Sometime in the future I need to update or write another blog post on benchmarks.  In nearly every portfolio update I include data and a pie chart showing how well portfolios are performing with respect to several benchmarks such as SPY, AOR, AOA, VTI, or VT.  All these "benchmarks" are securities where one can invest, an important feature of a benchmark.

None of these return percentages are accurate benchmarks as was the old TLH Spreadsheet as none of this benchmarks properly handle cash flowing in and out of a portfolio as the IRR does for the individual portfolio.

Let me try to explain.  Assume you choose SPY as the benchmark.  It is one of the most common benchmarks as SPY is an ETF that tracks the performance of the S&P 500, a commonly used benchmark.  When money is added or withdrawn from a portfolio, the Internal Rate of Return (IRR) calculates how that new cash impacts the portfolio on an annualized basis.  The SPY IRR measurement is not taking into consideration to infusion or withdrawal of cash.  The old TLH Spreadsheet did.

To come up with an accurate benchmark comparison, one would need to maintain a separate SPY portfolio.  If one added $100 to a portfolio on the first Monday each month, then $100 would be added to the SPY on the first Monday of each month.

As currently calculated, the SPY measures the IRR from a starting date to a final date with no cash added or subtracted.

Hope this makes a little sense.

Lowell