Written by: Jared Coffin When you tune into a financial news network, you often hear, "the Dow Jones has gained or lost x percentage today." Or, "the S&P 500 has gained or lost x percentage.” These are indices that we commonly hear referenced.Many times, these indices are also used as a benchmark for your portfolio's performance. Or some variation may be used, based on your portfolio allocation and/or the underlying strategy. For instance, if you are invested in a buy-and-hold balanced portfolio, with a split of 60% stocks and 40% bonds, the benchmark may be 60% S&P 500 and 40% Barclays Aggregate Bond Index. Or some similar variation. Candidly, there are so many benchmarks and combinations that it's hard to keep track of all of them.The issue I have with benchmarks is that I believe they can cause investments to underperform over the long term. People tend to think in terms of relative performance instead of absolute performance . If investors' portfolios fail to capture all the upside that the benchmark obtained in a calendar year or two, they become disappointed and begin to look at other investment options. Many times, regardless of the investors' underlying portfolio strategy or risk tolerance, they compare their returns to what the S&P 500 returned. Depending on the strategy and risk tolerance, it may not necessarily be a fair comparison. In positive years, they want all the gains, and in negative years they want none of the losses.Unless you're an aggressive investor allocated to 100% equities, you can't expect to get the returns of the S&P 500. For instance, a conservative investor should not be expecting to capture as much of the upside or the downside as the S&P 500. An aggressive investor may capture all or most of the upside, but also must be willing to accept all or most of the downside. In general, if we take more risk to possibly receive greater reward, we must also accept the possibility of greater drawdowns. It doesn't always work this way, but that's what you'd generally expect.Let's use a hypothetical example from the following illustration. The years in which our hypothetical portfolio underperformed its benchmark are highlighted in red. And the years in which the portfolio outperformed its benchmark are highlighted in green. I've also illustrated the hypothetical growth of $1. 
I personally like the portfolio returns from our hypothetical example. However, many investors would be unhappy with such a performance, which in my opinion is the wrong investing perspective. Look at the returns from 2012 through 2014. Three years in a row this portfolio did not beat its benchmark. It drastically underperformed in 2013. Looking at 2013 and 2017, the underperformance is especially painful. Does that mean this portfolio is no good and should be abandoned? My answer would be, No. I don't think underperforming a benchmark alone is a reason to jump ship. However, there are plenty of situations where it makes sense to abandon a strategy. But I don't believe this is one of them.You must look beyond performance month-to-month, quarter-to-quarter and year-to-year. Ask yourself: Does this portfolio meet my risk tolerance, timeframe and goals? If yes, then give it some time to show what it's capable of producing. Also, sometimes the most important question to ask is whether the strategy makes logical sense and fits your emotional tolerance.Unfortunately, this is not how people tend to invest. In hindsight, they see a mutual fund, exchange-traded fund, or other investment vehicle that gave high returns the previous few years. Too often, people are quick to chase investments that recently outperformed a benchmark. When people consistently do this, they're chasing a level of performance that they're unlikely to ever obtain. In my opinion, it's completely natural for strategies to underperform their benchmarks for periods - even more so with certain tactical strategies. It can go both ways. Our hypothetical example's returns in 2008, 2011 and 2015 definitely look nice.We all like to think our focus is long-term. But emotions and market volatility tend to make us act like short-term traders. The challenge is to override our emotions with a strategy that makes sense. And then stick with it.Ditching a portfolio due to relative underperformance of a benchmark may cause you to unnecessarily abandon a perfectly fine investment. Try to think in terms of the absolute return over a longer timeframe. Avoid comparing yourself to your peers. Just because someone had a great year or two doesn't guarantee future results. In Aesop's famous fable " The Tortoise and the Hare ," the Hare started off looking great. Onlookers expected him to win. But his performance was erratic. And to everyone's surprise, the seemingly slower tortoise won the competition.So don't count out a portfolio that's slightly lagging. Slow and steady is just as capable of winning the race. If you would like to find out more, click here .
