How to Measure Your Investments' Performance
Your work has just begun once you have invested your money. You now need to monitor the performance of your investments to assess the progress you are making toward your goals. There are many different measures you can use to evaluate the performance of your investments. The ones you use will depend on the types of investments you own. Following are some of the more common measures for various investment types:
Yield is an income-based measure that shows how much income an investment pays over a specific time period, usually a year. It is calculated by dividing the income it pays by the price of the investment. Yields are earned on bonds, dividend-paying stocks, mutual funds, and some bank accounts. The yield of a bond is the same as its interest or coupon rate, so if you have a $1,000 bond and have earned $50 in interest, the yield is 5%. Bonds that are purchased in the secondary market may have a different yield than the coupon rate because the price to purchase the bond is different than its par value. The yield you earn on a bond purchased in the secondary market is known as the bond’s current yield. There are also more complete measures of bond performance, which include yield-to-maturity and yield-to-first-call. The yield-to-maturity measures the interest rate earned from a bond purchased at market price and held to maturity. Yield-to-first-call evaluates the yield a callable bond would pay if the issuer called the bond on the first possible date. As these are more complex measures, there are many good online calculators to help you determine these yields. A stock has to pay dividends in order to earn a yield and is calculated by dividing the dividend paid for the year by the stock’s market price. You can find the information needed to calculate the yield on your brokerage statement.
Investment return is the total amount of money you make or lose on an investment. To determine the return, add the change in value of the investment from the time you purchased it to the income earned in interest or dividends. Divide that by the amount invested. For example, if you bought 100 shares of stock at $20 per share for a total investment of $2,000 and while you owned it the stock increased to $25 per share, you would have earned $500 in increased value. Let’s say the company also paid $120 in dividends, so you have earned a total of $620 from the investment. To determine the total return, divide the $620 earned by the $2,000 paid for the stock, which is a 31% return, and the annualized return percent would be 9.42%.*
Investors often use various indexes and averages as benchmarks to evaluate the performance of specific investments or for a combination of investments. The index is an indicator of the direction of the entire market or of specific segments. When you select a benchmark, make sure you understand what you are comparing your investment to and what it means. Some of the more well-known indices and averages include:
Dow Jones Industrial Average, which is the most widely cited measure of the market and tracks the performance of 30 stocks of well-known, large companies.
S&P 500 Index is Standard and Poor’s index, which tracks 500 stocks of large U.S. companies and is the measure for several index mutual funds and exchange-traded funds.
Russell 2000 Index tracks 2,000 small company stocks and is the primary benchmark for that portion of the market.
Lipper Fund Indexes track different categories of mutual funds including growth, core, or value funds.
Dow Jones Wilshire 5000 tracks over 5,000 stocks listed on the major stock markets and includes companies of all sizes and across industries.
Barclays Capital Aggregate Bond Index is a composite that uses several bond indexes to provide an overall picture of the bond market.
Other Performance Tips
Here are some other things to consider as you evaluate the performance of your investments:
Transaction fees. To ensure you are getting an accurate measurement of performance, include the transaction fees paid when purchasing the investment.
Review your account statements. Take the time to review your statements, because they will provide both a high-level overview as well as detailed information on your account performance from the end point of your previous statement.
Consider the tax impact on your investments, because you may find that the gains you make in a taxable account are not as good as you thought, which may lead you to find better investments for your taxable account. Calculate your returns on an after-tax basis.
Think about inflation. When you hold investments for a long period of time, inflation can play a large role in your return, which means your money is losing value over time. The calculation that takes inflation into consideration is called a real return. To understand your real return, subtract the rate of inflation from your percentage return. For example, if your investments returned 10% in a given year and inflation increased by 3%, your real return is 7%.
There is much to be learned by reviewing your returns on an annual basis as well as comparing them over several years to understand when your investments showed stronger and weaker results. Also compare your results to various market environments in which they were invested. These reviews can help you decide if you need to adjust your portfolio.
*The above example is hypothetical and for illustrative purposes only. Please note that each person’s situation is different. Please consult your financial or tax professional regarding your circumstances.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.