The Dividend Guy Investment Process Part 9: My Benchmark

Written by The Dividend Guy on January 24, 2008

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If you are a do-it-yourself investor who buys individual stocks (i.e. dividend stocks), as many of my readers are, then we are slaves to our investment returns. But how do we know how we are performing? If we earned 12% last year, that may seem like a pretty good return. However, if the overall market provided a return of 22% then you didn’t do so hot. It would have been much better for you to have bought the market through an index fund or ETF. It is therefore important for investors to set up a benchmark that we can compare our performance to to gauge how we are performing.

The most common benchmark that investors track their performance to is the S&P 500. However, I do not completely agree with this since very few investors actually hold a portfolio that is 100% equities. It would make more sense to find a tracking mechanism that better matched the makeup of a true portfolio. I did that through the use of index tracking mechanisms devised by Richard Croft of R. N. Croft Financial Group Inc.

Croft has devised a series of portfolio benchmarks that take into account that certain investors have certain asset allocations in their portfolios. They have pegged these benchmarks as FPX Indexes. There are three choices of indexes to use as a benchmark each having a set asset allocation amongst equities, fixed income, and cash:

FPX Index

The FPX Index I track my portfolio to is the FPX Growth as it is the closest one to my actual asset allocation based on my stage in the investing lifecycle and views on portfolio structure. My primary reason for using this as my benchmark is it allows me to compare my overall portfolio and not just one component of it. Again, if I was investing in 100% U.S. equities then I could track my portfolio against the S&P 500. I don’t have 100% equities, so the FPX Growth index provides me with a more realistic snapshot of how I should be doing based on a set asset allocation.

One other important thing to note is that I do not measure my portfolio results to the benchmark on a month-to-month basis. A properly structured asset allocation takes time to work and more important is how the portfolio performs to the index over a longer period of time - at least five years. That being said, I do monitor my portfolio yearly to ensure I am at least on the right track. The decisions I make in my portfolio are asset allocation based and ensuring my actual allocation is in line with my target allocation.

Next in the process series I will discuss my focus on reinvesting dividends for some compounding love!


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3 Comments so far

  1. gabriel kenneth n taylor January 24, 2008 2:29 pm

    hello l let to take off my bay and see my card but l have now pin number inself pl can l ask of to rejobo my number on line 633174021016830295 it divdend card hi bay name is on the top of the pega so if ltoi useed it on my how x thank

  2. This and That January 24, 2008 8:34 pm

    […] The Dividend Guy is writing a series of posts on his investment process. […]

  3. bruce Barondes January 27, 2008 11:44 am

    One small step ath the time…congratulations!
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