Benchmarking can be defined as the practice of setting up a standard measure, and measuring performance against it. We let the standards become a barometer of our success or failure.
WHY IS BENCHMARKING NEEDED?
The world needs benchmarking to move in a synchronized manner. Why do we have calendars and clocks? A team needed in the same place at the same time to execute a certain task is able to come together, because they follow the same calendar and clocks.
Calendars and clocks impose a framework, which compels us to act in a certain manner. If we have set a certain target or goal, we keep moving towards it in a disciplined manner.
Benchmarking is a useful tool to drive people towards a predetermined goal. Macro-level goals (economy, prosperity, financial wellness) can be achieved only if all the micro-units (individuals, companies, systems and devices) work in tandem.
WHAT IS A GOOD BENCHMARK IN MONEY MANAGEMENT?
A good benchmark is one that corresponds to the investor’s style, risk appetite, goals and targeted returns. Comparing apples to oranges does not make sense for anyone in the game.
Benchmarks for individuals should also take into account personality, educational and professional background and social milieu in which they operate.
BENCHMARKING IN INVESTING
Money Managers decide on a measure like stock market indices or historical performance. They use it to analyze the performance of a portfolio compared to the performance of other market segments.
Fund managers use asset allocation and diversification as tools to achieve or exceed the targets.
Fund managers of mutual funds extensively use these methodologies.
BENCHMARKING FOR INDIVIDUALS
Consciously or sub-consciously, people compare themselves to peers, and nurse ambitions about reaching where the superiors are.
Choosing a benchmark is the first step which needs to be done right. Is it income, expenditure, lifestyle, investments or net worth? They are all interlinked. Your income and expenditure will determine your lifestyle, and your investments will determine your net worth.
People in the same income bracket may expect to have the same net worth, but it does not always happen. It is because they spend, save and invest differently.
Is it possible for so many people to save or invest in the same manner? No. The size of the family, responsibilities, social setup, culture, mindset, geographical location all make a difference.
The combination of all these factors makes you unique, and our financial plan needs to be unique too– customized and tailored to suit your needs, not a general benchmark.
WHEN DOES BENCHMARKING WORK AGAINST YOU?
Benchmarking against your parents, siblings, friends or neighbours who are not in the same income bracket, stage of life or have similar financial goals can be disastrous. You set yourself up for failure.
You may feel inflated because you’ve done better than a certain set of people. A sense of achievement and contentment is good, if it does not impede future progress.
You may feel dejected because you always have less than others and feel inadequate. It undermines confidence, and becomes a barrier to growth.
WHAT CAN BE DEEMED AS FINANCIAL SUCCESS?
Measure your performance against your own financial goals. If you are in line with the same, and have money to meet your needs at the right time, you are doing well.
There is no point in fretting about things beyond your control. You cannot change the economy or the stock market. But you can align your course of action and strategy to meet your financial goals.
There is no point in beating yourself up for failure. You are a human being pulsating with dynamic thoughts, not an excel sheet delivering results as per the formulae fed into it.