2012 Year in Review

Hello Everyone.  Well 2013 is finally here.  It may be a good opportunity for you as an investor to evaluate where you are, where you have been, and where you want to go in the future.

Despite all of the negativity in the air at the beginning of the year, 2012 for the most part was a good year for the markets.  You may be realizing this as you open your 4th quarter statements.  But if you are like most investors, as long as you see the positive returns, you are content to file the statement away and move on to other issues competing for your attention.  This brings me to an important concept in investing called benchmarking. 

I received an anonymous email a few weeks ago asking what I thought a 40lk should have returned this year.  Immediately I knew this was a case where the investor had no idea what returns they should expect, given the funds they owned.  This is truely a sad sceneario, as you can imagine this person, if they have an advisor, has no way to hold the advisor accountable.  Imagine buying a car, and having a breakdown only 3000 miles after purchase.  Most drivers know that that is unacceptable, but if you didn't have a standard of comparison, how would you know?  Imagine how many lemons you would buy and be completely blissful about it if you did not know the standard of quality for cars sold by dealers?

In short, every fund in the fund universe has a "benchmark".  This benchmark is used as a standard of comparison.  It is generally believed that a fund should perform similiar to it's benchmark (or sometimes called an index).  For example, many US large cap stock funds have the S&P 500 as their index or benchmark.  The S&P 500 tracks the performance of 500 of the largest US firms in various industries.  It is generally thought to be a good composite representation of the market for US large stocks.  Mutual funds that trade and own these stocks should perform up to the benchmark, but unfortunately that is not the case routinely.  That my friends is a topic for another blog post.  If you are interested in what your funds' benchmarks are, a great website to visit is morningstar.com.

Jeremy Burri
Veritas Financial