How to tell if your portfolio is a winner
It's important to know whether you should change your portfolio. Returns are relative, so use these markers to know if you have a winning portfolio.
An investor walks past in front of an electronic board showing stock information at a brokerage house in Beijing, China, November 17, 2015.
China Stringer Network/Reuters/File
The quality of portfolio returns, like many financial matters, is聽relative.
To get a rough idea of how their returns stack up, many investors measure their portfolio performance against a benchmark, such as聽the S&P 500 or the Dow Jones Industrial Average.
It鈥檚 not realistic to expect聽your聽portfolio to beat a benchmark, but it聽should keep pace with the overall market. Here鈥檚 how to tell聽if yours is on track.
Pick an appropriate benchmark
This is key, says Tim Shanahan, a certified financial planner and president of Compass Capital Corporation in Boston. 鈥淭he typical default benchmark for many accounts and plans is the S&P 500, which may or may not be correlated to the assets that you actually own.鈥�
If you have a well-diversified portfolio, you own not just stocks from U.S. companies of various sizes, but also international stocks, U.S. and international bonds, and alternative asset classes, such as real estate. You likely own most of these assets in the form of mutual funds, but you might also hold some聽individual stocks and bonds.
The S&P 500, meanwhile, reflects only the performance of 500 of the largest companies in the U.S.
An investment advisor聽can create聽a blended benchmark and compare it to your portfolio鈥檚 performance.聽A聽聽will probably provide a similar statement, often through聽an online tool that lets you track聽your portfolio聽against various benchmarks.
But if you鈥檙e on your own, you鈥檒l have to do that legwork: Compare the large-cap equities in your portfolio to聽the S&P 500, but look at other indices, too, says Brent Dickerson, a certified financial planner with Trinity Wealth Management in 鈥婰ubbock, Texas.
鈥淚 would suggest looking at the Russell 3000 index as a good broad index of large-, mid-聽and small-cap companies,鈥� Dickerson says. 鈥淎s for international stocks, assuming someone is invested in developed countries, they should consider the MSCI EAFE index as a good benchmark for that.鈥� The MSCI EAFE covers equities in Europe, Australasia and the Far East.
Remember that index funds don鈥檛 need to be benchmarked
By nature,聽聽(ETFs) already track an index, whether that鈥檚 the S&P 500 or the Dow Jones. These funds own聽all of the investments within an index in an attempt to mimic its returns.
鈥淚f you hold an S&P 500 index ETF, then the benchmark is the S&P 500. So it鈥檚 basically comparing an apple with the same apple,鈥� Dickerson says.
Managed mutual funds, on the other hand, employ professional investors to select and manage their investments, so they need to be benchmarked. The same goes for聽portfolios put together by financial advisors.
Don鈥檛 forget about fees
Investment fees are unavoidable:聽401(k)s have administrative fees. Mutual funds, including index funds and ETFs, have聽. If you work with an investment advisor or robo-advisor, you鈥檒l be charged a management fee. And if you聽use part of your聽portfolio for聽,聽you鈥檒l incur trade commissions. ETFs, which are traded like stocks, are also subject to trade commissions, though many brokers now offer a list of commission-free funds.
Fees聽reduce your returns. If yours聽add up to, say, 1%, you鈥檒l pay $10 for every $1,000 you鈥檝e invested. And if your portfolio is returning 7% on average, you鈥檒l actually see a return of 6% after expenses. But these fees aren鈥檛 reflected in benchmarks.
鈥淎 benchmark is a raw thing,鈥� Shanahan says. 鈥淪ubtract fees to see the see raw return, and then compare that to the benchmark.鈥�
Most mutual funds will show performance net of聽, but you may have to subtract management fees, administrative fees and transaction costs yourself.
Don鈥檛 over-think it
Most account providers include a benchmark on your regular statements, and many provide聽comparison tools online, but you don鈥檛 need to compare your portfolio聽every week, month or even quarter. Once a year is fine, especially for retirement investors, Shanahan says.
But you should be聽paying attention to the markets on a regular basis, so you鈥檙e not surprised by what you find in your statements.
鈥淭here鈥檚 a risk of having too much headline news, but a lot of folks pay zero attention,鈥� Shanahan says. 鈥淚f the whole U.S. equity market is down for whatever reason, it鈥檚 logical that your account might be down, too.鈥�
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