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Tracking Performance of Your Investments

One of the most important things you can do when tracking your investments is to set the right expectations. A percentage return that could be considered strong in one market environment might be considered weak in another. There's no single, unchanging standard—for instance, that all stocks should return a specific percentage each year. Instead, performance standards are moving targets. That's why it's important to judge an investment in the context of your portfolio strategy as well as against the appropriate standard or benchmark. Here are three ways to keep track of your investments.

Read Your Account Statements

Keeping track of your investments is important, but you might wonder how often you should check on them. Your monthly or quarterly statement will generally tell you the current market value of your investments as of the closing date, the change in value since the last statement, and the year-to-date change. You'll also see a record of your transactions for the previous period, including purchases and sales, and information on dividends, bond income, and mutual fund distributions, as well as realized and unrealized capital gains and losses. Some statements also show projected earnings and provide pie charts showing how your portfolio is allocated. It's important to read your statements before you file them away, both because you need to know how you're doing in relation to your goals and because you need to see whether your statement is accurate, with all your trades accounted for and recorded correctly.

Some investors look at their portfolio values daily or weekly, and if you own extremely volatile investments and have a short-term investment strategy, that can be a good idea. However, if your strategy is long-term, it's important not to get overly concerned with short-term fluctuations in value, since trading based on short-term volatility could sidetrack your long-term goals and cost you money in taxes and transaction fees. Instead, you may want to check performance monthly or quarterly on the statements you receive from your investment accounts.

Most likely, your returns will fluctuate throughout the year, reflecting both the fortunes of your particular investments and the ups and downs of the overall market. This is where benchmarks, discussed below, can come in handy, so you can compare the returns in your statement with the returns of other investments. For example, if the market is strong but your portfolio value is flat, that might be a sign for you to look more closely at your individual investments. Yet if your portfolio slumps when markets everywhere are falling, your portfolio may simply be reflecting market conditions.

If you have all of your investments in accounts with a single financial services company, you may get a consolidated statement containing information about all your accounts. However, if you have accounts at several firms, or if you have both tax-deferred and taxable accounts, you may need to look at several different statements to get a complete picture of your total portfolio performance. In addition to sending you regular statements, many brokerage houses give you 24-hour access to your account information online, so you can look up the latest values for your holdings any time you like. In addition, you may be able to access your account information by phone.

Use Benchmarks to See How Your Investments Measure Up

Generally, when people refer to the stock market's performance, they're actually referring to the performance of an index or average that tracks representative stocks or bonds. The index serves as an indicator of the overall direction of the market as a whole, or of particular market segments. Investors use these indexes and averages as benchmarks, to see how particular investments or combinations of investments measure up.

Some of the more frequently cited indexes and averages include:

  • Dow Jones Industrial Average. The most widely cited measure of the market, the DJIA tracks the performance of 30 stocks of large, well-known companies.
  • S&P 500 Index. Standard and Poor's index tracks 500 stocks of large-company U.S. companies and is the basis for several index mutual funds and exchange-traded funds.
  • Russell 2000. This index tracks 2,000 small-company stocks and serves as the benchmark for that component of the overall market.
  • Dow Jones Wilshire 5000. Tracking over 5,000 stocks, the Wilshire covers all the companies listed on the major stock markets, including companies of all sizes across all industries.
  • Lipper Fund Indexes. Lipper calculates several indexes tracking different categories of mutual funds, such as Growth, Core, or Value funds
  • Barclays Capital Aggregate Bond Index (formerly Lehman Brothers Aggregate Bond Index). This is a composite index that combines several bond indexes to give a picture of the entire bond market.

Though the terms "index" and "average" are sometimes used interchangeably, they're actually quite different because of the way they're calculated. Averages add up all the prices of the investments included in their roster and divide by the number of investments. Indexes, on the other hand, set a base starting value for their holdings at some point and then calculate percentage changes from that base. The best-known market measurement, the Dow Jones Industrial Average, is called an average but it's actually calculated using a blend of the two approaches. You should know that not all benchmarks are indexes or averages. For example, the standard benchmark for long-term bond yields is the yield of the 30-year U.S. Treasury bond.

Which benchmark should you use?

In general, if you want to know how an investment is performing you look at the benchmark that tracks investments that are most like it. It's important to know what you're comparing your investment against and what the comparison means. For example, when you compare a stock's performance to the performance of the S&P 500, you're comparing it to U.S. large-company stocks. When you compare it to the Russell 2000, you're comparing it to small-company stocks. When you compare it to the Dow Jones Wilshire 5000, you're viewing it against the field of all listed U.S. stocks.

It makes sense to compare the performance of a large-company stock or large-company mutual fund to large-company stock indexes, and small-company stocks or funds to small-company stock indexes. If you're concerned with how your stock is faring against others in its industry, you compare it against an industry benchmark.

There are, however, valid reasons for making cross-category comparisons when evaluating the performance of your entire portfolio as opposed to a single investment. For instance, you may be curious about whether your portfolio of stocks is doing as well as a mutual fund that has an investment objective similar to yours. Or, you may be considering changing your strategy by shifting some of your money to a different subclass of investment. In that case, you could compare the returns for your current portfolio to the benchmark for the class of investments you're considering.

You should always keep in mind that you can't count on the market to behave the same way in the future as it has in the past. These comparisons, while a helpful way to evaluate your investment options, should not be considered predictors of future performance.

An important rule to keep in mind when measuring investment performance against benchmarks is to examine returns over longer periods of time—ideally, several years versus one year or one quarter. Short-term results can be misleading because a particular company or fund may have a banner year or suffer a slump in comparison to its benchmark. But these results may be due to one-time events, which may be unusual and not a fair representation of the investment's performance over time. Benchmarking against an atypical quarter could give you a skewed view of actual performance of a particular investment.

Do Your Homework

Another way to evaluate your investments' ongoing performance is through your own due diligence. This can include reading recommendations of professional research analysts in research reports, consulting public reports and records regarding your holdings, and paying attention to what’s in the media.

  • Research Reports: Analysts at brokerage firms and at independent research firms look not only at current performance, but also at future potential to give you a picture of an investment's strengths and weaknesses in the context of the wider market. Analysts also recommend actions based on performance. The actual language analysts use may vary, but in general, they recommend that you buy, hold, or sell an investment. Whether you actually buy or sell based on an analyst's recommendation is up to you. Among other things, you should decide whether buying or selling a particular investment is in line with your individual investing strategy. You should always look at analyst research in the context of your own goals and your own expectations for performance.

    Furthermore, analysts don't always agree with each other. As a general rule, they also tend to give more positive than negative recommendations. If you're using professional research, it may be a good idea to read the recommendations of several analysts to help you determine how an investment is performing and whether you should make any changes to your portfolio.

    With bonds, analysts don't give buy, hold, and sell ratings. Instead, they provide credit ratings, which measure an issuer's financial ability to meet its debt obligations. If you've bought highly rated bonds, called investment-grade bonds, you'll rarely find the issuer's credit rating changing dramatically enough to affect your investment's return. However, unless you've bought U.S. Treasury debt, a lowered credit rating is always a possibility.
  • Publicly Available Reports: To keep current with your investments, you should also look at the reports issued by companies relating to their financial situation and future prospects. For example, companies that issue public stock must provide shareholders with annual reports, and they must also file annual reports with audited financial statements, known as 10-Ks, with the Securities and Exchange Commission (SEC), which you can find online using the SEC's EDGAR database.

    Companies also file quarterly reports with the SEC. You can use these reports to evaluate corporate performance in more depth than you can manage by simply checking prices and yields online. You might also want to keep in mind that the annual report that companies send to shareholders, while easier to read than the 10-K, is usually designed to emphasize the positive aspects. The 10-K is plainer and more direct, and may provide insights you may overlook in an annual report.

    Mutual funds also provide semi-annual and annual reports to help you track the fund's progress. The reports give you information about returns and fees, plus a list of the fund's holdings, so you can check the underlying investments that the portfolio manager has chosen. By comparing these reports over time, you can see how the fund's holdings have changed. You should also compare the fund's results to the appropriate benchmark, to see how it fares next to its peers. Most mutual fund reports provide this information, often in the form of a comparison chart.
  • Financial Media: In addition, it's very easy to set up online news trackers that will email you stories on the companies, funds, industries, and markets that you're interested in. This way, you can be on the lookout for news that might have an impact on your investments, and provide you time to analyze the situation and decide what changes, if any, to make to your portfolio.