Why is the median account problematic as a benchmark?

The median account being problematic as a benchmark primarily stems from the fact that it cannot be specified in advance. This characteristic means that investors cannot know beforehand what the median performance will be, which undermines its utility as a benchmark for evaluating investment strategies. Benchmarks are most useful when they are predetermined and can be consistently referred to for performance evaluations.

For example, established benchmarks typically have defined parameters or historical data to guide expectations of performance. In contrast, the median is a dynamic measure that varies with each new set of data, making it unpredictable. This unpredictability can lead to challenges in assessing whether an investment manager is performing well or poorly relative to the median, as the benchmark shifts based on market performance and the behaviors of other investors in the market.

The inability to specify the median in advance can lead to ambiguity and lack of clarity in performance measurement, rendering it less effective for comparative analysis in investment management.