Invest smarter – escape the benchmark trap

IN THE world of professional investing, a scary obsession has taken hold – the fixation on benchmarks and relative performance. This phenomenon, which I coin “benchmarkism”, is distorting incentives and pulling many institutional investors in the wrong direction. It is time to explore how we can escape this benchmark trap for smarter investing, where the focus is on stable long-term wealth growth.

Investment benchmarks started in the late 19th century when Charles Dow introduced the Dow Jones Industrial Average in 1896. At that time, the role of benchmarks was minimal. Investors were primarily focused on dividends, as demonstrated by funds such as those offered by international asset manager Robeco. Benchmarks played no role in Robeco’s funds until decades after the firm was founded in 1929.

It was not until the efficient market hypothesis gained prominence in the 1960s that benchmarks started becoming the investment industry’s central performance yardstick. Today, beating benchmarks is often seen as the definitive measure of success, overshadowing the most fundamental rules of investing – do not lose capital and achieve an adequate return. Investors are increasingly fixated on relative short-term performance.