Is There a Better Benchmark to Gauge My Returns Against Than the S&P 500?

By Markets Fool.com

It's mailbag time again on theRule Breaker Investingpodcast, and there are plenty of great questions forMotley Fool co-founder David Gardner. In this segment, a longtime listener wants to know if there's a better way to measure his investing success than comparing his returns to the good old S&P 500 index.

Continue Reading Below

A transcript follows the video.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

{%video%}

This podcast was recorded on July 27, 2016.

David Gardner: Let's get it started right away this week with one from Jordan Parcel. Jordan, you wrote: "Hi, David. Thank you for all of your help and everything you do for the average investor. I love hearing it all. I have not missed one of your podcasts yet." OK, I need to just pause it right there. Jordan, you rock!

Continue Reading Below

Back to your text: "Specifically, I enjoy hearing about your big winners and losers, but I find it hard to judge how I'm doing with my investments. I've been following the Fool for about four years and investing for three. My goal has been to accomplish higher returns than the S&P, because if I can't beat that, I ought to be fully invested in ETFs. With your team's help, knock on wood, my portfolio has held up pretty well against the S&P, but I was wondering if you had a better guideline to judge my performance. Thanks. Jordan Parcel."

Or maybe Par-cel. Although the former coach of the New York Giants and New England Patriots used an extra "L" when he went by Bill Parcells, so I'm still thinking, Jordan, I've got your name nailed.

OK, you've actually asked a few questions. First of all, you said you've been following the Fool for four years and investing for three. That's not a question, but I want to say, good job. So it sounds to me like you were following along for a whole year before you started investing. And that says a really good thing to me about you're taking the time to educate yourself and to think about all this, maybe even to save, scrap some money together to invest, and then you got started. So congratulations and good for you.

There are really two threads that I want to pull out of your question. The first is just beating the S&P 500. That's what you've described in your note, Jordan. You said, "Hey, I'm doing this because if I'm not going to be beating the market, the S&P 500, then I might as well be in ETFs."

And I want to reassert that that is, in fact, the goal of at leastMotley FoolRule BreakersandStock Advisor, the services that I work on. CertainlyMotley FoolSupernova as well. Not every service for every Fool is designed to beat the market, necessarily. Some of our members, especially older members, don't care as much about beating the market as they do preserving their capital. And so you have popular services like Jeff Fischer'sMotley FoolPro, which is really there to help people try to not lose money, even though it also has a good record of beating the market.

So I do want to just mention that not everybody has this same goal. But at least for me, David Gardner, and my brother, Tom, and the books that we started The Motley Fool with -- the 1996 best-sellerThe Motley Fool Investment Guide -- from the beginning, pretty much, we've said, in fact, the very first day we launched on AOL, Aug. 4 of 1994, we said, "We think you should be trying to beat the market. Otherwise, yeah, buy an index fund. And so follow along with us and watch us. We think we can beat the market."

And I'm happy to say from that day forward we pretty much have been beating the market, and I don't think it's that hard a thing to do, really, in a world in which so many people are just trying to mail it in. They're just giving their funds over to somebody else who's managing them, often charging them 1% or 2% just to replicate the market's averages, but delivers that person, unfortunately, a sub-market return because of the fees of 1% or 2%. So if we can get around that, and do it ourselves -- and that's what you're talking about, Jordan -- then I say bully to us and it's worth going for. ANd I've certainly been well rewarded my life for investing in stocks directly.

So I do want to reassert that that is the goal, and so if you're a new listener to Rule Breaker Investing this week, if you've just found our podcast or The Motley Fool, I hope you know that most of us, we think, should be invested, to start with, in index funds, and just specifically, how about just the S&P 500 Index Fund, or Vanguard has one called the Total Market Index Fund. We like Vanguard because they are the Wal-Mart of the industry. They have the widest selection and the lowest prices, and really the fees that you pay for funds are what affect so much your returns over long periods of time.

So darn it, if you can't beat 'em, join 'em. Just go ahead and take the index fund and have fun with the rest of your life. But I think Rule Breaker investing, in particular, appeals -- not just the podcast, but the service -- to people who want to do better than average. And the benefits of doing better than average are very substantial, especially when measured over time.

If you and I can just exceed the S&P 500's return by 1% annualized, it might not sound like much after one year, but take out a calculator and do the math, and check out the difference between an 11% annualized return over 25 years versus a 10% annualized return. Now, I'm not doing it right now, because I'm doing Mailbag. I don't have my calculator in front of me, but it's not that hard to do with a calculator, and you'll see it's very substantial. Just a one-percentage-point difference. And I'm happy to say we've managed to achieve more than that in services likeMotley FoolStock Advisor. So I just want to reassert that's why we do what we do most of the time for many of our members who are looking for that, even if not everybody in life is looking for that.

And then the one other thread I wanted to speak to, before we move on, is just how do you judge yourself and score yourself? And for me, I still haven't found a better way than something as simple using anything from Quicken, where you can type in your stocks. At The Motley Fool we have a scorecard tool. You can use a spreadsheet. You can no doubt search the internet for a simple spreadsheet, a template that you could use, and just keep track of how you're doing with each stock.

When I buy a stock, I type in the ticker symbol. On the next cell over, I type in the price that I paid for it, and I usually include the commission there. Then on the next cell over, the next column of my spreadsheet, I'll just go ahead and indicate where the S&P 500 was that day, and then I have another couple of cells where I show the percentage gain in my stock, or loss. That happens, too, sometimes. And then the S&P 500, by comparison, and I net those out.

And then at the bottom -- and I hope this doesn't sound too hard; I don't do that much buying and selling, so it's not that hard for me -- but I would encourage you to track not just stock by stock, but the overall portfolio, of course. And if all that sounds like too much work, how about just note the amount of money that your brokerage account starts at on Jan. 1 of each year and then the amount that it closes at. And then do just tag it against the S&P 500. That's still, to me, the best way to judge your performance.

Of course, if you're investing in a more focused way, like you're just buying oil stocks or something, I guess you should be comparing yourself to an oil-sector fund, so make sure you're picking the right benchmark. But for most of us at The Motley Fool, the S&P 500 does just fine.

David Gardner has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.