What is the most effective benchmark for strategies built for the average investor? Themselves, of course. That is why we created the Individual Investor Index (i3).
The i3 is a unique index that approximates the returns of the average US-focused DIY investor.
How is the Individual Investor Index calculated?
Calculations are based on multiple data sources including the International Securities Exchange Sentiment Index, Commitment of Traders and odd-lot sales and purchases. Rather than combine sentiment measures that suggest how investors are feeling, the i3 attempts to demonstrate what investors are doing. The i3 will always be in a state of refinement as we discover new and better ways to approximate the actions of retail traders.
How accurate is it?
Completely arbitrary, the i3 is more entertainment than science. However, we feel it is more realistic than most industry benchmarks which do not accurately represent the average investor.
A common benchmark is the SPY ETF, but how many traders who buy ETFs will hold SPY for an extended period of time? Another common benchmark, and one that we used up until recently is the 60/40 stock/bond allocation. While this allocation is typical of a robo-advisor portfolio, most of our audience is not interested in handing over control of their equity to an automated service, so why compare apples to oranges?
Frankly, most investors suffer from cognitive distortions regarding their returns. One of our objectives is to help investors stop losing money. The i3 may bring a dose of reality to the average trader and bring into stark relief the need for rules-based strategies. Check out our work.