Sheltering in place? See how we can work with you from the convenience and safety of your own home. LEARN MORE >

How well is your investment actually doing? It's complicated.


We have all heard someone proclaiming what an expert investor they are, usually by describing a return they achieved on some investment they made.  But how does one actually determine whether or not they have made a good investment?  Investment yield assessments are much harder to obtain than most people realize.  Further, once one has an accurate calculation of yield, how do they make an objective assessment of how good the return is that they have actually achieved?   Let me start with the three basic ingredients required for every reliable yield calculation:

  1. First, one must have details for every transaction in the account that is being evaluated.  This means details of all investment purchases and sales, interest and dividends payments received, deposits and withdrawals, as well as the date of every one of these transactions.  This information is required to make sure that deposits and withdrawals are not factored into the yield calculation and provides the ability to time weight all dividend and interest payments that are received between the beginning and ending dates being measured. 
  2. Next, one must calculate a time weighted rate of return using all transactions in "1" above.  The calculation is more difficult than most people realize.  While it is possible to complete this calculation using an Excel spreadsheet, most people probably don't have the spreadsheet skills to make such a calculation accurately.  A professionally developed yield calculator tool is the best way to make sure one is getting accurate results.  This would require entering all the transaction data into that tool to run a time weighted rate of return calculation.
  3.  Finally, once you have an accurate yield calculated, how do you know if that return is good or bad?  Clearly a negative return is bad and a positive return is good.  Right?  Not necessarily.  The explanation will require the remainder of this blog.  The difficulty in measuring results is that they must be compared to a benchmark.  Just imagine - how would you evaluate how good a baseball hitter was if there was no one to whom to compare that hitter's statistics?  Even a hitter connecting with every pitch might not be so good if every hitter is hitting every pitch.  A good hitter is getting hits when all the other hitters are struggling.  So, to measure yields, what benchmark do you use?

Most experts agree that determining investment performance goes beyond simply calculating the investment yield obtained.  It requires the comparison of a correctly calculated yield to other investors trying to invest in a similar set of assets or basket of securities of the same asset class.  More specifically, every investment we make is entirely or predominately in some identifiable asset class.   There are many types of asset classes but we will recognize the more common asset classes such as large cap stocks (commonly referred to as the S&P 500), mid-cap stocks, international developed stocks, emerging market stocks, technology stocks, healthcare stocks, etc.  Every one of these asset classes has a basket of stocks of similar size that the industry has fit into an Index.  So, if I invest in a mutual fund that holds only or predominately large cap U.S. stocks then I can evaluate the performance of that mutual fund by comparing it to an index of stocks in the same asset class (in this case the S&P 500).  If my mutual fund selection (or individual stock selection) out-performed the index then the industry refers to that as creating alpha.  This simply means it outperformed its index, in this case the S&P 500. 

So, what do statistics tell us about how well professional investors create "alpha" (or, outperform their comparative index, e.g., other hitters)?  Fortunately, this is a statistic that is studied quite a bit.  All mutual funds in which  U.S. citizens are allowed to invest through publicly available exchanges, like the New York Stock Exchange or Nasdaq, must be registered with the Securities and Exchange Commission (SEC) and report their yields to the SEC using prescribed uniform formulas.  This then allows proper comparisons between the index and the professionally managed mutual funds.  In actuality, the results for the professionally managed mutual funds are not very good.  Very few outperform their respective indexes (usually significantly less than 10% for 5 plus years) and the longer the time period being evaluated the worse that comparison to the index gets.  This is the case whether you are taking about bond asset sectors, stock asset sectors, international, etc. regardless of whether markets are going up or down. 

Often you will see an investment security that claims to have out-performed its index.  However, one should always be dubious of such claims.  Such claims remind me of a couple that we went to visit when we lived in Manhattan.  Upon our arrival to their condo they claimed to have a (Central) "park view" which is very prestigious in Manhattan.  Shortly after our arrival they proceeded to highlight their "park view" by climbing up on a sill and looking out a window, pointing out a couple of tree tops that could not be seen from anywhere in their condo except from the top of the sill they were standing on.  Well, like that mutual fund claiming to beat the index, nobody looks out the window like that.  By my definition, you don't have a park view and that mutual fund did not beat the index. 

Do you want an honest assessment of how your investments are performing?  With every financial plan we do, if you provide us with the necessary information we can feed that data into our professionally developed yield calculator and provide you with an unbiased assessment of how your investment account(s) actually performed (there will be no climbing up on the ledge).   You might find you did just fine, or you might find that you could have done better.  


About the Author:  Milt Fullen is a CPA and CFP® fee-only fiduciary advisor with more than 30 years of experience in the financial services industry. He is a multi-year winner of Columbus Monthly’s Five Star Wealth Manager Award, and Fullen Financial Group ranks among Columbus Business First’s top fee-only financial planning firms in Central Ohio. We have helped over 200 individuals and families prepare for retirement, and we manage more than $180 million of assets on behalf of our clients. Our team of professional advisors has a wealth of experience and the best credentials in the industry, supported by the latest technology tools and a dedicated client service team.

Contact Milt by email: This email address is being protected from spambots. You need JavaScript enabled to view it.



All expressions of opinion reflect the judgment of the authors on the date of the post and are subject to change. All investments and investment strategies have the potential for profit or loss. · Content should not be viewed as an offer to buy or sell any of the securities mentioned or as personalized financial advice. Legal and tax advice is general in nature. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Fullen Financial Group is not engaged in the practice of law. · Hyperlinks on our posts are provided as a convenience. We cannot be held responsible for information, services or products found on websites linked to ours.