QUESTION: Accounting and reporting: what is a benchmark and how to choose it?

Understanding the concept of a benchmark and knowing how to choose it plays a key role in evaluating the effectiveness of your investment strategy. Regarding accounting and reporting, a time-tested scheme usually works great, which helps to systematize the process of monitoring investments and look objectively at the results of your trading in the stock market.

To implement this scheme, you need to consistently go through five mandatory stages.

When choosing a benchmark, an investor should be guided by the composition of their portfolio and their own risk tolerance. If you invest predominantly in the shares of the largest companies, a logical benchmark would be the blue-chip index or the main ruble index. For portfolios with a mixed structure including bonds and gold, a combined benchmark is compiled where each asset class has its own specific weight.

Comparing portfolio returns with a benchmark allows you to answer the main question: does your strategy bring additional value compared to passive investing in the market as a whole? If your portfolio consistently underperforms the chosen index over the long run, taking into account all costs and commissions, this is a serious reason to review the asset structure, reduce costs, or switch to passive index investing.