Benchmarking Investment Performance: Going Beyond the Numbers

What Is a Benchmark and Why It Matters

A benchmark is a standard or reference point against which the performance of a portfolio can be measured. It provides the context needed to answer a crucial question: How am I doing?

Let’s say your portfolio grew by 8% last year. That sounds good—but was it? If the overall market returned 12%, then your performance lags. If the market was flat or declined, you outperformed. A benchmark provides the measuring stick to put your returns into perspective, providing a common, neutral reference point that advisors, institutions, and clients can all understand and rely on.

Benchmarks also help assess risk by comparing returns relative to the level of risk taken-highlighting, for example, when a portfolio is more volatile than the benchmark but offers no meaningful increase in returns, suggesting that the extra risk may not be worthwhile. 

Common Types of Benchmarks

• Broad Market Indices  Represent diversified exposure across global markets: MSCI World, MSCI ACWI, FTSE All-World Index

• Regional Indices Focused on specific geographic areas: S&P 500, STOXX Europe 600, MSCI Emerging Markets, SMI (Switzerland)

• Sector Indices Track the performance of specific industries or sectors: MSCI Healthcare, Nasdaq Technology Index. However please note that if you are overweighting a specific sector as i.e. healthcare within the global portion, that’s your active choice. Therefore, unless you have a sector specific mandate, the benchmark should be based on broad indices like MSCI World, MSCI Europe, SMI, without adjusting for sectors.

• Custom Benchmarks A tailored mix that reflects a specific allocation (e.g., 60% US, 30% Europe, 10% CH)

Compare Like for Like – What Makes a Fair Benchmark?

Now that you know what a benchmark is and why it's crucial, the next step is ensuring that your benchmark reflects what you're actually invested in. This is where the principle of comparing like for like comes into play.

If you’re investing in European equities but comparing your performance to the S&P 500, you’re setting yourself up for distortion. The S&P 500 is heavily influenced by U.S. tech giants and the dollar’s performance. Meanwhile, European markets might be driven by industrials, financials, and different macroeconomic dynamics.

Using a mismatched benchmark can distort your view of how well your portfolio is truly performing. You might gain false confidence if you outperform a weaker or unrelated benchmark, or feel unnecessary concern if you underperform a benchmark that doesn’t accurately reflect your investment strategy. In both cases, the result can be poor decision-making based on misinterpreted performance.

To make a fair comparison, your benchmark should match your portfolio in terms of:

• Geography: Match your benchmark to your regional exposure (e.g., use MSCI Europe if you invest mostly in European stocks).

• Asset Class: If your portfolio includes bonds, use a blended benchmark that reflects both equities and fixed income.

• Market Cap: Small-cap focused portfolios should not be compared to large-cap indices like the S&P 500.

• Currency Exposure: If your investments are in USD but you live and spend in CHF, you need to adjust for currency movements.

• Risk Profile: Compare against a benchmark with a similar volatility and risk-return profile.

Sometimes, a standard index just doesn’t reflect your strategy. For example, if your portfolio is 60% U.S., 30% Europe, and 10% Switzerland, no single benchmark will capture that mix accurately. In that case, you can construct a custom weighted benchmark using regional indices. Please note that custom benchmarks take a bit more effort but provide a more accurate picture of whether your strategy is delivering the results you intended.

Adjusting for Reality – Currency, Inflation, and Real Returns

Once we found a fair benchmark, it’s time to bring in two powerful but often overlooked forces: currency movements and inflation. These forces can quietly distort how investment performance looks, especially if you invest internationally or live in a country with very different inflation dynamics.

Currency Effects: When Returns Shift with Exchange Rates

If your portfolio is denominated in CHF but you invest in U.S. stocks, your true return isn’t just what the S&P 500 delivered in USD. It’s what you earned after converting those gains into CHF. If the dollar weakens, your returns shrink in CHF - even if the U.S. market was up.

A practical example:

• S&P 500 return: +10% in USD

• USD depreciates 5% vs CHF

• Your CHF return: (1 + 10%) * (1 - 5%) -1 ~ 4.5%

Ignoring FX can distort your perception of performance. During strong foreign market rallies, you might overestimate your gains if a weakening local currency inflates results.

Inflation: The Hidden Erosion of Value

Inflation eats away at purchasing power. For instance a 7% return in a country with 6% inflation is not the same as a 7% return in Switzerland with 1% inflation. The former leaves you barely ahead in real terms.

Real return = (1 + nominal return) / (1 + inflation rate) - 1

Benchmarking a Regional and a Global Portfolio

In this section we’ll explore two practical, real-world examples of benchmarking: one for a regional portfolio and one for a global portfolio following a clear step-by-step approach to construct fair, currency- and inflation-adjusted benchmarks that reflect actual investment exposures and realities:

1. Start with the local return of each investment selecting the appropriate benchmark

2. Adjust for currency movements into CHF.

3. Adjust for inflation in CHF to see real purchasing power.

Case A: Regional Portfolio – 100% Swiss Equities

Portfolio Setup: Invested entirely in the Swiss Market Index (SMI), denominated in CHF

Benchmark: Use the SMI itself or MSCI Switzerland as the benchmark

Nominal Return: The 10-year annualised return for the past 10 years is ~5.8% (geometric average)

Inflation Adjustment: Swiss average inflation over 10 years: ~0.3%

Real Return: (1 + 0.058) / (1 + 0.003) - 1 ≈ 5.48%

Because the investment is denominated in Swiss francs, there is no need to adjust for currency movements. This simplifies the analysis considerably. More importantly, adjusting for inflation reveals the real purchasing power of the returns. In this case, while the nominal return appears modest, it reflects consistent and steady growth in a country with historically low inflation. The real return, therefore, offers a more meaningful measure of the portfolio’s ability to preserve and grow wealth in real terms.

Case B: Global Portfolio – 60% US, 30% Europe, 10% Switzerland

Portfolio Setup:

• 60% in S&P 500 (USD), 30% in STOXX Europe 600 (EUR), 10% in SMI (CHF)

• Base currency: CHF

Custom Benchmark Construction:

Weighted combination of S&P 500 (USD), STOXX Europe 600 (EUR), SMI (CHF)

FX Adjustment to CHF:

• USD depreciated slightly vs CHF over 10 years (e.g. ~-0.88% annually)

• EUR depreciated vs CHF over 10 years (e.g. ~–1.16% annually)

Benchmark Results:

The portfolio’s Swiss component, represented by the SMI, offered stability and the advantage of no foreign exchange drag. However, that came at the cost of lower nominal growth compared to global markets. In contrast, the foreign allocation -particularly to U.S. equities-was the key driver of the portfolio’s stronger overall performance, benefiting from higher corporate earnings growth and stronger sector dynamics.

Taken together, the custom benchmark portfolio delivered a solid 7.57% real return in CHF. This result highlights the effectiveness of the regional diversification and sector allocations over the past decade, combining resilience from domestic holdings with growth from international markets.

Conclusion – Make Your Benchmark Work for You

Throughout this guide, we have explored the full spectrum of benchmarking - from defining what a benchmark is to creating meaningful, real-world comparisons that account for currency and inflation. The takeaway is clear: a benchmark is more than just a way to track performance. It provides critical context, allowing you to understand whether your portfolio is truly creating value. Without it, raw returns are hard to interpret. By aligning your benchmark to your actual portfolio structure - geography, asset class, risk, and currency - you can ensure your comparisons are fair and relevant. For global investors, ignoring currency movements and inflation can significantly distort the picture, while custom benchmarks tailored to your asset mix offer deeper insight into what’s working.

The more globally diversified your portfolio, the more essential it becomes to move beyond generic benchmarks. Crafting an FX- and inflation-aware benchmark takes a bit more work, but it pays off by offering a clearer view of your strategy’s effectiveness. Whether you're just starting or refining a long-standing strategy, take the time to define a benchmark that truly fits your portfolio. It’s a small step that can bring sharper clarity, better decisions, and deeper confidence in your investing journey.