For many of us, evaluating our investment account statements is like going to the dentist:  it’s the right thing to do but we would rather put it off!   Sure, we want to feel good about our investments’ performance.   Charting investment returns?   Ranking investments, picking a strategy?   About as much fun as that dentist visit.

The good news is that the average investor shouldn’t have to spend a lot of time charting investment returns.  With time and education this task can be quickly dispatched on a quarterly or yearly basis.   Here are some basics you should master as you evaluate portfolio performance.


Understand Your Account Statement

The statement summary should provide the information you need to measure your portfolio’s health.  The summary should include the following:

  • Statement Beginning Balance
  • Dividends and Interest
  • Market Appreciation (Depreciation)
  • Deposits & Withdrawals
  • Fees & Expenses   [other expenses?]
  • Statement Ending Balance

Don’t just concentrate on your ending balance: The ending balance is a function of all the components above.  Understand how much growth is coming from dividends and how much is coming from market appreciation.   For the conservative investor, dividends and interest should be a relatively large component of increase in the ending balance;   for the more risk-tolerant investor, market appreciation should make up the predominant part of the gain.     Understand that the amount of the ending balance increase or decrease is related to your deposits or withdrawals. We tend to underestimate how much we withdraw from and overestimate how much we deposit into our investments accounts. The Fees and Expenses category is important because in addition to investors not sticking to their original investment strategy, fees represent the biggest drag on overall performance.  This category reflects fees charged to your account by the company holding the account (e.g., trading fees), and for those investors who have an advisor, fees charged by your investment advisor.  The beginning balance plus all the other account activities discussed should add up to the statement ending balance.

Measuring Rate of Return

Measuring rate of return sounds simple, right?  The calculation is easy if you don’t have any interim deposits or withdrawals and you are only measuring the change of one time period–let’s say one year.  In that simple case, calculate the percent change between the ending and beginning balance and that is your rate of return. Note that this rate of return is net of fees charged to your account.

You will want to measure the rate of return on your account over a period of time and will likely have made interim deposits and withdrawals on your account.  In that case, you will need to refer to calculators provided by your broker or to an outside financial calculator to give you the result.  If your broker does provide you annualized return information, make sure it is on a “dollar weighted” not “time weighted” basis.  (Dollar weighted returns take into account the timing of your deposits and withdrawals and thus provide the best way to look at your returns.) If your broker doesn’t provide an easy way to calculate your annualized personal rate of return, you will have to refer to an online financial calculator. The best online calculator I could find is at the “mutual funds store,” which has a  personal rate of return calculator Put in the dates and amounts of your beginning and ending balances, deposits and withdrawals, and voila, out comes your annualized personal rate of return!

 Choosing the Right Benchmark

After you know your personal annualized rate of return, you will need to compare your performance to some other index.  Most investors know that the stock market doesn’t always go up.  If your portfolio has gone down, by let’s say -2% over the past year, and the market has gone down by -4%, then pat yourself on the back, you outperformed the market!  But what benchmark to do you choose to compare yourself with?    People most often compare their portfolios to the S&P 500 index.    This is a solid benchmark for large cap US funds only.   Hopefully you will have a well-diversified portfolio that contains small cap stocks, international stocks, and bonds.  The Russell 2000 index, the Morgan Stanley Capital International EAFE index, and the Lehman Bond Aggregate Index are some useful indexes that can be used to measure performance of these funds.  To know if your overall portfolio is doing well, you will need to calculate a weighted benchmark that reflects the value of all your holdings.

Once you have calculated your annualized rate of return and weighted benchmark from your portfolio, you are ready to compare your investment account’s performance to your personal benchmark on a quarterly or annual basis!

by Barry Jamieson, MA

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