Benchmark

A benchmark is the reference index for measuring your portfolio performance. Index Balance compares your TWRR return against your chosen benchmark every month.

Definition

A benchmark (or reference index) is the standard against which the performance of a portfolio or investment fund is compared. It answers the question: "Am I doing well or poorly relative to the market?" Without an appropriate benchmark, there is no context to judge whether an 8% return is good or mediocre.

For a typical passive management portfolio, the natural benchmark is the index that the funds replicate. If you hold 100% MSCI World, your benchmark is the MSCI World. If you have a mixed portfolio (80% developed, 20% emerging), your benchmark should be a weighted combination of both indices in that same proportion.

Index Balance allows you to compare your TWRR return against the selected benchmark month by month, calculate cumulative alpha (how much you have gained or lost relative to the index), and visualise in which periods your portfolio outperformed or underperformed.

Practical example

Your portfolio returned 12% in 2023. The MSCI World rose 18% that year. Your alpha was -6%: you underperformed the market by 6 percentage points. This may be normal if you hold some emerging markets exposure (which rose less), but it is important to understand the source of the difference.