Let’s say that you have a balanced portfolio, and you’ve selected the S&P 500 to represent the equity portion, and the Barclays Agg for the bond side. Your strategy for the portfolio is 80% stocks, 20% bonds, thus your index is blended in the same fashion (i.e., 80% S&P, 20% Barclays).
Because of the challenges in the stock market you’ve decided to move more money into bonds, reducing your exposure to stocks to just 40%. And so, your portfolio now looks like 40% equities / 60% bonds. Do you alter your benchmark accordingly? That is, should you alter the balance of the two indexes which represent the benchmark?
And why not? Because this change is a tactical move, brought about by your belief that such an adjustment will be good for your client, given what’s going on in the market. If you adjust the benchmark, you won’t know if this was good or not. By keeping the benchmark aligned with your long-term strategy (80/20), this temporary shift allows you to see if it was good or bad.