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How to Assess Investment Performance More Accurately


It goes without saying that in today’s society, everyone should invest. Cash savings are a decent starting point for building a quality safety net for retirement. However, the interest rates they provide dictate that they are not super appropriate for reaching long-term financial stability. That is so since they are unlikely to maintain the pace of inflation, reducing one’s buying power in the long haul. Hence, why investing is so essential. It gives money a chance to work harder for its owner, especially when funds get put towards the stock market, supplying a chance for everyone to multiply their original outlay many times over, with compound interest being an investor’s best friend.

That said, the investment process involves gauging its progress periodically, super necessary for hitting long-term goals. Investors must always be wise to the well-being of their portfolios. And they acquire this info via implementing tried-and-tested metrics, using technology and benchmarks, and avoiding the common pitfalls of this practice. These things and a few other essential ones get explained in detail below.

Understanding Investment Performance Metrics

Before an investor attempts to get into measuring trading performance, naturally, he must know the essential tools of the trade. In truth, multiple metrics exist that properly assist in finding out the health of a portfolio. But likely, the most popular ones are the Sharpe and Sortino ratios, the R-Squared, the Beta, the compound annual growth rate, the return-on-investment percentage, and the standard deviation.

Aside from selecting an appropriate metric, investors also must pick a proper monitoring frequency. Various debates regarding this topic exist, with most suggesting checking investment status every three months, as this is the rate at which earnings get reported (quarterly).

For newbies to the financial sphere, briefly, we will run down the cited metrics in this subheading. The ROI, or return on investment, is an approximate measure of profitability. It usually gets calculated by subtracting the original investment cost from its final value, then dividing the novel figure by the investment’s expense and multiplying by one hundred. The compound annual growth rate or CAGR represents the rise in the value of a security over a specific period, often longer than a year. The beta coefficient quantifies market volatility, while the R-squared correlates the portfolio to the benchmark’s returns.

The Sharpe ratio divides the excess returns to assess risk-adjusted performance by a measure of its volatility. The Sortino does the identical task (determines a portfolio’s risk-adjusted returns), but it does this using downside risk relative to an investment target. It is analogous to the Sharpe ratio.

Identifying Factors That Impact Investment Performance

Every investment decision must factor in multiple elements for success. Of course, a myriad of things goes into affecting investment decisions. These include market conditions, strategy, risk tolerance, taxes/fees, and more, which get touched upon here.

First, it must be said that investments usually get financed out of borrowing or current savings. So, interest rates influence them strongly. High ones make borrowing more expensive, but they also supply a better rate of return from keeping money in the bank.

Availability of finance also comes into play in investing. It gets required in periods when dramatic rebalancing gets needed. Note that variable and high inflation tends to create more confusion/uncertainty impacting investing performance, with regions that experience extended periods of stable/low inflation often showing higher investment rates, on average. That should get analyzed, with investors viewing inflation predictions for the coming months/years before pouring money into a distinct security that can get affected by it.

The influences of political stability, the industrial/economic situation in a territory, market trends, income per capita, and infrastructure, which can directly get linked to economic growth, should not get underrated, as they are all super influential and can have a dramatic impact. The same goes for technological development (the productivity of capital) and market confidence/expectations.

Everything listed above has a part to play in how investments shape up. And each shapes the process differently at distinct points, depending on various aspects occurring within a set timeframe.

Evaluating Investment Performance Against Benchmarks

What is a benchmark in investing? In essence, it is the same thing as in any field, nothing more than a point of reference. Investors and analysts use benchmarks in investing in appraising the potential return of a portfolio and better grasp how their moves/traders are doing vis-à-vis other market segments. Traditionally investors lean on the broad market and market-segment stock indexes to accomplish this. These are the Russel 2000, the S&P 500, and the Barclays US Aggregate Bond Index. In short, an index tracks the performance of a distinct group of securities, most often grouped by industry. These get widely reported on by most high-end media outlets and brokerages.

Depending on the incorporated tactic, an investor’s implemented benchmark will differ. The Dow Jones Industrial Average and the S&P 500, created by Standard & Poor’s, are terrific indexes for gauging the US stock market’s performance as a whole and for those who wish to invest in stocks like those from tech entities like Google (Alphabet) and Microsoft, of global brands like Procter & Gamble and Boeing. On the other hand, commodity indexes measure to discover the effectiveness of a basket of commodities. An example of such a benchmark is the BCOM or Bloomberg Commodity Index, which gauges twenty-one commodities in five sectors, agriculture, industrial metals, precious metals, energy, and livestock.

Logically, when someone is trying to assess their portfolio’s state, they must do so by comparing its results against a benchmark that represents the sector where it belongs.

Avoiding Common Pitfalls in Assessing Investment Performance

A copious number of stumbling blocks can exist when one attempts to see how their trades are performing. One of the primary reasons investors often do not get an accurate picture of the shape of their portfolios’ is that they had no clear investment goals when they began their trading journey. Thus, they cannot evaluate where they are and what they should expect in the long term if current market trends persist. Also, it is essential that everyone knows how to look past near-term chatter and understand how each investing-affecting factor can drive long-haul performance.

Like with most things in life, investments go through peaks and valleys, and it is the job of investors to know this, not put too much emphasis on it, but not overlook it when things appear to be going overly south.

Other frequent mistakes in this wealth-accumulating undertaking are not reviewing one’s investment regularly, not performing adequate due diligence, letting emotions guide the way, not paying enough attention to taxes and fees, chasing yield, and reacting too much to news stories.

No one can control everything. Therefore, acceptance that securities and the market can occasionally go out of whack is something to keep in mind. Though, neglect to take proper action to shape an investing adventure through sufficiently assessing risk, focusing on the overall performance of a portfolio instead of individual investments, trading too often, and failing to diversify enough can have dramatic effects on one’s trading efficiency.

Using Technology to Assess Investment Performance

In the pre-2000 era, investment performance tracking tools were something exclusive to premium financial firms. They were not commercially available products on hand for purchase by everyday casual investors. In the 2000s, nonetheless, that began to change thanks to increasing internet penetration. And when the smartphone started to take hold of the world, various companies sought to bring securities trading to the masses. That is reaching a fever pitch now via the emergence of countless investments and saving apps like Acorns and Robinhood. While these also have securities tracking instruments build-in, many veteran investors and super financially-savvy people like to use software specifically designed for these purposes. Established choices are StockMarketEye, Seeking Alpha, Kubera, Sharesight, and the Motley Fool Stock Advisor.

The benefits of this dedicated software lie in its robust features that help users build reliable retirement plans, organize their investments in mini-portfolios, create Stock watchlists, boast super varied charting options, and more. They even let investors import spreadsheet data from brokerages, allowing them to get up and running with these tools in minutes. And by utilizing their built-in functions, they can speedily analyze gains and losses, compare investment performance to benchmarks, and get alerts for various market occurrences.

It is paramount to note that the mentioned tracking products in this subheading receive Real-time data available from the most used exchanges globally. And they can get utilized for also tracking fiat and digital currencies. On top of all this, they also employ over a dozen technical indicators and charting styles that facilitate a clear picture view for all users regarding the health of their portfolios and when they should buy or sell.

Needless to say, they come with monthly/annual price tags that may seem somewhat sizable for the common folk. But, anyone serious about putting their funds to work would be foolish to avoid their use, as they serve the role of multiple analysts on standby, ready to provide invaluable information about held and up-for-grabs securities at a drop of a dime.

To Sum Up

As a rule of thumb, the steps in assessing investment performance the right way begins with picking the right metrics. The most renowned picks are the Sortino and Sharpe ratios, the beta, and the R-Squared. Then comes evaluating the factors that could produce an inaccurate forecast concerning held securities or a false analysis of their current standing. That can happen when not accounting for fees and taxes, market conditions, geo-political stability, etc.

It is also vital to use a suitable benchmark as a comparing standard to view where a portfolio’s strength is. Plus, what are its prospects going forward? For most stock investors, the S&P 500 does this task quite well.

It would be irresponsible to close out this article without informing readers that it is paramount that everyone uses whatever help that technology can provide in the investment process to make as educated guesses as possible. And, it bears repeating that investors should have expectations that markets are cyclical, no security can have a continuous upwards trend, and never let their emotions guide their decision. Allowing feelings to cause unthought-out reactive moves can be super detrimental and have long-term negative effects.

So, stick to empirical data supplied by top-shelf software and guidance by famous financial experts. Yet, be aware that even with these, as with virtually anything. There is no certainty in investing.

Additional Resources

–        Investment Performance Measurement – Bruce J. Feibel, 2003

–        Commodities: Markets, Performance, and Strategies – Harold Kent Baker, Greg Filbeck, Jeffrey H. Harris, 2018

–        The Five Rules for Successful Stock Investing – Pat Dorsey, 2004

–        Performance Measurement for Alternative Investments – Timothy Peterson, 2015





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