Know the Appropriate Benchmark for Your Mutual Funds

Each fund has a different approach and goal. That’s why it’s important to know what you should compare it against to know if your portfolio manager is doing a good job. For example, if you own a balanced fund that keeps 50% of its assets in stocks and 50% in bonds, you should be thrilled with a return of 10% even if the broader market did 14%. Why? Adjusted for the risk you took with your capital, your returns were stellar!

Some popular benchmarks include the Dow Jones Industrial Average, the S&P 500, the Wilshire 5000, the Russell 2000, the MSCI-EAFE, the Solomon Brothers World Bond Index, the Nasdaq Composite, and the S&P 400 Midcap. One quick and easy way to see which benchmarks your funds should be measured against is to head over to Morningstar.com and sign up for a premium subscription which is only around $14.95 per month. You can then research reports on various funds and find out how they evaluate them, view historical data, and even get their analyst’s thoughts on the quality and talent of the portfolio management team. Talk to your accountant – it may even be tax deductible as an investment research expense!

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