One of the most common and costly mistakes that new investors make is not measuring their performance against an appropriate benchmark. Many don't compare to ANY benchmark, much less an appropriate one. What is the danger? The biggest drawback is you will never really know how well or poorly you are investing.

A stock-tracking index such as the S&P 500 is the most common type of benchmark. There are tons of them, they are easy to look up, and there are plenty of free tools available that will allow you to compare your performance to an index with just a couple of mouse clicks. We will provide a list of the most popular and which strategy they match in the chart below.

Here's an example to put this concept into context:

The year is 2003 and all of your money is invested in Large Cap US companies. Your total portfolio increases by 14% for the year. Pretty strong, right? The problem is that you have absolutely no basis of comparison. Now let's add some information and see how drastically it can change the picture.

The S&P 500 Index contains 500 large cap companies, so it is the perfect benchmark to use for this example. In our example, you gained 14% for the year but the actual S&P return for 2003 was more than double at 28.68%. To add insult to injury, let's also throw in the possibility that your returns are much less because you selected highly volatile companies and a few tanked. This means that not only did you trail the S&P returns dramatically, but you are also likely to lose money faster than the S&P 500 when the market turns bearish since you have a higher risk portfolio.

Regardless of your strategy or goals, you should always compare your month-over-month and annual performance to an appropriate benchmark. We already mentioned that if you don't compare you'll never know if you're improving as an investor. Another major reason is to see how well you are implementing your investing strategy.

For example, if you've chosen to purchase large growth stocks and technology stocks a good index to compare too would be the NASDAQ 100. If you outperform the index for several years in a row, then you have proven that you are good at implementing your strategy of buying high potential growth and technology stocks. However, if you are underperforming the index, you either need to study your strategy more or just buy an Index Fund or ETF that tracks the NASDAQ 100.

Unfortunately, many people think that buying an index fund is like throwing in the towel. They feel this way because it means accepting the market returns, index investors aren't really implementing any traditional investment strategy. However, here's a little secret to keep in mind; index investors beat over 75% of investing professionals and an even higher percentage of individual investors. If you want to learn more about Index Investing, read our Complete Guide to Index Investing or our Index Investing Review (Index Funds & ETFs). If you can't beat 'em, join 'em.

Most beginning investors feel intimidated when they hear index names like the S&P 500, Dow Jones, or Nikkei so here's an alphabetically index list to help you figure out which index to use. The question we get the most is "what if I have several types of investments or if I am trying more than one strategy?". No problem. That means you'll look at more than one index and you should compare each investment or group of investments to their relevant index.

Major Index Reference Chart

You probably noticed that there is a lot of overlap. You don't have to choose the perfect index, you can either select the most popular or select several, just make sure you choose indexes that are relevant. For example, if you're buying Blue Chip stocks, you should definitely look at the Dow Jones Industrial Average but you may also want to occasionally compare against the S&P 500 since it is a similar large cap indexes.