A 4-Step System for Measuring Your Investment Returns

by Rick Kahler

Is ‘beating the market’ the right measurement? Try this four-part method to evaluate your portfolio’s performance in a more meaningful way.

If your portfolio is properly diversified, it will include a much broader range of asset classes. My preference is eight or nine different classes held in index funds. A typical mix might include stocks from large, medium, and small companies in both the U. S. and foreign countries, international bonds, real estate investment trusts, commodities like wheat, gold, and oil, market neutral funds like managed futures, and Treasury Inflation Protected Securities. It’s not really relevant to compare quarterly returns on such a diversified portfolio to the Dow.

Instead, many professionals recommend a four-part method to evaluate your portfolio’s performance in a more meaningful way.

1. Take a long view.

The changes you see in a monthly or quarterly investment statement are purely the result of random movements in the market, what professionals call “white noise.” You might be surprised to know that even one-year returns fall into the “white noise” category. It’s better to look at your performance over five years or more. It’s better still to evaluate through a full market cycle, from, say, the start of a bull market to the start of a new bull market. However, you should remember that there are no clear markers on the roadside that say: “This line marks the start of a new bull market.”

2. Compare your performance to your goals.

Suppose your financial plan indicates that your investments need to generate 2% returns above inflation in order for you to have a good chance of affording a long, comfortable retirement. If that’s your goal, chances are your portfolio is not designed to beat the market. Instead, it represents a best guess as to what investments have the best chance of achieving that target return, through all the inevitable market ups and downs between now and your retirement date. If your real returns are negative over three to five years, that means you’re probably falling behind on your goals and you might be taking too much risk in your portfolio.

3. Recognize that some of your investments will go down even in strong bull markets.

The concept of diversification means that some of your holdings will inevitably move in opposite directions, return-wise, from others. Ideally, the overall trend will be upward. The investments are participating in the growth of the global economy, but not at the same rate and with a variety of setbacks along the way. If you see some negative returns, understand that those are the investments you’re counting on to give you positive returns during times when other parts of your investment mix turn downward.

4. When you look at your portfolio statements, don’t focus only on the bottom line.

Remember that the account total is only a snapshot showing the value of the account on one given day. This value constantly fluctuates, sometimes slightly and sometimes more widely. Instead, make sure the investments listed are what you expect them to be. Look at the longer time periods rather than monthly or even quarterly changes. Notice which investments went up the most and which were down and you’ll have an indication of the overall economic climate. Maybe your overall portfolio beat the Dow this quarter or over this year to date and maybe it didn’t. Either way, this variation probably only represents white noise.

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Reviewed August 2023

About the Author

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at [email protected] or 343-1400, ext. 111.