Investment Performance: How Are You Really Doing?


As advisors, we often hear about how someone’s investments are in “good shape” or “already managed” by someone else.

web-4484-101413-gs4484.jpgBut how do you know how well you’re really doing?

For example, are you being compensated appropriately for the risk you’re taking? In comparison to what are you doing well?

Many times, when thinking about how your stock investments are doing, it’s easy to compare nominal performance relative to an index such as the S&P 500 or the Dow Jones Industrial Average.

For bonds, most people tend to compare themselves to generic fixed income benchmarks which reflect the performance of the total U.S. investment grade bond market or one that measures the performance of half U.S. government bonds and half investment grade U.S corporate securities.

While all of these indexes are certainly appropriate measuring sticks for helping to answer the question, you should also understand the following about your portfolio:

  1. What investments comprise your total portfolio? Do you own just U.S. stocks and bonds, or are you globally diversified including alternative assets?
  2. After determining how you were invested, it is important to pick the most appropriate benchmarks for your actual asset mix. These are generally available from most financial service providers.
  3. Finally, most broad indexes don’t truly help answer the question regarding “real” performance. This can only be answered by measuring performance against equivalent assets. If that is too detailed a comparison, a reasonable compromise is to measure against a comparable universe of assets. Indexes such as these can be found at Morningstar.com.
Ultimately, to effectively monitor performance you need to review your investments in two ways. The first is against a static “target” universe such as the S&P 500 or the Barclays Capital U.S. Aggregate Bond Index. The second is against each mutual fund manager’s actual allocation in all of the subcategories. This way, you can evaluate both the manager’s asset allocation skills through his “overweights” and “underweights” as well as the quality of their specific investments.

Finally, a review of fees is another important part of overall investment performance. Fees should be reasonable compared to other similar money managers and should appropriately reflect the value added by the manager. High fees are not necessarily inappropriate if investment performance, net of the fees, justifies the charges. However, if net investment returns over time are mediocre to poor on a risk-adjusted basis, investors may want to consider a change.

Clearly, the question of “how are your investments really doing?” cannot be answered completely without first assessing what you own, determining appropriate benchmarks for comparison, and analyzing the risks taken and expenses paid to generate those returns.

You are wise to establish risk and reward performance expectations with your managers or advisors prior to implementing an investment program and should monitor their results for ongoing compliance with those initial expectations.