Benchmarking Smarter Than The S&P 500

Rather than measuring performance without context, benchmarks are a tool for managers to define success or failure by comparing portfolio return to another asset.The purpose of benchmarked return is to identify positive and negative alpha. Alpha, or abnormal return, is the over or under performance of one's portfolio with an asset of the same risk profile: it would not make sense to determine over or underperformance of a portfolio of gold mining stocks to real estate performance.In a stock portfolio, one the biggest indicators of risk and return is market capitalization. Small caps, for example, are up 117 percent over the past ten years while large caps have gained just 81 percent. Despite this differentiation, many investors chose the S&P 500 (NYSE: SPY) or Dow Jones Industrial Average to judge performance of their investments. These benchmarks make sense if the investor only holds a basket of large cap stocks, but that is not the case for most people. In an attempt to widen equity market exposure, most investors hold a collection of small, medium and large cap stocks. An easy way to get a snapshot of wider equity market performance is via the Wilshire 5000.Despite its name, the Wilshire 5000 is currently composed of 3,817 stocks. The theory behind the index is that it holds all US traded stocks with liquidity. Liquidity is determined with rules such as the stocks must trade everyday and have a large float. The index is one of the best ways to get a snapshot of total equity market performance.Investors with truly diversified portfolios across market caps and sectors (but still market cap weighted) will get a much better snapshot of their portfolio's alpha by benchmarking it against the Wilshire 5000.Approximately 70 percent of Wilshire 5000 companies are small caps, however they make up approximately just 10 percent of the market value.The Wilshire 5000 is up 2.46 percent in 2015 compared to 1.79 percent for the S&P 500 and 5.02 percent for the Russell 2000.