Benchmarks are average or standard measurements of the performance of an investment market or asset class. They usually serve as a base for comparing the performance of an individual holding against the benchmark overall market performance.
Kinds of benchmarks
National stock market indexes like America's Dow Jones Industrial Average, Japan's Nikkei 225 or Germany's DAX are the best known and most widely used benchmarks for equity investors. But sector-based indexes like the small cap Russell 2000 Index and the NASDAQ Biotechnology Index are growing in popularity, while global-market investors prefer Morgan Stanley Capital International's three-continent EAFE Index.
Bond markets also employ different indexes as benchmarks for different markets and sectors. The widely-used Lehman Brothers Aggregate Bond Index, an accumulation of several bond market indexes, forms a traditional benchmark for bond funds. Yields on 10-year U.S. Treasury bonds are considered one of the strongest benchmarks for long-term bond performances.
Some investors look beyond the markets themselves to the broader national or international economic outlook for performance gauges. Short-term interest rates are probably the most commonly-employed indicator benchmark but quarterly employment, productivity and GDP numbers are all valued by traders and investors as 'reality check' benchmarks.