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When I watch golf and look at the results of the top players, I can immediately know exactly how they compare both to the standard (called par) and to each other.

Why doesn't investing have such a standard? Or, if there is one, what is it and why isn't it more well known?

If there isn't one, why not use a fictitious investment that always returns 10% per year with no fees? Here is an example of how this would work:

Consider a couple of potential investments (with one initial outlay of money in 2001) over the 20 year period from 2001-2021 and compare them to the standard, which I'll label S20 for "standard investment for 20 years." I'll show the compound annual growth rate and a rating which represents how the investment does compared to the standard (a multiplicative factor, e.g., if it's 1.20 the investment made 20% more than the standard).

Investment CAGR Rating
S20 10.0% 1.00
S&P500 Index 7.4% 0.62
Dow-Jones 6.7% 0.54

From the rating column, we know that the S&P500 Index investment results in an amount that is 62% of what the standard investment would produce and the Dow-Jones value is only 54% of the standard.

The use of a standard can provide a simple approach to compare investments that have different fees and returns that can be confusing to investors. The advantage of this standard is that every serious investor has an intuitive idea of a 10% annual return (with no fees) and we can easily gauge the ratings against it. We know that if the rating is > 1 the investment is better than the standard and that if it is < 1 we know it is worse (and in each case we know how much better or worse). We need a standard!

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    Usually the relevant index IS the standard to measure against.
    – Eric
    Commented Mar 3, 2022 at 13:41
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    To abuse your analogy, why isn’t every hole a par 3?
    – Eric
    Commented Mar 3, 2022 at 14:01
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    What does "standard" mean? If you want to set a 10% target because it's an easy number to work with ratios in your head, go for it. Otherwise let me ask you this: are you normalizing to one preferred currency, or do you also need to normalize exchange rates to some "standard currency" first?
    – user662852
    Commented Mar 3, 2022 at 14:04
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    Let's imagine such a standard exists and somehow works. (1) Everyone immediately stops investing in anything rated less than the "standard", since that is throwing money away for no reason. (2) The standard must adjust. (3) Repeat until the market collapses. || In reality, no one would pay attention to this nonsense.
    – Matthew Read
    Commented Mar 4, 2022 at 0:07
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    The great thing about standards is that there are so many to choose from!
    – Dan B.
    Commented Mar 5, 2022 at 0:30

6 Answers 6

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Here are some (non-exhaustive) reason why different benchmarks are used, or why a constant benchmark is not optimal:

  • Returns are different in different time periods. In your golf analogy, par is always par. In investing, returns for the market overall vary over time. So a 10% return in 2021, for example, is not the same (in terms of "good" or "bad" relative to the market) at a 10% return in 2000. You have to look at it relative to something in that same timeframe.
  • Investors have different objectives. A pension fund is not looking for investments with the highest return overall. They're looking for investments with the best return with a certain level of risk. A young investor, on the other hand, may want to maximize return regardless of the level of risk. Different benchmarks can be used depending on your risk tolerance.
  • Not all investments are equal. You would not expect a government bond (minimal risk) to have the same return as a small-cap startup stock (high risk).
  • Even return is not universally defined. Do you include dividends? what about changes due to currency?
  • The concept of a "benchmark" in investing is to compare to an alternative investment. For example, would I have better return investing in my portfolio or the S&P 500? If not, why am I wasting time creating a custom portfolio? Since there is no investment that gives you a guaranteed 10% return for all time, a constant benchmark is not as meaningful.
  • You can compare investments without a constant benchmark. In your example, it's obvious that the S&P 500 has a higher return that the Dow over whatever time period you used. It seems that you're just converting an annualized return to a total return over some unspecified period, but that calculation is time-dependent.
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    None of those are counterproofs by themself. Preferences for risk - a metric can have multiple numbers that individual people choose to weight differently. Different performance in different times - you could imagine a metric that's time dependent (even if an index is the only way to get that in practice). Yes, you obviously include dividends. "Compare to an alternative investment" - his question is what that would be or why it doesn't exist, which you don't answer.
    – blueorchid3
    Commented Mar 4, 2022 at 0:31
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    I've given reasons why alternatives do exist. If a constant return were agreed upon by the market, it would likely be in use already. I don't know how to definitively answer why something does not exist.
    – D Stanley
    Commented Mar 4, 2022 at 2:22
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    @blueorchid3 the proposed benefit of the OP was a single number, which a layman can easily grasp (> 1 good, < 1 bad) - if you include additional numbers and constraints, the proposed solution is not simpler anymore than the range of existing benchmarks and ratings. It is not THE universal benchmark anymore, it becomes A benchmark of many.
    – Falco
    Commented Mar 4, 2022 at 9:41
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    @Falco: That may be true, but in practice, for simple cases, you really only need two numbers (alpha and beta). That shouldn't be too hard for a layperson to understand, IMHO.
    – Kevin
    Commented Mar 4, 2022 at 9:50
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    May even be worth noting that in golf par isn't always par. The game in 2022 is very different from the game in 1982. Clubs and balls are better, players are all putting in the gym time. So the 500 yd par 5 hole in 1982 that would avg 4.84 strokes in a PGA event then is averaging 4.01 today. It may say 'par 5' like it always has, but the best players expect to birdie it and have good chances at eagles. In short: nothing stays the same, right?
    – R. Hamilton
    Commented Mar 4, 2022 at 17:23
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"Why is it easy to set a standardized scoring metric for golf, and not for investments?"

Because golf is a sport standardized by various sporting bodies, to the extent that those bodies align for purposes of tournament play. So whatever body that runs the Masters circuit can define the rules however they like, and people can either participate in that tournament or create some rival tournament where hits with a driver count for double.

But there is no 'universal body that defines financial metrics', instead there are dozens/hundreds/thousands of individuals and groups that all have their own incentives for defining things in a certain way. For example, accounting bodies that might want simplicity in reporting vs financial educators who might want to seem that they alone have the universal answers, vs institutions that want to create a repeatable 'edge' for the performance of their investment choices, etc. etc. etc.

I gently suggest that you may not be as 'serious' an investor as you think, given that you don't seem to acknowledge that an investment which earns less is not necessarily worse, dependent on the risk of that investment. If I could earn a 9% risk-free return on a liquid T-Bill, I certainly would consider that far better than a 10% return on equity! So, already, we have started to lay the groundwork about exceptions, which would create complexity that reverses your attempt at universiality, and suddenly instead of '12 standard methods', we would have 13*.

*https://xkcd.com/927/

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  • I will gently inform you that I am familiar with risk. I especially like Vanguard's stock/bond chart (which they have published and updated many times) that shows the potential variability of a portfolio's return based on its components. For this metric that I am proposing I am not that worried about risk - it's more of a simple standard that many investors could find useful in comparing returns.
    – soakley
    Commented Mar 5, 2022 at 23:35
  • @soakley But without any consideration of risk or asset type, a single 'return' number is nearly meaningless. And to anyone who wants an 'intuitive comparison to a flat 10% return', they can simply look at the return of the asset compared to 10%. There does not seem to be any increased simplicity from doing what almost amounts to converting % variance to a 'logarithmic'-type numeric chart. You mention in one of your comments 'sure, you can compare indexes against eachother, but why not compare everything to the same standard?'.
    – Grade 'Eh' Bacon
    Commented Mar 7, 2022 at 14:28
  • Did you know that the standard interest rate in Kazhakstan right now is above 10%? So by your standard, buying Kazhakstan bonds would be 'good'. But surely you can see that this simplistic declaration of 'good' avoids the inherent currency / government risk that would be involved in such an investment.
    – Grade 'Eh' Bacon
    Commented Mar 7, 2022 at 14:29
  • No, by the standard, the Kazhakstan bonds just have shown a better return than the standard. "Good" is something each investor must evaluate by considering multiple aspects of an investment. Return and risk are two components. This standard idea is focused on the return.
    – soakley
    Commented Mar 10, 2022 at 0:07
  • @soakley Re-read the phrasing in your question, final paragraph: "We know that if the rating is > 1 the investment is better than the standard and that if it is < 1 we know it is worse (and in each case we know how much better or worse)". The fact is that oversimplifying by turning a concrete value [% return, very intuitive] into an esoteric 'rating' runs the risk of implying to a less-informed investor qualitatively that the investment is "better or worse" [as you have phrased it].
    – Grade 'Eh' Bacon
    Commented Mar 10, 2022 at 13:48
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CAGR plus (lowness of) volatility is probably the best metric you'll get for historical performance (some investors might prefer one to the other,) and an index is the equivalent of par.

But valuing investments relies in part on betting on unknown, future or hidden information. Peoples' untapped preferences, the future, information known but not yet revealed by a company, shifts in trends, disproportionate influence by individuals' decisions like a government official or founder of a new company, etc. Especially when applied to narrow areas like a single product or even industry.

So future performance will involve at least some guessing, and even for historical performance, it's hard to distinguish a good bet from being lucky. Other games of hidden information solve this by playing thousands of rounds (poker performance, baseball metrics like BABIP) and assuming that the future will be largely the same, that players' skill will change slowly, and that variance is small enough to deal with.

But in investing it's entirely possible for an entire country, generation, industry etc to believe something that turns out to suddenly change or be wrong. Individuals can think differently, but any attempt to convince someone of their position requires arguments that you might believe or not; something you can't base a metric on.

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    Growth rate divided by standard deviation is the Sharpe ratio
    – Nayuki
    Commented Mar 5, 2022 at 15:31
  • Yes, and the Sharpe ratio (and its subsequent revision) has proven itself as a good metric when considering risk. I'm more concerned with comparing investments with similar risks. I think that investors have a solid understanding of a constant 10% return and can more easily relate to such a standard than how comparisons are currently (typically) done.
    – soakley
    Commented Mar 5, 2022 at 23:24
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    @soakley How does your proposed method account for risk at all? If you need the comparative asset risks to match what you are basically implying is North American stock market risk, then you could simply compare to the market index for the same period, which (1) more directly calls out the fact that there is a specific comparison being made, and (2) is more accurate. I still fail to see how converting "6% return on this mutual fund vs 8.6% for the S&P 500 over the same period" into "rated 0.8" is at all more intuitive, as it requires blind faith without understanding of the mechanics.
    – Grade 'Eh' Bacon
    Commented Mar 7, 2022 at 16:58
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One word: RISK.

Which is better: a golfer who always gets par; or a golfer who always gets a birdie but because of their unusual swing, each time they take a stroke they have a 0.1% chance of tearing a ligament and ending their season? The latter would have a better average score, no? Does that make them unconditionally 'better'?

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  • No, it does not. And a higher return alone does not make an investment better. But return is a useful metric and I believe a standard can make it easier for the average investor to better understand returns of investments.
    – soakley
    Commented Mar 5, 2022 at 23:19
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There is a sort-of universal standard: the Black-Scholes model, aka the BSM model. See https://www.investopedia.com/terms/b/blackscholes.asp.

The BSM takes a set of 5 inputs (strike price of an option, current stock price, time to expiration, risk-free rate, and volatility) and produces a price. This makes it practical to compare options of different types and durations in a standard way. The creators of this model won a Nobel Prize for it.

BSM can be used to judge many types of investments - any that can be modeled as a derivative investment. Although originally devised for options, it's clear many other investment types are just special cases of the option scenario, e.g. buying stock is an option with no cost, immediate expiration, and strike price = current stock. In other words, some inputs can be 0.

The BSM isn't perfect, and it makes assumptions that may not always apply in the real world, but is a framework for creating your universal standard.

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  • I was aware of the Black-Scholes model, but not that it was applicable to so many different types of investments. Thank you for posting this.
    – soakley
    Commented Mar 5, 2022 at 23:16
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Fundamentally, because investments have (at least) three characteristics: return, risk, and time held--and these cannot be satisfactorily collapsed into one number.

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  • The proposed standard is one investment. It has the three characteristics you mention. Its return is 10%. There is no standard deviation or risk. It can be measured over any time frame.
    – soakley
    Commented Mar 6, 2022 at 14:43
  • Then it has SD = 0, and an infinite vector of time frames. These come into play any time it is compared to other investments, which also have these characteristics.
    – benifex
    Commented Mar 7, 2022 at 7:29

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