Evaluating investment performance

12 June 2017 10:24 am

Choosing investments is just the beginning of your work when investing in the stock market. As time goes by, you’ll need to monitor the performance of these stocks to see how they are working together in your portfolio to help you progress toward your goals. Generally speaking, progress means that your portfolio value is steadily increasing, even though one or more of your stocks may have lost value.

If your investments are not showing any gains or your account value is slipping, you’ll have to determine why and decide on your next move. In addition, because stock markets change all the time, you’ll want to be alert to opportunities to improve your portfolio’s performance, perhaps by diversifying into a different sector of the economy or allocating part of your portfolio to international investments. To free up money to make these new purchases, you may want to sell individual investments that have not performed well, while not abandoning the asset allocation you’ve selected 
as appropriate.

How are my investments doing?
To assess how well your investments are doing, you’ll need to consider several different ways of measuring performance. The measures you choose will depend on the information you’re looking for and the types of investments you own. For example, if you have a stock that you hope to sell in the short term at a profit, you may be most interested in whether its market price is going up, has started to slide or seems to have reached a plateau. On the other hand, if you’re a buy-and-hold investor more concerned about the stock’s value 15 or 20 years in the future, you’re likely to be more interested in whether it has a pattern of earnings growth and seems to be well positioned for future expansion.

In measuring investment performance, you should be sure to avoid comparing apples to oranges. Finding and applying the right evaluation standards for your investments is important. If you don’t, you might end up drawing the wrong conclusions.

Yield
Yield is typically expressed as a percentage. It is a measure of the income an investment pays during a specific period, typically a year, divided by the investment’s price. 
Yields on stocks: For stocks, yield is calculated by dividing the year’s dividend by the stock’s market price. Of course, if a stock doesn’t pay a dividend, it has no yield. But if part of your reason for investing is to achieve a combination of growth and income, you may have deliberately chosen stocks that provided a yield at least as good as the market average. 

However, if you’re buying a stock for its dividend yield, one thing to be aware of is the percentage of earnings that the issuing company is paying to its shareholders. Sometimes stocks with the highest yield have been issued by companies that may be trying to keep up a good face despite financial setbacks. 

Sooner or later, though, if a company doesn’t rebound, it may have to cut the dividend, reducing the yield. The share price may suffer as well. Also remember that the dividends paid out by the company are funds that the company is not using to reinvest in its businesses.

 

Rate of return
Your investment return is all of the money you make or lose on an investment. To find your total return, generally considered the most accurate measure of return, you add the change in value—up or down—from the time you purchased the investment to all of the income you collected from that investment in interest or dividends. To find percent return, you divide the change in value plus income by the amount you invested.

Here’s the formula for that calculation:
(Change in value + Income) ÷ Investment amount = Percent return
That number by itself doesn’t give you the whole picture, though. Since you hold investments for different periods of time, the best way to compare their performance is by looking at their annualized percent return.

If the price of the stock drops during the period you own it and you have a loss instead of a profit, you do the calculation the same way but your return may be negative if income from the investment hasn’t offset the loss in value.

Remember that you don’t have to sell the investment to calculate your return. In fact, figuring return may be one of the factors in deciding whether to keep a stock in your portfolio or trade it in for one that seems likely to provide a stronger performance.

Helpful tips
Whatever type of securities you hold, here are some tips to help you evaluate and monitor investment performance:

• Don’t forget to factor in transaction fees. To be sure your calculation is accurate, it’s important to include the transaction fees you pay when you buy your investments. If you’re calculating return on actual gains or losses after selling the investment, you should also subtract the fees you paid when you sold.
• Review and understand your account statements. In addition to fees, your account statement offers a high-level picture of your account performance from the end point of the previous statement, including the total value of your account.
• Calculate total return. If you reinvest your earnings to buy additional shares, as is often the case with a mutual fund and is always the case with a stock dividend reinvestment plan, calculating total return is more complicated. That’s one reason to use the total return figures that mutual fund companies provide for each of their funds over various time periods, even if the calculation is not exactly the same result you’d find if you did the math yourself. One reason it might differ is that the fund calculates total return on an annual basis. If you made a major purchase in May, just before a major market decline or sold just before a market rally, your result for the year might be less than the fund’s annual total return.
• Factor in inflation. With investments you hold for a long time, inflation may play a big role in calculating your return. Inflation means your money loses value over time. It’s the reason that Rs.10,000 in 2000 could buy a lot more than Rs.10,000 in 2017. The calculation of return that takes inflation into account is called real return. 

As you gain experience as an investor, you can learn a lot by comparing your returns over several years to see when different investments had strong returns and when the returns were weaker. Among other things, year-by-year returns can help you see how your various investments behaved in different market environments. This can also be a factor in what you decide to do next.

However, unless you have an extremely short-term investment strategy or one of your investments is extremely time-sensitive, it’s generally a good idea to make investment decisions with a view to their long-term impact on your portfolio rather than in response to ups and downs in the markets.