Creating the Ideal Benchmark: Freeze Your Adviser
by Mark Hulbert
Has your adviser beaten his performance benchmark, or hasnt he? Youd think that the answer to this question would be straightforward. But youd be wrong. Thats because standard performance comparisons raise a surprising number of complex issues. Should the benchmark against which he is compared include all market sectors, or only some of them? Should the weight that each security has in that benchmark be a function of its market capitalization, or should some other allocation model be used?
These are just two of the thorny methodological questions that arise when trying to determine whether a particular adviser has actually added value to a simple buy-and-hold approach.
It is in part because of these complexities that advisers often are able to wriggle out from underneath what otherwise would be devastating to themtheir failure to beat a given benchmark. The advisers simply can argue that, compared to their own ideal benchmark, they would have compared more favorably.
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