Answering this simple question can be one of the most important things you do to help you reach your financial objectives. Unfortunately, getting the “right” and complete answer may not be easy.
There are two parts of your portfolio’s performance that you should examine:
How is it doing in an “absolute” sense? How much income (dividends) did it produce and did it go up or down in value?
How is it doing in a “relative” sense? How did its income level and change in value compare to other benchmarks?
Reviewing Absolute Performance
The best way to calculate portfolio performance is to use a calculation method called the “time weighted internal rate of return.” This takes into account the timing of any additions or withdrawals to the portfolio as well as dividends and changes in the value of the portfolio. You may find online calculators to perform this calculation at some websites.
The other way is to start with the beginning value of your portfolio and simply add any additions you made and subtract any withdrawals. You then compare that total with the ending value. The difference is your net positive or negative return. Dividing that difference by the beginning value will give you a percentage gain or loss. This method isn’t perfect because it does not reflect the timing of additions or withdrawals, but should get you relatively close.
Reviewing Relative Performance
While it is important to know whether your investments are gaining or losing, you must also remember that your investments are part of the overall financial market and changes in the overall market will definitely have an impact your performance. Therefore, you should see how your portfolio’s performance compares to the overall market or some other “benchmark” that is comparable to your portfolio. If your equity portfolio is up 6% and the stock market is up 12%, you have gained, but you have not done as well as the rest of the market. Likewise, if your portfolio is down 6% and the overall market is down 12%, you have done very well in comparison.
What should you do?
First, be realistic in your expectations. The year of 2008 was a bad one for stocks with the S&P 500 index falling 37% while it rose by over 26% in 2009, 15% in 2010, 2% in 2011, 16% in 2012, 32% in 2013 and over 13% in 2014. Over the 10-year period ending in 2014, the average total return for large company stocks (comparable to the S&P 500 index) was 7.7%. The best year (2013) had a return of over 32% and the worst year was 2008 when the return was a negative 37%. While the bull market of 1995 to 1999 produced average returns of over 28% and the bear market of 2000 to 2002 saw the market fall by over one third, returns during those years were well outside the long-term average returns.
Establish a benchmark.
Second, establish some “benchmark” with which to compare your portfolio. The S&P 500 is a good stock market comparison, but is only comprised of very large companies. If your portfolio contains more small and mid-size companies, you may want to use the S&P 1000 or the Wilshire 5000 to get a better comparison.
Determine if you need to make changes.
Finally, use these comparisons to determine if you should make changes in your investment strategy or the way you invest. If your portfolio is consistently under performing the market, consider changing how you select stocks. Discuss your strategy with your investment advisor, spend some time studying the market or reading investment books. You may also want to consider using mutual funds, even some form of index mutual fund, to try to do better.