Congratulations! You are invested in the stock market. You may have an IRA, a brokerage account, a retirement account, or some other type of investment account. The bottom line is you’re invested into the market, know the basics of buying and selling and are regularly contributing to your account.
So how do you know your money is doing what you want it to do; that is making more money for you? This is basically called performance. In the investing world, Investopedia defines performance to take into account returns, interest and dividends. Depending on the type of investor you are, one, two or all three may be important for your and on different levels.
Return is arguably the largest aspect of performance and is the change in the market of the investment since you purchased it. For example, if you purchased Apple (AAPL) for $150 a year ago and its market price is $220 now, that is a difference of $70 per share or return of 46%. Is 46% good or bad?
In order to find that out, we need to measure it against something, a benchmark.
A benchmark as defined by Investopedia is a “standard against which the performance of a security, mutual fund, or investment manager can be measured.” It goes on to say that indexes are typically used for benchmarking.
The most common benchmark investor’s use for stocks is the S&P 500 Index. This is an index of the market value comprised of the 500 largest companies’ publicly traded U.S. companies. If you simply Google, the 2017 return of the S&P 500, you’ll find that it returned 21.83%:
And if you invested solely into AAPL stock, you’ll find that your investment into AAPL performed SIGNIFICANTLY better (over 24%) than the S&P 500 Index.
Many may say you got lucky from the performance of this single investment, and almost all will say it was a risky move. But that is a totally different story.
And is comparing one single stock to the entire S&P 500 Index, representing 500 companies really a fair comparison? Probably not.
I would not call it an apples to apples comparison or a tech stock versus a tech stock, which would make more sense.
Step 1: Gauge Your Current Performance Numbers
Take a look at this screenshot from my Personal Capital tool. It shows my performance of my overall portfolio so far this year as 7.82%:
If you don’t have a Personal Capital account I recommend to sign-up for one for free. You can learn more about this helpful investment tracking tool in Simple Personal Capital Review.
So is a 7.82% return good, bad, decent? Let’s do an apples to apples comparison here. Why? Because I have a diversified (at least I and an advisor whom I consulted with recently thought so) set of investments.
According to Bloomberg, the S&P 500 Index in year-to-date 2018 has returned 3.66%.
It appears my portfolio is performing better than the S&P 500 Index, so far!
Step 2: Measure Your Investments Against The Market Your Invested In
Many of us are invested mainly in the U.S. stock market. So let’s continue with the S&P 500 Index as our benchmark
According to Don’t Quit Your Day Job, in 2016 the S&P500 Index returned 9.84%. Personally, my portfolio did not perform as well. This is one of the reasons why I’m transitioning my portfolio into ETFs and index funds. The passive approach of these investments does better than an active approach.
Step 3: Adjust Your Investments If Needed
If you are not where you want to be in your investment performance (based on using a benchmark and comparing), there could be several causes:
Cause: one or more of the investments are not performing well.
Solution: determine why that investment is not performing well (e.g. poor earnings report) and if it is appropriate to sell some or all of that investment
Cause: the benchmark you are mirroring your investments with is not performing well.
Solution: practice patience or determine if this benchmark is still appropriate for your overall investment objectives.
Cause: your overall investment style may not be working to achieve the performance you desire (the cause for my portfolio’s performance, of lack thereof).
Solution: determine the performance you want and which investments will help you get there. Naturally, the performance of the S&P 500 Index can be achieved by buying index funds that mirror the Index.
Outperformance Requires Rebalancing
Your investments could be significantly outperforming a benchmark. And believe it or not, this may be a cause for concern too, why? Outperformance may be an indication of exposure to excess risk.
When outperformance takes place, it too requires action. You should go into your portfolio and sell off the winners and buy into ones that may not be performing as well. I know it sounds crazy, but one of the keys in long-term market success is to have an investment plan and stick with it. Part of “sticking with it” is to make sure your investment allocation continues to reflect your plan and often exercising your patience.
And in terms of risk, you don’t want to be in your 60s or whenever you plan to retire with a 90% exposure to stocks, which in the next year drop by 20%! For a $2 million portfolio, this is a drop of $400,000! This will hurt your portfolio at a time where you may need to start making withdrawals.
Performance is a relative indicator. We all want positive performance, just different levels of this depending on our overall investment plan. And the only way to stay on top of that is to periodically check and make adjustments along the way.
Join The Discussion:
- How do you measure your investments’’ performance?
- How do you proceed to make any needed changes?
- Which benchmark do you use and does it change as your measuring stick over-time?
I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!
Check out my simple, yet detailed Personal Capital Review here.