b. Investment benchmarks: Investment benchmarks are hypothetical investment portfolios that show how a specific set of assets performed over a specific period of time. These portfolios can help investors evaluate how their investments are performing versus how the benchmark is performing over the same time period. Unless you have a benchmark or standard, by which you can judge your investments’ performance, you cannot know how your investments are doing. For example, if you invest in a mutual fund of large-capitalization stocks and your annual return is 10 percent for 2009, how do you know if this is a good or bad return? You cannot know if you do not have anything to compare this information with. But if you know that your benchmark for large-capitalization stocks, the Standard and Poor’s 500 Index, rose only 26.4 percent during 2009, then you know that your investment performed poorly in that year.

Investors select benchmarks based on asset classes (equities, bonds, cash), size or capitalization (large-, mid-, and small-capitalization stocks), geography (international, regional, and emerging markets stocks and bonds), issuer (government versus private bonds), and investment style (value versus growth). Investment benchmarks are covered more thoroughly in later sections of this website.