Benchmark

A benchmark is the answer to “compared with what?”. On its own, “my strategy made 12% this year” tells you very little. If a fund that simply holds the 500 largest US companies made 20% over the same year, you did a lot of work and took a lot of risk to end up 8% behind doing nothing. If that fund lost 5%, the same 12% is remarkable.

The most common benchmark is SPY, a fund that tracks the S&P 500 — shorthand for “the US stock market”. QQQ tracks the hundred largest companies on the Nasdaq and leans heavily towards technology. There are narrower ones too, for a single sector: VGT for technology, VDE for energy, IBB for biotech. The right one is whichever you would realistically have owned instead. Measuring a portfolio of chip makers against an energy fund flatters or damns it for reasons that have nothing to do with your decisions.

Trading rules use benchmarks a second way, as a weather report. A rule that buys dips works far better when the broad market is rising than when it’s falling, because a dip in a falling market is often just the start of a bigger drop. So a rule can check its benchmark first — is SPY above its own recent average? — and sit on its hands when the answer is no.

In BotStock each symbol on a list can name its own benchmark, which is the one a rule’s market check reads for that symbol. Left alone, it uses the account’s main benchmark, which is SPY. An oil company on a list is a reasonable thing to point at VDE instead: the energy sector can be having a bad month while the wider market is fine, and that’s the weather that matters for it.

Beating a benchmark over a few months proves very little either way. Over a few years, with the costs of trading counted, it’s one of the more honest questions you can ask of any strategy.