I started investing a couple years ago when I started working full time. My investments are doing well. I would ideally like to know how well. Of course, I can go see what my performance was in terms of yield. But what I really want to know is "How good is MY yield compared to my peers?"

I know that I have a very knowledgeable financial adviser and I'm wondering if that is why my investments are doing so well, or if it is simply because the markets have been doing well.

How do I tell? Is a simple comparison to the S&P 500 sufficient to answer my question?

up vote 7 down vote accepted

It can be pretty hard to compute the right number. What you need to know for your actual return is called the dollar-weighted return. This is the Internal Rate of Return (IRR) http://en.wikipedia.org/wiki/Internal_rate_of_return computed for your actual cash flows. So if you add $100 per month or whatever, that has to be factored in. If you have a separate account then hopefully your investment manager is computing this. If you just have mutual funds at a brokerage or fund company, computing it may be a bunch of manual labor, unless the brokerage does it for you.

A site like Morningstar will show a couple of return numbers on say an S&P500 index fund. The first is "time weighted" and is just the raw return if you invested all money at time A and took it all out at time B. They also show "investor return" which is the average dollar-weighted return for everyone who invested in the fund; so if people sold the fund during a market crash, that would lower the investor return. This investor return shows actual returns for the average person, which makes it more relevant in one way (these were returns people actually received) but less relevant in another (the return is often lower because people are on average doing dumb stuff, such as selling at market bottoms).

You could compare yourself to the time-weighted return to see how you did vs. if you'd bought and held with a big lump sum. And you can compare yourself to the investor return to see how you did vs. actual irrational people.

.02, it isn't clear that either comparison matters so much; after all, the idea is to make adequate returns to meet your goals with minimum risk of not meeting your goals. You can't spend "beating the market" (or "matching the market" or anything else benchmarked to the market) in retirement, you can only spend cash.

So beating a terrible market return won't make you feel better, and beating a great market return isn't necessary. I think it's bad that many investment books and advisors frame things in terms of a market benchmark. (Market benchmarks have their uses, such as exposing index-hugging active managers that aren't earning their fees, but to me it's easy to get mixed up and think the market benchmark is "the point" - I feel "the point" is to achieve your financial goals.)

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    Fortunately my brokerage is calculating my dollar-weighted return. It is good to be able to put a name to this figure, I didn't know what is was called. – Stainsor May 4 '11 at 15:04

Generally S&P 500 will be used as the benchmark for US investors because it represents how's the US market performs as a whole.

If you've outperformed the S&P 500 during the last couple years, great. However, at the end of day, you would want to look at the total growth percent that your portfolio has achieved, as compared with that of S&P 500.

Anyway, your portfolio might actually ride along with the bull market during the 2009-2010 period (more-so for the small caps).

From an article I wrote a while back:

“Dalbar Inc., a Boston-based financial services research firm, has been measuring the effects of investors’ decisions to buy, sell, and switch into and out of mutual funds since 1984. The key finding always has been that the average investor earns significantly less than the return reported by their funds. (For the 20 years ended Dec. 31, 2006, the average stock fund investor earned a paltry 4.3 average annual compounded return compared to 11.8 percent for the Standard & Poor’s 500 index.)”

It's one thing to look at the indexes. But quite another to understand what other investors are actually getting. The propensity to sell low and buy high is proven by the data Dalbar publishes. And really makes the case to go after the magic S&P - 0.09% gotten from an ETF.

protected by MrChrister Mar 10 '14 at 13:49

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