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Caution: Be Careful How you Evaluate Investment Returns!


How should we gauge the performance of our portfolios? My fear with investors at times is that they "don't know what they don't know".

Investing Money

How should we gauge the performance of our portfolios? My fear with investors at times is that they “don’t know what they don’t know”. This can stem from a lack of education from their advisor or from personal lack of understanding on the make-up of one’s portfolio. I often see many investors (at least in the USA) confuse the American benchmarks of the S&P 500 and Dow to be their benchmark of comparison. This is only ONE (US large cap) of many asset classes that can make up a well-diversified portfolio. I certainly understand where this confusion comes from though, with every paper and financial TV show that we are exposed to having these popular indices amplified under a microscope and far too over analyzed.

When it comes to performance, many factors are in play, a few key of which are:

1. What asset classes are you/should you potentially be in?

A well-diversified portfolio may consist of being in, depending on your risk tolerance and time horizon this may vary from investor to investor: US large cap equities, US mid cap equities, US small cap equities, domestic bonds, international bonds, sector funds (i.e. tech, health care, Natural resources, etc.), European equities, Asian equities, emerging markets, etc.

An interesting graph is included at the bottom of this article. It shows what a well-diversified portfolio’s performance has done relative to the specific returns of the major indices. This is a helpful visual to understand where diversification is more on the end of true investing than gambling.

2. Another factor is how invested your portfolio actually is.

Many portfolios carry some amount of cash for buying opportunities, to cover expenses, fees, etc., which may slightly tilt your portfolio returns (for better or worse) towards 0% since that is what cash is currently yielding

3. Annual performance can be sensitive to timing of buying.

If you are dollar cost averaging or putting money in your portfolio on a monthly basis or periodically throughout the year, your actual performance will not be the same as the reported index performance since you only participated for part of that return. (Again, you could be better or worse than the index, but just another variable in play influencing returns.)

If you are in a truly well-diversified portfolio, you will rarely have the portfolio movement of these benchmarks. You may certainly be higher or lower — but rarely the same, and understandably so, if you understand that a portfolio will be in many different asset classes and is often invested throughout that year (usually not all on Jan. 1) and is subject to fees and expenses.

Dollar Cost Averaging does not assure a profit and does not protect against loss in declining markets. Also, since such a program involves regular investment purchases regardless of fluctuating price levels of the investment, consider your financial ability to continue purchases through periods of low price levels.

Neither diversification nor asset allocation guarantee against loss, they are methods used to manage risk.

Please keep in mind that one cannot invest directly in an index.

Click here for a larger view of the chart, along with index definitions.

Asset Class Returns

$1,000,000 Investment Comparison from 2000 — 2014

Data source: Asset Class Returns (2000 — 2014) chart shown above in this post. Chart source: First Clearing, LLC, 2015. Data assumes reinvestment of all income and dividends and does not account for taxes and transaction costs. Investments will fluctuate and may be worth more or less than originally invested. Past performance is not indicative of future events.

Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated.

Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. This is not a recommendation of any strategy or product in particular. 1149946/DOFU 3-2015

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