Printer Friendly

Benchmarking your portfolio. (Special Advertising Section).

In today's volatile markets, it's more important than ever to monitor your investment performance. Instinct tells you that when your portfolio values are dropping you are suffering from weak results. But it's not as simple as that. In the financial markets, returns should be judged on a relative basis and not on absolute results. This is particularly important when evaluating investment performance in declining markets.

Traditionally, portfolio results were often judged based on how they compared to the Standard & Poors 500 Index. Investment advisors and money managers whose results beat the index were favored and those that failed to best the S&P 500 were replaced with managers that did.

As computers have proliferated, they have allowed much more detailed studies of performance results and how the underlying investments impacted the returns. Research studies have demonstrated that diversification among asset classes reduces volatility and increases total return. One result of this is the recognition of some lesser known indices. Just five years ago only the professionals watched the Nasdaq Composite Index. Now it's quoted along with the Dow Jones Industrial Average. But there are dozens of smaller indices that may be useful when appraising portfolio results.

The financial press quotes the Dow Jones Industrial Average widely. Most of America assesses their market performance based on those numbers. When the Dow goes up, people smile and celebrate. This occurs frequently even though their investment portfolios do not contain a single Dow stock. Thus it's highly possible that even though the Dow had a 100 point upward move, their portfolio could be down.

Many of the lesser known indices may provide a much closer comparison of results. If you want to have the most accurate data on performance, it's important to compare "apples to apples". The industry term for this assessment is benchmarking. This is the process of making a relative comparison of investment returns. In other words, it compares specific portfolio results to an investment index that most closely mirrors the subject portfolio. This index is known as the style benchmark.

A basket of technology stocks might be judged against the Standard and Poors Technology Index while a portfolio of some smaller capitalized value stocks might be compared to the Russell 2000 Value Index. When benchmarking, the issue is whether or riot the account beat the index. Whether the numbers are positive or negative is not relevant to the analysis.

A diversified portfolio will hold assets of various classes. It could contain a mix of small, middle, and upper tier capitalized value and growth stocks. To correctly analyze the results, the percentage of the portfolio allocated to each asset class should be determined and held up against a dollar weighted average of- the closest underlying index.

Once these results have been ascertained, a true relative performance comparison can be calculated. Since performance of any given investment portfolio is to a large extent driven by asset class, this is an important comparison to make before reaching a conclusion on portfolio results. Effectively, this removes the emotion of a falling market from the analysis and will allow you to make a rational determination.
COPYRIGHT 2002 Journal Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2002 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:monitoring investment performance
Author:Williams, Bob
Publication:Arkansas Business
Geographic Code:1USA
Date:Sep 30, 2002
Previous Article:Reasons to consider using hedge funds as a part of your investment strategy. (Special Advertising Section).
Next Article:Fixed income alternatives in a low interest rate environment. (Special Advertising Section).

Related Articles
GFOA'S New Performance Management Initiative.
Investment adviser advertising: for the uninitiated, the SEC's complex rules can have unintended consequences.
Benchmarking: a tool to improve mill performance.
Dow Jones Newswires forms partnership with The Rankings Service.
Corporate liquidity is here to stay--for now.
A custom mix: a growing number of insurers are adding product liability considerations to create a stronger investment management process.
Innovations in managing public funds: benchmarking and total return.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters