Having that increased level of understanding and confidence becomes important when markets go through a down period. The Investment Policy Statement (IPS) establishes investment guidelines and a framework for long-term investment thinking that can help calm nerves when things are particularly volatile.

When it comes to answering the final question, choose your benchmarks wisely. Say you have a portfolio that’s 40% invested in U.S. large-company stocks, 20% in U.S. small-company stocks, 30% in bonds, and 10% in foreign stocks. Don’t use the S&P 500 as your portfolio’s benchmark. It’s inappropriate. After all, the S&P 500 is made up strictly of U.S. large-company stocks. The S&P 500 may be a suitable benchmark for the 40% of your portfolio that’s comprised of U.S. large-company stocks, but not for your entire portfolio. In most cases, you’ll need to use a combination of benchmarks to measure the success of your portfolio as a whole and the success of your individual investments.

You’ll also need to decide over what time periods you want to benchmark your portfolio and your investments. Do you want to benchmark the portfolio’s annual returns? Its three- or five-year returns? Some combination?

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