We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is a Benchmark Error?

Mary McMahon
By
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

A benchmark error is the use of an inappropriate reference when assessing portfolio performance. This can result in inaccurate calculations. They may overstate the performance of an investment portfolio, creating a sense of false confidence, or they could understate it, leading an investor to change strategies when this actually wasn’t necessary. Such errors can create serious problems for investors and may be an especially large problem for portfolio managers, who must exercise due diligence in their assessment of portfolio performance to prevent issues like this.

Investors use benchmarks as standards to gauge their portfolio performance. It’s important to select an appropriate one. A person with heavy investments in European commodities, for example, shouldn’t be using the Nikkei as a benchmark, because performance in the Japanese market isn’t directly tied to European commodities. Instead, that investor would want to use an investment index tied to European commodities, because the investor’s portfolio should perform at or above the returns on the index.

The mixture of assets in a portfolio can create significant a benchmark error. Investors may select reference standards that don’t accurately reflect the contents of their portfolios, and thus aren’t useful frames of reference. Benchmark error can occur in this setting because although the investor performed the math correctly and tracked performance of both the portfolio and the benchmark, it wasn’t a meaningful comparison. Essentially, the investor has compared apples and oranges.

As people make changes to a portfolio to diversify, get into new investments, or get rid of old investments, they may end up creating a benchmark error. The change in the investment mix could make an old standard a poor candidate. Investors adjusting their investment strategy should make sure their references change accordingly. Establishing a new benchmark can ensure the portfolio’s performance is accurately tracked from the start to reduce the risk of errors and create a reliable baseline.

In some cases, multiple benchmarks may be used for a portfolio. This can be advisable if there’s a broad mix of assets and no one reference provides an appropriate assessment tool. Investors using multiple references need to be especially watchful for benchmark error, because it can be easy to make mistakes in calculations, or to apply standards inappropriately on the basis of old information. They may over or underestimate the percentage of a particular kind of investment in the mix, for example, which can create a ripple effect of errors as they start to calculate performance.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.