In medicine any new investigation/test is compared against a existing ‘Gold Standard’ test which evaluates a disease. For example in the case of pulmonary embolism (blood clot in lungs) the current Gold Standard is a Pulmonary Angiogram (PA) in which opaque dye is injected into the blood vessels of the lungs to show blockages by the blood clots. Any subsequent test is thus compared to the Specificity (ability to determine people without the disease) and Sensitivity (ability to determine people with the disease). Regarding pulmonary embolism, it seems that a High Resolution, Helical CT Angiography (CTA) scan may have better diagnostic results.

Conventional pulmonary angiography (aka The Gold Standard) is invasive, time-consuming and expensive while CTA is faster, less invasive and somewhat more available.

Interestingly, in medicine, a strong effort should be made to determine the ‘Pre-Test Probability’ of a positive finding before subjecting the patient to a particular test. This time is spent assessing the clinical situation and coming up with an ‘educated guess’. Evaluation of the pre-test probability may help prevent overuse of tests but will also guides the interpretation of new information in the presence of old information. Before buying any investment we should consider the probability of success especially when there are many other potential investments into which we can sink our hard-earned money.

The point of this is to remind us that we need to compare our financial portfolio rate of return to our own gold standards (Benchmarks) otherwise we may be wasting our money and our time (think compound interest). I believe that our Financial Gold Standards should be real-world and accessible investments. Given the current state of affairs, I propose that we measure our financial health against the most readily available investments - ETFs!  Not Indexes but ETF’s shuld be the real standard.  Indexes cannot be bought except in the form of an ETF.

Electronic Traded Funds are inexpensive, easy to use and accessible to all investors. If we are not beating the ETF Gold Standard, than we have to ask ourselves why we are not just investing in them and getting on with the rest of life! I am not a believer in Mutual Funds although they are especially good at increasing the wealth of many people, particularly those who sell them. The stocks of many fund companies are decent investments though.

The ETFs you choose against which to compare your portfolio should reflect your asset mix. For example if you are invested in large US bank stocks than you should compare your net returns to IYF. Your US Regional Bank holdings should be compared to IAT.

With a little research you can find the ETFs that best reflect your portfolio holdings. Here is a great place to start with 792 ETFs listed.

With all the effort we make choosing investments I think we should all spend a little time on an Annual Portfolio Health Checkup.

If you enjoyed this post, make sure you subscribe to my RSS feed!