How Should YOU Measure Your Investment Performance?

Investors shouldn't be obsessed with their portfolio's performance, but an annual evaluation is key to keeping you on track.

I’ve spent over 25 years in the financial advisory profession but recently had a startling realization about investment performance. During a friendly debate with a friend who manages a small-cap mutual fund, I realized even seasoned investment professionals can have misperceptions about investment performance. My friend had a fixation on top quartile performance, a key measure of his professional ranking, but one with little application in the real world — where clients typically own mutual funds representing various asset classes.

Our debate got me to thinking: How should the average investor measure investment performance? I recommend investors focus on two components of performance:

How is my performance number calculated?

How is my account doing relative to a fair benchmark?

Your Performance Calculation

The performance calculation methodology involves two key variables: 1) the mathematical formula used to produce a return figure and 2) the portfolio(s) that are being measured. Most professional money managers use a Global Investment Performance Standards (GIPS) compliant methodology to calculate investment performance. Brokers, Registered Investment Advisers and custodians often provide performance information to clients in their account statements. It is important to ask your provider if their performance report uses an approved GIPS methodology. Time-weighted returns are the most commonly used measure.

Interestingly, GIPS does not require investment performance to be reported net of fees. Consumers would be wise to ask their adviser for performance reports net of fees. After all, it’s not what you earn, it’s what you keep that is important.

Equally important is understanding whether the performance number is specific to your account, or merely a listing of the performance of each mutual fund. According to the GIPS guidance statement on fees, “The GIPS standards are based on the concept of presenting composite performance to prospective clients rather than presenting individual portfolio returns to existing clients (emphasis added).” Very simply, it is permissible for a broker or custodian to show a performance number on your statement for XYZ mutual fund that may or may not be your actual investment performance.

I’ve seen brokerage statements list a client’s various mutual fund’s performance, but not include the client’s overall account performance. Investors should ask their adviser for their specific account’s performance net of all fees. Most advisers have software that can calculate this.

Which Benchmark to Use

What about benchmarks? How can investors gauge their performance relative to other alternatives? This simple question raises many issues.

Should you benchmark your portfolio versus an index like the S&P 500? What’s a fair comparison for a portfolio invested 65% equity / 35% fixed? What about an all-equity portfolio comprised of large-cap, small-cap, international, REITs and emerging markets?

Morningstar provides a quarterly list of average returns by category, which is a reasonable basic benchmark to measure a specific fund. For accounts using a diversified, multiple asset class approach, Morningstar provides returns for different asset allocation funds, sorted by equity ranges. This is a helpful guide should your portfolio be comprised of large-cap, small-cap, international and emerging market funds.

The Bottom Line

While an obsession with performance can be counterproductive (often leading to chasing past winners and inferior performance), an annual review of portfolio performance is something all investors should undertake. Make sure you understand what is being measured and how it is being measured so you can track progress toward your goals.

About the Author

Mike Palmer, CFP

Managing Principal, Ark Royal Wealth Management

Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER™ professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
How to Know When You Can Retire

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022


Why Women Need to Take a More Active Role in Their Financial Futures
Women & Money

Why Women Need to Take a More Active Role in Their Financial Futures

It’s a mistake to let someone else make all your decisions or take care of everything for you. You can start taking control of your finances by review…
January 17, 2022
Is the Stock Market Closed on MLK Day?

Is the Stock Market Closed on MLK Day?

Both the stock markets and bond markets will have Monday off as the nation honors civil rights leader Martin Luther King Jr.
January 15, 2022
Stock Market Holidays in 2022

Stock Market Holidays in 2022

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2022.
January 14, 2022
6 New Year’s Resolutions for Your Wealth Plan
retirement planning

6 New Year’s Resolutions for Your Wealth Plan

Everyone could benefit from checking these six items off their to-do list this year.
January 14, 2022