"Forget the S&P" as a Benchmark ?

My partner recently called my attention to Jonathan Clement's piece in the Wall Street Journal which decried the use of the S&P500 as a performance benchmark for portfolios. Actually, it's not quite that simple. Clements seemed to both lampoon the use of, and then use, anyway, the S&P500 as a performance benchmark for various fund styles, and whole portfolios of multiple instruments.

My partner lamented, and I agree, the piece was so obtusely written as to almost defy analysis, let alone understanding.

Mr. Clements begins by stating that many readers of his column have contacted him to crow about their investments having beaten the S&P recently. Clements goes on to state that,

"... I don't believe they're investment geniuses. Here's why beating the S&P 500 is no great accomplishment......In fact, if you haven't outpaced the S&P 500 over the past five or six years, something is likely seriously wrong with your investment strategy. After all, as part of a well-diversified portfolio, you ought to spread your money across large stocks, smaller companies, foreign markets and bonds. Any mix of that kind should have handily beaten the S&P 500."

Well, yes. Let's just forget about risk, and timing. And while we're at it, lets compare the return of various asset classes as if they are all equal. And the brief time period over which the observations are taken.

Clements bounces between lecturing on using the proper benchmark for each type of investment and mutual fund style, and then saying you should compare your entire investment return, across all instruments, to the S&P500. On that basis, he dismisses outperforming the S&P as child's play.

Later, in the article, he talks about how is IRA account has handily beaten the S&P, but then admits its is in "small stocks and foreign markets, both of which have easily outpaced the S&P 500."

Again, let's forget about how much more risk is typically found in foreign markets, or small stocks, too, for that matter. It's not a fair comparison by any means, and certainly not significant over very short timeframes.

Professional portfolio managers undrestand that the S&P500 is an appropriate benchmark for large-cap equity portfolios. Period. For hedged funds, it's cash. For bond funds, I would guess it's some variant on a popularly tracked bond index. Why Clements thinks anyone has implied more than this is beyond me.

What dismays and disappoints me about this muddled, wrong-headed piece by Clements about investment performance, is that it's in a large, broadly distributed, reputable business daily- the Wall Street Journal. And Clements writes a weekly column on investing.

With "help" like this, you wonder if most individuals can just preserved their capital over time, let alone actually make money. We see now just how sadly missed Lou Rukeyser will be.