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Most brokerage accounts highlight the current return on your investment (average cost-basis of your portfolio is X, now market value is Y, so your return is Z%). But I don't find this single metric very useful if someone wants to invest for the long term. Specially because:

  • It doesn't tell anything about the rate of growth
  • It is very susceptible to day to day market noise

So my question is:

  • What kind of metrics do you look at, while analyzing the health of your stock market investments?
  • The "health" of your portfolio has very little to do with ups and downs in the market. Health should be based on your process -- how you've allocated your assets and how diversified you are. – gaefan Feb 15 '18 at 16:32
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You can find (mostly online) brokers that will give you a long list of risk and return metrics some of which can be rather arcane, but most of those are only really useful for people doing short term investing or that are building rather specialized portfolios. For a long-term investor, generally only four metrics are useful:

  • Current total portfolio size (always good to know how much you have for future planning)
  • A simple measure of portfolio risk. 1 year historical volatility is generally widely available and is really the most useful metric for understanding your portfolio.
  • The fees you are paying both to the broker and any funds you invest in. Your broker may not make this easily to find, but this must be available to you.
  • And finally some measure of historical returns. 1 year, 5 year and lifetime time-weighted returns usually give you a better feel for how you have done in the past. However, some would argue that historical returns can actually mislead more than enlighten so use with caution.

Talk to your broker if you can't find any of these on their website. If not they should at least be available to you by paper yearly.

Return metrics will always be susceptible to noise (one reason they are last on the above list of useful metrics). Honestly, one really good way to avoid the noise is to check your accounts less often. There is a lot of good research that shows that the less retirement investors check their returns of their portfolio the better they tend to do.

Research shows that for long term portfolios the individual investors that tend to do best spend a good amount of time building a solid portfolio (maybe with the help of a professional) and then only really checking on it every few years or when they have major life changes.

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Actually, I think you're wrong on both counts:

It doesn't tell anything about the rate of growth

Sure it does - you just take your periodic rate of return and adjust it to an annual rate of return using the following formula:

Say over 6 months your account has grown 5%, meaning your account is worth 105% of it's original value. Your annual rate of return would assume that you earn another 5% over the next 6 month, so your account will be worth another 105% , os at the end of one year your value will be (1.05 * 1.05) = 1.1025, which means you have a 10.25% annual return.

More generally, you can convert your return R over any time period T (as a number of years) to an annual return r using the formula

r = (1 + R)^(1/T)

It is very susceptible to day to day market noise

No, the day-to-day noise evens out. Sure if you have a good or bad day then it will skew the return a bit for that day, but if your rate of return over the past 6 months is 5%, then your annualized rate of return will be calculated using the same formula above. Over the effect of day-to-day changes will be miniscule.

What kind of metrics do you look at, while analyzing the health of your stock market investments?

I compare it to a benchmark that represents my risk tolerance. For me, since I'm heavy in equities, the S&P 500 is a decent benchmark to compare myself against.

A second measure would be to compare your risk (variability of daily changes) to the same benchmark. That's more complicated since it involves calculating the daily return of your portfolio and the benchmark, but my brokerage site does that for me. If you have a less risky portfolio, you can expect lower returns, and if you want more returns you can go with slightly riskier investments. The worst case is a risky portfolio with below-average returns over the long run.

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