Measuring Portfolio Performance


Achieving an accurate measurement of your portfolio’s performance is an important, but sometimes challenging, part of any investing. Being able to confidently measure the performance of your equities, fixed interest and other investments can help ensure you’re on track to meet your long-term financial goals. In this article we will discuss some tips and factors to consider.

One key is to not search for or expect positive returns every time you measure your portfolio performance. Over the course of any day, month, year or even longer in some cases, your portfolio value can be up or down—that’s the nature of investing. The goal of your investing strategy should be to reach your long-term goals, which may mean accepting more short-term volatility if you require higher long-term returns. Of course, this does not mean you need to refrain from calculating your investment performance entirely, but that it needs to be put in proper context.

Factors to Consider

There are a number of different factors to consider when measuring your portfolio performance—these will largely depend on your goals and how you have constructed your portfolio. Regardless of your investing strategy and asset class makeup, you should consider all of the following when calculating your portfolio performance:

  • Capital appreciation— Capital appreciation is any rise in the value of an asset above that of its original cost. Capital appreciation along with dividend and interest payments make up some of the major sources of total portfolio return.
  • Income—Dividends or interest payments paid from a security such as an equity or fixed interest security, typically reported as an annual figure.
  • Fees and costs—Depending on your portfolio and investment manager, there can be many costs to consider. One is the cost of buying and selling securities, for which you’ll typically pay a brokerage commission. Other costs can include management fees you pay for funds you hold, fees you pay to an adviser and many more. If you’re unsure what fees you’re paying, ask your investment adviser. If you don’t use an adviser, consult the institution where your assets are held.
  • Portfolio cash flows—If you are distributing money from your portfolio, this should not detract from your performance measurement. It wouldn’t be fair to your portfolio strategy to equate a 10% withdrawal with a 10% reduction in performance. There are many ways to account for withdrawals in your calculation, but it is important to weigh each distribution by the amount of time it was invested. Again, this can be challenging for any individual investor, so you may benefit from consulting an adviser about how to appropriately factor this into your investment performance calculation.
  • Total rate of return—Your total rate of return should account for all factors. It begins with gross return of your portfolio—capital appreciation and income—less all fees and portfolio distributions.
  • Tax efficiency of your portfolio—While taxes aren’t necessarily a reflection of investment performance, you should certainly consider potential taxes when investing. You may need to factor in capital gains taxes, dividend taxes and more in order to calculate an after-tax portfolio return. You should consider how investing in different account types and investments could affect your tax situation.

When calculating your own portfolio performance, it’s important not to lose sight of your long-term goals and objectives. Your investment performance can vary and reacting emotionally to volatility can cause you to make poor investing decisions. Here, we’ll discuss why it’s crucial to understand your long-term goals and investment strategy.

Steering the Long Course

Successful investing generally requires establishing long-term goals, choosing the optimal investment strategy to achieve those goals and then sticking with that strategy. Inevitably you will need to stay disciplined when faced with volatility and uncertainty, whether this is economic, political, or confined to performance of specific asset classes. Deviating from your defined strategy could have an adverse effect on your long-term return and could even cause you to fall short of your long-term goals.

When investing towards your long-term goals, measuring investment performance tends to be most meaningful over longer time frames. While it is natural to focus on recent portfolio movements, making portfolio decisions based on short-term price movements could ultimately prove to be a mistake.

Short-Term Calculations Can Be Misleading

By reacting to volatility, investors risk making the kinds of emotional decisions that—however right they feel in the moment—may prove detrimental to their long-term returns. For example, short-term negative volatility may provoke you to sell your investments at a loss. If the volatility ultimately proves to be a temporary correction, you could miss a subsequent bounce back.

Conversely, when a particular sector has experienced strong performance, it can be tempting to concentrate investments in this one area without full consideration of the risks. But investing in a narrow space or in just one area often serves only to increase the risk of loss. For an example, consider Technology stocks’ euphoric rise in the late 1990s. Had you bought into the frenzy as these stocks were overheating, you could have lost a considerable amount thereafter.

A financial adviser may be able to help you stick to your long-term investing strategy in difficult times. Making emotional trades and reacting to market movements can detract from long-term results, so a good adviser could help you avoid these common investing mistakes.

While investment performance is one way to evaluate portfolio and investment strategy, basing your decisions on past performance—of markets and advisers alike—can be dangerous. Past performance does not guarantee future results, and no one can promise to match past returns or outperform the market without risk. Hiring an investment firm based solely on past performance can be risky.

Contact Fisher Investments UK Today

Fisher Investments UK aims to educate qualified investors and help them identify their long-term financial goals. Once you’ve identified your goals, we may be able to evaluate your current portfolio and recommend an asset allocation we think is best-suited to help you reach those goals. To learn more, call today to speak with one of our qualified professionals or download one of our educational guides for more investment strategy tips.