[TOP STORY] Fitting investment benchmarks to individuals

SIMON BROWN: I’m chatting now with Jonathan Brummer: he’s an investment consultant at RisCura. Jonathan, I appreciate the early morning. Benchmarks – in many senses a really important part of the entire investment process, and they help us understand how we are doing; it’s less about the short term, more about the medium- to long term. The important point of the benchmark, though, is it really needs to fit the individual, to fit the risk requirements and the like.

JONATHAN BRUMMER: Yes, I think it’s an important thing to discuss because it is I guess, such an accessible benchmark. It’s something that people understand. So if we start with inflation, we know [it] erodes the buying power of your money. You need to increase your investments by more than inflation, which means you’re growing your wealth. So up to this point it all makes sense.

I think CPI is similar in the sense that CPI moves quite slowly. It changes, let’s say, between 3% and 6%, but in investment markets your return can be much more volatile; it can be up by 20%, down by 20%. It’s saying ‘I want to do at least as well as someone out there’. That’s the problem. Defining who that someone is, is very hard. And really what does it matter? Because you need to be focused on your own goals, not someone else’s. So again it is a benchmark that’s out there. I’d say just be careful.

So it’s a better, I guess, relative position to measure against, and the good thing is if I achieve reasonable returns relative to those over the short term, I will get to my CPI-plus-5% over the long term. So a good benchmark, I think, starts with ‘what is your outcome?’ Then pick the asset classes and the mix that’ll get you there, and then use those asset classes as the benchmarks. That’s going to work actually over a very short period – over one month, one year, it will work.

So, as an investor, if my investment is down 5% in a one-year period, does that mean I should panic? Does that mean I’ve done something wrong, or I should change something? If I’m measuring it relative to a CPI-plus, which is clearly going to be a positive number, I might make a wrong decision.

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