What Is a Benchmark

A Benchmark is the standard against which investment performance is compared. It's usually an index that represents the market. For Korean stocks it's the KOSPI, for U.S. large caps something like the S&P 500.

Having a benchmark lets you judge 'whether my performance is better or worse than the market.' A 10% return is good if the market rose 5%, and lagging if the market rose 20%. A return without a standard can't be interpreted.

A benchmark must be 'of the same character' as your investment to be fair. Comparing to the KOSPI when you invested in U.S. tech stocks is meaningless. You must choose an index matching the asset class, region, and style.

Also, you must distinguish an index reflecting only price (price index) from one reflecting dividends too (total return index). If your return includes dividends but the benchmark uses only a price index, an illusion arises that makes your performance look better than it really is.

It's healthier to view a benchmark as a 'yardstick for measuring performance' rather than a 'target you must beat.' Recklessly increasing risk to beat the benchmark can only enlarge the drawdown.

Especially for index investing, the purpose is to 'track' the benchmark. Because it's a strategy that captures the market return at low cost as-is, minimizing the difference from the benchmark (tracking error) is actually success. The meaning of a benchmark changes depending on the purpose.