What is a benchmark (S&P 500)?

Benchmark (S&P 500), explained

A return on its own says little. A pick that gained 10% in a year when the S&P 500 gained 20% underperformed, even though it made money. Comparing against a benchmark shows whether a tool added anything beyond what a low-cost index fund would have delivered.

The comparison should be like for like: the same dates, total returns including dividends on both sides where possible, and a benchmark that matches what the tool picks. Small-cap or non-US picks are often better compared with a small-cap or regional index.

When an AI stock tool claims to "beat the market", look for which index it means, over what dates, and whether the record is live or back-tested. Our own pick tracker logs tools' picks against the S&P 500 for this reason.

Example

If a tool's picks returned 12% over a quarter while the S&P 500 returned 8% over the same dates, the picks outperformed the benchmark by 4 percentage points for that quarter.

Related terms

• AlphaAlpha is the part of an investment's return above or below what its benchmark or risk level would predict, often used as shorthand for beating the market.
• BacktestingBacktesting is testing a trading or investing rule on historical market data to see how it would have performed had it been followed in the past.
• Survivorship biasSurvivorship bias is the error of judging results only from the stocks, funds or strategies that still exist, ignoring those that failed or disappeared, which makes past performance look better than it was.
• AI stock pickerAn AI stock picker is software that uses machine learning or other statistical models to rank, score or suggest individual stocks to buy, sell or watch.

Where this matters

Benchmark (S&P 500) comes up most when choosing AI stock pickers. See Best AI stock pickers for the tools we compare, with dated prices.