By FPA member, Stephen P. Ahern, CFP®, CPA/PFS
Last Updated: February 18, 2013
You may be a bit annoyed if you check your portfolio value on the week the market shot through the all-time highs, only to find that your portfolio did not keep up with stock market returns. While that feeling is understandable, make sure you’re taking into account several factors before you fall into the hole of self-pity.
How to Measure Portfolio Performance
If your entire portfolio was in an S&P 500 Exchange Traded Fund or Mutual Fund, you may have had a reason to complain that your return did not mimick the S&P 500 (but remember, there are fees in a fund and not in a benchmark index!).
More typically, you probably own a diversified mix of investments, which may include domestic large and small stock as well as foreign stocks. The portfolio may also have bonds, some cash, alternative investments, real estate and commodities. This might lead to a less volatile, less risky portfolio albeit with some muted upside. Without that diversification the increased risk results in a harder way to a comfortable retirement. You have to be able to sleep at night and still be able to reach your goals, so stick with the diversified approach and measure your overall performance against a comparable benchmark.
In order to build that comparable benchmark, you will need to include a proportionate share of each of the portfolio’s investment classes. For example, a bond fund might use the Barclays Aggregate Bond Index while a fund that invests in Non-US stocks might use the MSCI EAFE Index.
With the newly created blended and weighted benchmark, you are ready to compare your portfolio’s return with a relative comparison, that when viewed over various periods of time, will help you see trends. Focus on one-, three-, five-, and ten year rolling returns for a portfolio when comparing to your customized benchmark to give you a more accurate comparative performance measure.
Compare each component part to its own benchmark for a determination of its relative performance. If you find that a particular area/manager has unreasonably trailed for a significant period, it may be time for a change.
What Do You Need from Your Investments?
Setting realistic expectations for your portfolio as a whole is more important than relative performance. How much return do you need? Why take on more risk than necessary to meet your needs/goals? In your financial planning, determine the average growth you need over time. Higher returns may have higher risk. The goal of your “absolute return” is to meet the planning goals without excess levels of risk. You may even want to get less risky as you get closer to needing distributions from the portfolio.
Eye on the Big Picture!
If you hear the news and wince when the market falls or feel better when it rises, but have no real idea of how your investments are doing, you need to assess the situation with a big picture performance review and determine if you are track to meet your goals. A credentialed (CPA/PFS or CFP®) advisor can offer perspective on your portfolio, its performance, your goals and how they all interact to get you where you want to go.
Stephen P. Ahern, CPA/PFS, CFP® is the President of Wealth Management Advisors, LLC and a Shareholder in Sullivan Bille P.C., CPAs both in Tewksbury, MA. www.SullivanBilleGroup.com
