Benchmarks

A reader sent an email shortly before I left asking me about investment benchmarks.

The emailer said he favors foreign equities and wondered what I thought a suitable benchmark would be.

I'm not positive what type of input he was looking for. A reasonable foreign benchmark would be MSCI EAFE which has no US exposure and is easy to follow, another reasonable benchmark would be the MSCI World which is about 50% US but is very difficult to follow.

Currently I have about 32% in foreign stocks and perhaps I will have more in the future. Even though I have such a large weight to foreign I still use the S+P 500 as a benchmark. The reason for this is that my use of foreign is my attempt to add value to client accounts versus an easy to follow and understand benchmark.

An argument could be for several different broad based measures to use as a benchmark but a lot of the big ones have a fair bit of correlation to them and the SPX lets clients know where they stand.

I manage one account that is targeted to be all foreign, which in practice means 70%-80% foreign. I am not the primary point of contact for this one so I don't know if the firm uses EAFE as a benchmark but I use EAFE for this one as a starting point for portfolio construction and monitoring.