Evaluating Your Investment Performance

Introduction

Evaluating your investment performance is the process of reviewing how well your investments are doing relative to your goals and expectations. It involves taking into account factors such as market conditions, investment fees, and changes in your personal circumstances that may have an impact on your investment decisions.

There are several important factors to consider when evaluating your investment performance, and it is important to understand them in order to make sound decisions and maximize your chances of achieving your investment objectives.

Definition of Evaluating Investment Performance

Evaluating investment performance is typically the process of measuring your investments against predetermined goals and criteria. It helps you to answer questions such as “am I meeting my financial goals?”, “am I taking too much risk?”, or “am I maximizing my returns?”. It essentially involves looking at your current holdings, reviewing your objectives and expectations, and evaluating whether or not you are on track.

Importance of Evaluating Investment Performance

• Evaluating your investment performance allows you to make better decisions, as it allows you to understand where your investments are positioned relative to your goals and expectations.
• It helps you to identify investments that are performing well, as well as those that may be under-performing relative to your goals.
• It helps you to be more mindful of market risks and other factors that could potentially have an impact on your investments.
• It allows you to adjust your investment strategy and make changes if necessary.

Categories of Investment Performance

Investment performance is an important factor when determining if an investment strategy or decision was successful or not. Investors should consider all aspects of performance, as different categories play a part in the overall metric. Three main categories of investment performance are financial performance, participant performance, and advisor/manager performance.

Financial Performance

Financial performance is the most basic measurement of performance and includes things such as return on investment (ROI), capital gains, appreciation, etc. It is important to understand the specifics of each financial metric when evaluating performance. For example, capital gains and appreciation don’t tell the entire story as they may not be related to the overall strategy and timing of an investment decision.

Participant Performance

Participant performance is a measurement of the individuals involved in the investment endeavor. How well the participants understand the risk, strategy, and decisions is an important fact. Investors should look for participants who are knowledgeable about the decisions being made and can understand the risks involved in order to make the best decisions.

Advisor/ Manager Performance

Advisor/ manager performance refers to how well the advisor or manager performs in the investment process. This can include things such as how knowledgeable the advisor is on investments and how efficiently they manage assets. Investors should look for an advisor who is experienced, knowledgeable, and able to manage investments efficiently.

Setting Performance Standards

When evaluating your investment performance, it is important to establish criteria to measure subsequent progress against. This includes setting key factors such as risk tolerance, target goals, and time frames.

Risk Tolerance

Investors must determine how much risk they are willing to acccept in order to reach their desired outcome. As everyone's situation and appetite for risk varies, easy-to-understand descriptors such as 'conservative,' 'moderate,' and 'aggressive' may help determine the best strategy.

Target Goals

When setting performance standards, it is crucial to establish an attainable goal. What do you hope to achieve from your investments? Are you seeking a larger return but willing to accept more risk or a more conservative approach with a lower rate of return? Knowing the answer to these questions will help set realistic expectations.

Timeframe

Investment performance should also be evaluated within a specified timeframe. This will ensure that goals remain when the market fluctuates and allow investors to adjust their strategy if necessary. Short-term goals might look to capitalize on daily movements in the market, while longer-term goals may focus on retirement and related financial forms.

Investment Performance Criteria

When evaluating the success of an investment, investors should consider whether their returns are superior, substandard, or somewhere in between relative to the types of investments they are benchmarking them against. This will allow them to assess the overall performance of their portfolio and make any adjustments that might be necessary.

Superior and Substandard Investment Performance

Superior investment performance is generally defined as returns that exceed the applicable benchmarks. Substandard performance is generally defined as returns that are below the applicable benchmarks. When assessing whether performance is superior or substandard, investors should look at both absolute returns (in terms of dollars and cents) and relative returns (in terms of percentage gains).

Benchmarking against the Appropriate Investments

It is vital to benchmark performance against the appropriate types of investments. For example, an investor who has invested in stocks should not compare their returns to those of bonds. Likewise, an investor who has invested in short-term bonds should not compare their returns to those of long-term bonds. When performing comparative analysis, investors should use benchmarks that are similar to the type of investments they are evaluating.

One way of assessing investment performance is to compare an investor's total return (after taxes and fees) to an appropriate benchmark. This can provide insight into whether the investor is utilizing their capital effectively and achieving their desired level of returns. It can also provide context for making investment decisions in the future.

Systematic vs. Discretionary Investment Performance

Investors should pay close attention to their investment performance and depending on their strategies, they may want to evaluate their investments systematically or discretionary. In order to ensure that investors get the most out of their investments, they should understand the differences between systematic and discretionary evaluations of performance and how they can be used to create a successful portfolio.

Systematic Evaluation of Performance

Systematic evaluation of performance is a quantitative approach to investing that is focused on historical performance patterns and trends. Systematic evaluation of performance involves analyzing factors such as stock price, volume, and momentum to determine the best securities. Investors using a systematic evaluation of performance often rely on technical analysis, which involves using a set of indicators and patterns to forecast potential changes in the market. This method is often based on models that are designed to cut through the noise of day-to-day market fluctuations and focus on the underlying trends that may be affecting the performance of a particular security. Systematic evaluation of performance can be used by investors to generate successful portfolios and make informed decisions, however, it is important to remember that past performance does not guarantee future results.

Discretionary Evaluation of Performance

Discretionary evaluation of performance is a qualitative approach to investing that is focused on looking at the underlying fundamentals of a security and determining its potential value. This method of investing involves researching a security and determining its intrinsic value, as well as understanding the underlying industry and any political or socio-economic factors that may be affecting the value of the security. This method is often seen as a combination of fundamental analysis and market timing, and investors using a discretionary approach will often make decisions based on their gut instincts and personal experience. Discretionary evaluation of performance can be useful for investors who are seeking to make informed decisions, however, it should be noted that this method requires a great deal of skill, knowledge, and experience to be successful.

Investors should pay attention to their investment performance regardless of their strategies and evaluate their investments using a combination of systematic and discretionary methods. Systematic evaluation of performance can help identify potential opportunities, while discretionary evaluation of performance can help confirm whether a security is a good fit for a portfolio. By paying close attention to both methods of evaluation, investors can ensure they are making informed decisions that will help them build a successful portfolio.

Assessing Returns

One of the most important areas in evaluating investment performance is assessing your return on investment. This means that you need to understand not only the amount of gains or losses, but also how the performance has changed over time.

Graphs and Charts for Assessment

In order to effectively assess your investment performance, you should use high quality graphs and charts. Creating clear visuals will make it easier to compare your performance over different time frames, and also against benchmarks. For instance, a graph may reveal peaks and troughs in performance, or more gradual changes during a certain period.

Investigating Factors that Led to Change in Returns

Once you have assessed your return on investment, it is important to investigate the factors that led to changes in returns. This may involve looking into factors such as the macroeconomic environment, political or regulatory changes, or it may involve looking into changes in performance within your own portfolio. For example, if a specific stock has underperformed, it may be necessary to investigate whether this was due to an external factor or an internal issue.

To accurately assess your investment performance, it is important to monitor and assess returns over time. To do this effectively, you need to be able to track your performance with clear visuals, and also investigate any changes to try and find insights into what has caused them.

Conclusion

Maintaining a focused portfolio and regularly assessing your investment performance can have tremendous value. Whether you have a portfolio of individual stocks or a diversified portfolio of mutual funds and indexed funds, evaluating your investment performance is essential for the success of the portfolio.

Having a strategy to evaluate your investments is critical due to the quick-changing nature of the market. Periodically checking the performance can help you to build a portfolio based on both short-term and long-term goals. A regular review of your portfolio will also help you to balance your investments and determine whether your portfolio has become too risky.

It's important to focus on your overall investment goals and regularly review your portfolio to ensure that you are on track. Evaluating your investments and assessing their performance will help you to make more informed decisions and potentially increase your returns.

Summary of Evaluating Investment Performance

Evaluating your investment performance is essential for building and managing a successful portfolio. Monitoring your portfolio performance allows you to constantly evolve your strategies and shift your investments in response to market changes. It also helps you manage your risks and stay on track towards achieving your overall investment goals.

Value in Assessing Investment Performance

By assessing your investments, you can identify and address any issues, such as a lack of diversification or an overweight position in one sector. Additionally, it helps you to improve your decision-making processes and spot potential problems before they become too costly.

• Analyzing the performance of your investments allows you to adjust your portfolio in response to market changes.
• Tracking your performance allows you to monitor and reduce risks.
• Evaluating your investments helps you identify and address any issues with your portfolio.
• Regularly assessing your investments helps you to make more informed decisions.