The power of a personal wealth benchmark

Investors often have a love-hate relationship with benchmarks.

They love it when the nightly TV finance report tells them the benchmark index has gone up and hate it when it loses value.

But benchmarks can be powerful sources of information for investors, advisers and fund managers that go beyond simple performance measurement.

Fund managers know the power of benchmarks - they are often measured on how well they track certain indexes and can be sacked if they consistently fall short. Advisers regularly use benchmarks to see how fund manager portfolios are performing for clients.

For investors the benchmark indexes are a good source of unemotional, independent intelligence on market performance and provide a sound framework for reviewing and investing a portfolio.

But the mainstream indexes are market measures and while they are great at giving us the total market or sector specific information they are not that helpful to an individual trying to gauge how well (or poorly) they are going on their wealth-building journey.

And investing is a journey and there are critical decisions to be made at various life stages and ages. Just over a year ago a new website service called Wealth Benchmarks was launched. The brainchild of Dr Doug Turek, a strategy consultant to the financial services industry and the principal of a boutique planning firm, the site lets investors fill in a free survey which then provides a quick comparison to a range of public data.

More than 17,000 people have answered the simple 10-question survey and more than 2200 have registered and completed an 80-plus questionnaire about themselves, what they own, their debt levels and how they invest. The reward for going to that effort is a detailed report about your finances and how you compare to others of similar age and circumstance.

So just as fund managers can see how they are going versus their competitors this is a way to measure how your investment strategy is going compared to people in similar situations.

Turek has now also published a small book explaining the various benchmarks he uses and it is interesting looking at the range of ratios and benchmarks that are available to investors and which ones are perhaps most help.

For most people the critical question is: Am I on track to be able to afford a comfortable retirement? A traditional measure is simply net worth - that is your total assets minus your total liabilities. Turek believes that this can give you a false sense of security particularly when it comes to valuing lifestyle assets.

His preferred measure is investment wealth and it can be calculated two ways - your net worth minus the value you put on your lifestyle assets or simply your total investments minus your total liabilities.

When he says lifestyle assets Turek is including the principal home, any holiday house, cars and so on.

This is a debate that financial planners have been having for years - particularly around whether you include the family home or not - but the main value of this measure is giving you a clear picture of your financial health after taking away the cost of any debt on geared investments.

Now for younger people the investment wealth figure may well be a negative figure - because if they have a substantial mortgage that is subtracted from their net worth.
Turek argues the concept of investment wealth is useful as it highlights the importance and need to build non-lifestyle assets "that can go to work for you when you don't want to".

Which leads to what Turek believes is the most important measure of wealth individuals should focus on - the investment wealth expense cover.

Basically this measures how many times investment wealth is a multiple of annual core living expenses. Turek describes it as a proxy for "how many years of living is funded by the equity in your investments".

This measure - which he has dubbed the Make Work Optional ratio - is relative and applies regardless of income and lifestyle level. Across the sample group on the wealth benchmarks study the average value was 12. That means the average person's investment wealth was enough to cover their core living expenses for 12 years.

Turek's wealth benchmarks provide a useful insight not only into how much you may ultimately need to save but perhaps more importantly help you track your progress compared to people in similar situations.