Posted by: Hermit Dave at 11:17 AM | No Comments | Add Comment
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