By Jeff Brown
“With the S&P 500 index trading at a current (price-to-earnings ratio) of around 26 times current earnings, and a historical average being 16 times current earnings, U.S. stocks are trading at elevated valuation levels,” says Daniel Lugasi, portfolio manager at VL Capital Management in Orlando, Florida. “Despite this, we have still been able to locate value in the market.”
Since most investors use mutual funds and exchange-traded funds, Lugasi recommends zeroing in on the benchmarks suited to individual funds – a large-capitalization benchmark like the S&P 500 for big-company funds and a small-cap one like the Russell 2000 for small-company stocks, for instance. Fund companies and the data firm Morningstar report each fund’s corresponding benchmark, so it’s not hard to find the right yardstick. It’s a red flag if your fund has not done as well as its benchmark. “The key is to use a benchmark that fits the style of the investment portfolio, otherwise there is no basis for comparison,” Lugasi says.