The second step is to choose an appropriate investment benchmark. The benchmark you choose is very important because it will help you determine how well your mutual fund (or asset) is performing over time. Before choosing a benchmark, you must decide which asset class you want to invest in and the way you want your fund to perform. Choose the benchmark that most closely matches the performance you are seeking. Do you want your benchmark to be broadly based (i.e., that has more constituents and hence helps reduce risk) or narrowly based (i.e., that has fewer constituents)? Generally, a more broadly based benchmark is better because it is more diversified and the returns will be less influenced by the poor performance of a single security. Choose a benchmark that most closely matches your desired performance. I recommend choosing a benchmark with as many constituents as possible.