To gauge performance, you need net worth benchmarks. Otherwise, you have no idea whether you’re outperforming or underperforming the masses. With net worth benchmarks, you can adjust your financial strategies as needed.
Even if your net worth is up by 20% one year, it may not be as impressive if the S&P 500 is up by 28% and you’re still young. Ultimately, everything is relative in personal finance. To achieve financial independence sooner, you must outperform your peers or at least the average.
Net worth benchmarks help you stay disciplined in growing your net worth’s compound annual growth rate (CAGR) over time. Additionally, these benchmarks will evolve as you age and your financial goals change.
When I was in my 20s and early 30s, my goal was to grow my net worth faster than the S&P 500. This is easier to do when you have less money, thanks to aggressive savings.
Now in my 40s, my goal is to try and earn a return at least double the risk-free rate of return. With the 10-year bond yield at around 4%, my target net worth return is about 8%.
The more money you have, the more risk-averse you tend to become. At least that’s been my experience. Moreover, there’s no need to swing for the fences when hitting singles and doubles can provide for a comfortable lifestyle.
If you’ve escaped the rat race, the last thing you want is to be forced back in, especially if you have young children. Your focus should be on maintaining a steady income.
For example, you could invest your entire $300,000 portfolio in the S&P 500 to potentially earn or lose $45,000 in one year. Losing $45,000 isn’t a big deal if you’re making a decent salary and are willing to work for many more years.
But if you’re retired, aiming for a 15% return is unnecessary. Potentially losing $750,000 in one year would be extremely painful!
If you can comfortably live off $300,000 a year, then you only need a 6% return. And aiming for a 6% return with a balanced stock/bond portfolio will likely protect you from bigger losses during bad years.
Let’s review various net worth benchmarks you can follow to gauge your performance. My hope is for all of you to outperform.
Net Worth Benchmarks to Gauge Performance
1) The S&P 500 Index: If you live in America, the easiest and most common net worth benchmark is comparing your portfolio’s return with the 500 largest stocks in the country. The S&P 500 represents 14 different industries, thoroughly representing the economic health of our nation.
2) Risk-Free Rate of Return Times a Multiple: The risk-free rate of return is the 10-year bond yield, which changes daily. You need to figure out a reasonable multiple on that bond yield because you are guaranteed to return the yield if you put all your money into Treasuries.
3) Sector-Specific Exchange Traded Funds (ETFs): If you work in a specific industry like real estate or pharmaceuticals, consider benchmarking your financial performance to an ETF that represents your sector.
More Net Worth Benchmarks to Consider
4) Consumer Price Index (CPI): The CPI, produced by the Bureau of Labor Statistics, should be considered the base case benchmark for everyone to beat.
5) The Case-Shiller Home Price Index: This has risen to be the authoritative benchmark for real estate performance, breaking down home price growth by region.
6) Hedge Fund Index: Hedge fund managers are supposed to be masters of the universe. However, in a bull market, they generally lag due to their mandate to hedge. They have absolute return goals where investors expect them to continuously make money even during recessions.
Alternative Net Worth Benchmarks to Track Performance
1) Your Parents’ Financial Situation at Your Age: Ask your parents about their financial situation when they were your age. This can provide a fun and insightful comparison.
2) The Neighbor You Despise: Comparing yourself to a neighbor you dislike is common but often unhelpful. You never truly know how they got their money, so it’s not a productive comparison.
3) Balance Sheet Affluent Formula: Created by Dr. Thomas J. Stanley, this formula suggests that your household’s net worth should equal 10% of the age of the main breadwinner times your household’s annual realized income.
Given that everything is always changing, you need a dynamic net worth benchmark to follow. Therefore, the best net worth benchmark might be the annual performance of the S&P 500. As long as your net worth is growing in line with the S&P 500’s performance, you’re making progress. If you’re close to retirement or retired, consider following a benchmark of 2X-4X the 10-year bond yield.
