How to measure investment performance

How, when and why to measure the performance of your portfolio

A case can be made for not obsessing over your retirement savings as long as you make regular contributions from every paycheck and are invested in a diversified mix of stocks and bonds for the long term. But at least once a year, it’s a good idea to check how your investments are doing.

Paying attention to investment performance can help you make informed decisions about where to invest. Most retirement plans offer a broad selection of mutual funds to choose from. You might even own individual stocks and bonds, which can be measured against other companies and overall market trends.

Read on to learn the basics of investment performance measurement.

Measuring stock performance

Professional investors use a range of measures to evaluate stocks. A key factor is price-to-earnings ratio (P/E), a measure of a company’s stock price compared to its profits. A high P/E compared to similar companies could indicate the stock is overvalued.

When measuring stock mutual funds, investors compare the performance of funds to benchmarks of similar stock groups. For example, a fund that invests in large companies could be benchmarked against the S&P 500® Index, which tracks the performance of 500 of the largest companies in the U.S.

But comparisons must also factor in risk. A high-risk investment can be expected to earn (or lose) more than a safe-and-steady bet. Time is also a factor: Long-term investors want to know how a stock or fund has performed over five or 10 years, not the past few months. Online tools can help compare apples to apples. For example, Morningstar rates similar funds by taking risk factors and fees into account.

Measuring bond performance

Bonds pay interest (called a coupon), a key measure of their value. But the coupon rate alone doesn’t tell you everything. A second important measure, yield, takes into account the current market price of the bond and measures it against the coupon rate.

Moreover, the market value of a bond fluctuates with overall market interest rates — a factor called duration, which is measured in years. Duration can tell you how much a bond’s price will increase or drop as interest rates change over time. For example, a bond that’s expected to lose 5% of its value if interest rates rise by 1% is said to have a duration of five.

Yet another bond measure is credit risk: If a bond issuer defaults, you lose your money. A bond could be very safe, like those issued by the U.S. Treasury, or very risky, like those issued by startup companies with lots of debt.

Bond funds are typically measured by the weighted average duration of all the bonds in the portfolio. As with stock funds, other measures of bond funds include fees and historical returns — how much money the fund has generated over time, compared to similar funds. And, as with stock funds, you can measure bond fund performance against benchmarks, such as the Bloomberg Aggregate Bond index.

Understanding your account statement

Regular statements from your brokerage or 401(k) provider can give you insights into recent performance. Pay attention to the account summary, a high-level snapshot of your investment performance since the last statement. Then look at the account activity, which offers a more detailed picture of trades that were made as well as money inflows and outflows.

Remember that performance is relative. A drop in value may reflect overall market performance and doesn’t necessarily mean your investments are laggards.

If you decide to make changes — perhaps to revise your diversification or risk strategies — the above performance measures can help you shop around. Be aware that experts use sophisticated formulas to judge performance. If you’re not comfortable researching investments online, consider investing in a professionally managed account or working with a financial professional.

RO2210182-0822