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How To Evaluate Your Investment Performance

How do you know if your investment portfolio is performing well? What standards are you supposed to compare yourself to? Is there even a standard?

Investment science relies on historical data much like medicine to make decisions and predict outcomes. As a patient if you have minimal exposure to smoking, alcohol, unhealthy foods, a sedentary lifestyle, and don’t have too bad of a family history then you likely will fare well clinically and achieve the upper limit of age expectancy.

Financially, if you invest conservatively in broad index funds, steadily increase your savings rate until retirement, avoid excess cash holdings, and avoid major financial mistakes then you likely will see an average annual growth of 6% in your net worth.


The Historic Standard

As a healthcare professional you may be a prolific saver and a high earner. This will allow you to amass a lot of savings.

What you do with these savings is important. Just because you have $500k in your account doesn’t mean you did well. We’re told to not compare ourselves to others but that’s not the case when it comes to investing. The value of your savings is related to how others behave and perform fiscally.

For sure you’re fucked if your portfolio performance isn’t at least 2% above inflation – that’s been the sort of minimum. Well, assuming you have been regularly investing. I’ll address investment behavior later in this post because I have hopped in and out of so many investments in the past that I never really had enough time to profit from the markets.

Of important note is that public investments as a whole spend more time in the positive territory than negative.

The broad US securities markets have returned somewhere in the 8-9% range on average annually for the past few decades. It doesn’t mean that you have to hit 8% every year. You might be more comfortable with a little more bond or cash exposure which historically brings down that return.


How To Calculate Your Rate Of Return

I keep meticulous records and it would still be a pain in the ass to hand-calculate my average annual rate of return for the past 5 years. I have made way too many account changes, withdrawals and deposits.

But what I can do is calculate my YTD (year-to-date) rate of return in order to evaluate my investment performance.

Read this post about why savings rate is still more important than your rate of return.

I can then take that rate of return and compare it to a similar investment portfolio’s historic performance.

For example, if my investments are up by 10% this year according to my Personal Capital account aggregate then I can compare that to a similar asset allocation of bonds/stocks/REITs.

If I have investment properties then I can look up and see how well properties have appreciated in value or in rental income returns in my market.

All my brokerage accounts now show me my cost basis and even my personal performance. This includes my total amount invested and my total returns. From these values I can easily calculate my personal rate of return.

Even easier, you can click on a link often labeled personal performance and it will give you an exact percentage of your personal rate of return. The below screenshot shows my rate of return since I opened this particular brokerage account.

I can even get more granular and select each individual investment group and see how they performed. For example, my REITs have returned 4.9% since inception.

Your Ideal Rate Of Return

Your ideal rate of return will be what you should compare your portfolio to every year. It’s based on your risk level, asset allocation, and your investment behavior.

If you have an asset allocation of 80/20 (80% equities, 20% bonds) then you can compare a similar portfolio to yours and see how you did.

If you have multiple withdrawals, loans against your 401k, and long periods of not investing in your account then you are going to underperform that ideal portfolio performance. This constitutes the investor behavior.

You need to find a portfolio comparable to yours. This can get complicated if you invest in individual stocks but easier if you are in index funds where you just have to figure out how well an index did.

I find that a financial adviser is great for this task. Your part would be curbing your investor behavior.


Investor Behavior

Common pitfalls in investing are letting your emotions dictate your investing strategy. Spending some time concocting and writing down your investment strategy will prevent this for the most part.

Exposing your portfolio to too much risk will make you pull out of the market when shit hits the fan. On the other end of the spectrum, you could park your money in a bad real estate market or position yourself in only cash which would expose you to excess inflation risk.

Restructuring your wealth is a good thing, but constantly flipping between investments will wipe out any of your potential gains. That’s because you’ll have to account for taxes and fees.


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