There's a whole universe of benchmarks from which to choose.© Yuichiro Chino—Moment/Getty ImagesSuppose you want to gauge how well your investment portfolio is doing. You’ll need some kind of a yardstick to measure its performance. This is where financial benchmarks come into play.

　　Much like a fund manager, you can compare your portfolio’s performance against a set of assets that’s appropriate for the investments you hold—stocks, bonds, commodities, currencies, cryptocurrencies, or whatever else is in your portfolio. You’ll want to look at assets that are traded on exchanges and/or periodically assigned a market value.

　　Measuring your portfolio against the right benchmark will tell you if you’re doing better or worse than the broader market(s) you’re invested in.

　　What is a financial benchmark?A financial benchmark is typically an index or another set of assets that can be used to measure the performance of other assets, portfolios, or investments over a period of time. It serves as a reference point to evaluate how well a given investment performs relative to a broader market or category that aligns with it (as closely as possible).

　　If your portfolio includes stocks from across all sectors of the U.S. economy, your benchmark would likely be the S&P 500 (SPX). If commodities are your focus, you might use the Bloomberg Commodity Index (BCOM) as your financial benchmark.If you’re HODLing a portfolio of cryptocurrencies, the Bloomberg Galaxy Crypto Index (BGCI) might be your go-to benchmark; it tracks Bitcoin (BTC), Ethereum (ETH), and other digital assets traded in U.S. dollars.A benchmark provides a standard that financial professionals and individual investors can use to gauge performance.

　　The four biggest benchmarks for U.S. stocksIf you tune into financial media, you’ll likely hear discussion about the “big three” financial benchmarks: the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite. You may also hear about a fourth: the Russell 2000.

　　S&P 500. This market capitalization–weighted index is widely considered a proxy for the broader U.S. stock market. It consists of the 500 largest publicly traded companies across all sectors of the U.S. economy. When Wall Street talks about “the market,” it often means the S&P 500. The capital asset pricing model (CAPM), a core component of finance theory since the 1960s, assigns the S&P 500 a beta of 1.0, meaning it’s the standard by which the risk of all other stocks and stock indexes are compared. 

　　Dow Jones Industrial Average. This index, the U.S. stock market’s oldest benchmark, is often referred to as “the Dow.” It’s made up of 30 blue-chip stocks and is known for tracking the largest and most established American companies. The Dow is also price-weighted, meaning that the companies with higher share prices will exert greater influence over the performance of the entire index.

　　Nasdaq Composite. The largest of the four, this index includes more than 3,000 stocks on the Nasdaq exchange. It’s the most technology-heavy index and is seen as a proxy for the entire information technology sector. Note that the Nasdaq-100 is a market cap–weighted index of the 100 largest companies in the Nasdaq Composite, so it’s smaller and even more tech-concentrated.

　　Russell 2000. Considered by many to be a fourth benchmark, this index tracks 2,000 small-cap companies in the U.S., including companies with market caps between $250 million and $2 billion. Many of them are newer, growth-oriented companies.

　　How do investors use financial benchmarks?The easiest and most common way to use a benchmark is to compare it to a portfolio’s returns. Suppose the S&P 500 rose 10% the previous year.

　　If your portfolio made over 10%, then it outperformed the market.If it returned less than 10%, then it underperformed the market. Simple enough. But there are more complex ways that portfolio managers and researchers use benchmarks in financial models:

　　Measure volatility or risk. Beta measures a security’s variability versus a benchmark. For example, a stock with a beta of 2.0 has, historically, been twice as volatile as the S&P 500. Calculate expected returns. Benchmarks play a critical role in calculating an asset’s expected return using the capital asset pricing model (CAPM). Evaluate fund manager performance. Professional fund managers (and investors who may allocate a portion of their portfolios to them) look at the funds’ alpha—the amount by which returns outperform the benchmark’s return.There are other ways to use benchmarks, but each has a similar theme: If you need to make a comparison, a benchmark gives you something to compare to.

　　Alternative benchmarksWant to pinpoint your analysis? Use a benchmark that focuses on the characteristics of the asset or portfolio you’re evaluating. In addition to the commodity and cryptocurrency examples mentioned above, here are a few more targeted benchmarks:

　　U.S. S&P sectors. If you’re heavily invested in a specific sector (such as financials, energy, or information technology), there’s an S&P 500 sector index for each of the 11 sectors of the U.S. economy. U.S. fixed income. If you hold bonds and other fixed-income securities, then you might look at the Bloomberg U.S. Aggregate Bond Index, which includes U.S. Treasuries and other investment-grade bonds. U.S. corporate bonds. If you hold a basket of corporate bonds, the Bloomberg U.S. Corporate Bond Index might be an appropriate benchmark. If you’re holding riskier bonds (“high-yield” or “junk” bonds), a more appropriate benchmark might be the S&P U.S. High Yield Corporate Bond Index.These examples barely scratch the surface. There are plenty more subsets if you need to zoom in to match your investments.

　　Global stock benchmarksIf you’re investing in international stocks, each country has its own broader market benchmark (equivalent to the S&P 500 in the U.S.).

　　Canada: The Canadian stock market is represented by the S&P/TSX Composite.U.K.: The FTSE 100 Index tracks the 100 largest companies listed on the London Stock Exchange.Eurozone: The Euro STOXX 50 represents 50 of the largest companies from 11 countries across Europe.Japan: The Nikkei 225 tracks 225 of the largest companies on the Tokyo Stock Exchange.China: The CSI 300 includes 300 of the largest stocks on the Shanghai and Shenzhen stock exchanges.Australia: The ASX 200 tracks the top 200 companies listed on the Australian Securities Exchange.And if your portfolio is diversified internationally, you might consider any of these world indexes as a benchmark:

　　MSCI World Index tracks stocks from 23 developed markets across the globe.MSCI Emerging Markets Index tracks stocks from 26 developing (“emerging”) markets around the world.There’s an index to match almost any category of financial instruments you might hold in your portfolio.

　　The bottom lineThink of financial benchmarks as a scorecard for your portfolio. They offer a clear reference point, general context, and, in a way, a little competition. But you have to make sure you’re choosing a benchmark that aligns with your portfolio and investing strategy.

　　Ultimately, it’s not always about beating your benchmark, but using it as a tool to make sure you’re consistent with your investing objectives and risk tolerance.

　　Specific indexes and benchmarks are mentioned in this article for educational purposes only and not as an endorsement.

　　ReferencesBloomberg Indices: Innovative Solutions for Changing Markets | bloomberg.comRatings & Benchmarks | spglobal.comMSCI World Index | msci.com