Standard benchmarks such as the S&P500 and Russell indexes are commonly used for performance analysis because of their ubiquity. However, they represent specific asset classes and it makes little sense to use them as benchmarks against a diversified portfolio that covers multiple asset classes.
With Portfolio Lab, you can build a model portfolio made of composite asset classes, using ETFs as proxies, and use this model portfolio as a benchmark. For example, a blended benchmark of 70% S&P + 30% aggregate bonds can be replicated with a portfolio of 70% SPY + 30% AGG. Using ETFs is acceptable because most ETFs track their index very closely, and it has the advantage of making your benchmark investable.
To create your benchmark:
- Use ‘Edit->New’ to create a new model portfolio. Enter the benchmark name as the portfolio name.
- Enter the constituents of the benchmark with their weights
- Select rebalancing: monthly
Your newly created portfolio can now be used as a benchmark. Whenever you need this benchmark, click Compare option in backtest, then A portfolio, then select your benchmark. You may also use this as a benchmark in the PDF report.