How Do You Know If Your Portfolio Is Doing Well

Happiness is all about expectations met or unmet.  There have been so many articles written about how to discuss fees with your wealth manager or financial advisor, but very few that talk about the mutual responsibility between the advisor and the client about how to measure performance of your investment portfolio.   This is an important discussion because whether you are managing your money yourself or you turn it over to a professional, the question is do you know how to measure the performance of your portfolio?

In 2008, when the S & P 500 had a -37% return, if your portfolio achieved a return of -35% because you were using the S & P 500 as a benchmark would you have been happy?  Conversely, in 2013 when the S & P 500 had a 32.39% return, would you have been happy if you and your advisor agreed that 6% return was the absolute return that was agreed on with you and your advisor.  Today, the big concern for investors is that without a clear set of guidelines on how you are measuring the performance of your portfolio, it’s easy to utter the words, “we didn’t meet my expectations!”   Here are several ways to measure performance.

The Absolute Approach

With the absolute approach, you are pre-determining the absolute rate of return you want to achieve every year.  In this scenario, you aren’t worried about how well the Dow Jones Industrial Average, the MSCI EAFE, or the Nasdaq are doing.  What you are doing here is simply stating that your goal is to make 5% every year as an example.  When you hold your wealth manager or financial advisor accountable, you aren’t worried about relative measures positive or negative.  Rather, you are leaving it up to them to make the portfolio allocation in such as fashion to consistently hit that number.  You’ll still need to have an agreed upon time frame to measure success. What you have to ask yourself here is if the stock market goes up 30% next year and your portfolio makes 5.1%, do you agree you will be happy given 5% was your stated benchmark?

The Relative or Benchmark

With the relative or benchmark approach, you are pre-determining a benchmark to compare your portfolio against to determine success.  The important part with the benchmarking process is to select the benchmark.  If your portfolio is 50% stock and 50% bond, you wouldn’t want to use the S & P 500 as a benchmark.  However, you also don’t want your financial advisor or wealth manager to come up with some concocted internal benchmark that you have never heard of before such as the “ABC Moderately Conservative Benchmark” where you don’t know how your benchmark was constructed.   Typically, with this strategy you need to give your portfolio a few years to be measured against this benchmark to measure overall success.  If the S & P 500 was the benchmark against your stock portfolio and you had a year where the S & P 500 was -30%, but your portfolio achieved -25% you would be super happy, correct?  In theory, the answer should be yes.  In reality, most people begin to realize that under no circumstances do they want to lose 25% in any given year.

Two 8% Returns Are Not The Same

The last part of this equation is to measure risk.  Most reviews you do on your portfolio are primarily centered around return without regard to asking the question about risk.  If you were measuring two wealth managers or financial advisors and both got 8% return over the past 12 months, would they be equally as good?  No!  The real answer would require you to delve into the numbers to understand more fully who took more risk.   Ask this question in your next meeting.  “What is the highest possible return and the lowest possible return I could earn on this portfolio over the next twelve months?”  This is a simple question which on the surface will give you some clue as to how much risk you are taking.

What’s unfair to yourself or a wealth manager you give the reins to manage your money, is to tell them you want to make 10% without taking any risk. That’s fantasy land.  Make a determination on whether you want to measure success on a relative basis, an absolute basis, and remember even if you stuff the money under your mattress…you are still taking risk.

About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves


My friends and family all think I’m a workaholic, but I say I’m just a guy that loves to help people do better in life.

My mother is still the only one that calls me by my real name Theodore Michael, my wife calls me Teddy, but for the rest of you it is just plain old Ted.

Ever since I was a little kid, I always loved money and being an entrepreneur. In fact, I still have cassette tapes of me talking to my grandmother at the age of five and my mother tells me all the time how much I played with money as a kid...

Read More About Ted Here

Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is 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 regarding your individual situation. 

Background and qualification information is available at FINRA's BrokerCheck website.

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