Everything is relative, regardless of which investment performances you’re measuring. What may have been great performance a year ago may be considered good, bad, or indifferent today, depending on how the particular market you’re invested in is doing.
Unless you have evidence of other negative indicators, don’t knee-jerk into selling an investment just because its performance lags behind an index one year. You’re investing for the long-term. What’s underperforming its index this year may well bounce back next year.
The trick to using indexes is to be able to definitively tell how well the performance of your investments stack up against their peers in the market you’re in. With that know-how, you can answer questions like: Is this stock’s performance average? Is this mutual fund’s performance above average? Is this bond’s performance poor?
How does your performance compare with the indexes? Although you don’t want to be 50% or more off the indexes or benchmarks for your investments, lagging 10% to 20% behind is nothing to sneeze at. For example, if in 1998 your investments came in 20% under the S&P 500’s 28% performance, you would have reported more than a 22% return. Could you live with that? You should be happy to. With a 20% return, you’ll more than double your initial investment in four years. These are the kinds of years you come to live for as an investor. And you’ll be glad you built a portfolio rather than investing in just one or two stocks that may have entirely missed this increase in value.
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