A benchmark (also called an index) is a measuring device that shows the average performance of a specific set of securities: benchmarks are used for comparison purposes. Benchmarks may be modeled after published indexes or customized to fit a specific investment strategy. Benchmarks are the standard by which you should judge the performance of individual assets in your portfolio; they also allow you to evaluate your portfolio as a whole. You cannot know how well your portfolio is performing unless you have a benchmark with which to compare that portfolio. Comparing asset performance to benchmarks is Principle 7 of successful investing.

There are three primary purposes of benchmarks. First, benchmarks allow you to track the average returns of a specific asset class. Second, benchmarks allow you to compare different mutual fund managers in similar asset classes; similarly, benchmarks allow you to monitor recommendations made by financial brokers. Third, benchmarks give you a framework for building new portfolios and exchange traded funds (ETFs).

The following are a few questions you should ask yourself when choosing a benchmark:

• Does the benchmark represent the assets you are interested in?
• How broad is the benchmark?
• How many securities does the benchmark include?
• How is the benchmark constructed?
• How is the benchmark weighted?