In: Categories » Legal and finance » Investing » Measuring Investment Performance ~ Keeping the Winners and Selling the Losers
|
Measuring portfolio performance is often difficult. For example, suppose that you invest $2,000 in a mutual fund that returns 15 percent in the first quarter of the year. In each of the next three quarters, you invest $2,000, but the fund doesn’t provide any returns during those months. Your return on the first $2,000 is 15 percent. Your return on $6,000 for following nine months is zero. The fund reports an annual gain of 15 percent, not counting dividends and gains distributions. However, these percentages don’t mean that you should measure performance on a short-term basis. Market prices vary and returns fluctuate for many reasons. What really counts is the true rate of return, which can’t be measured from quarter to quarter. Another problem in measuring portfolio performance is risk. Risk is defined as the variability of returns. In other words, the more the returns vary, the greater the risk. One of the disadvantages of using standard deviation (a mea surement of the variability of historical returns around the average return) is that it considers good variability. Good variability means that returns are exceeding expectations — an event that increases the stock’s volatility and standard deviation. The stock is now considered more risky because returns are higher than expected. What this shows is that standard deviation isn’t always a good way to judge risk. In other words, standard deviation is just a measurement of volatility. Risk enters the picture only if volatility is below the investor’s return target. You have many ways to measure the performance of your portfolio. One way to measure performance is to use benchmarks — that is, compare the perfor mance of your various investments with top performances and indices. For example, you can rank them by P/E ratio: Divide your stocks into capitalization groups (small-cap, mid-cap, and large-cap) and rank each group by P/E ratio. Compare your investments with top-performing stocks in each capitalization group daily and weekly. (For more information about capitalization groups, see Article 7.) Yield: Divide your fixed-income investments (bonds and Treasury secu rities) by quality rating and then rank each group by yield. Compare your investments with the top-performing bonds in each asset allocation class.
|
legal disclaimer
1) Our website is not responsible for the information contained by this article as well for any and all copyright infringements by authors and writers. E-articles is a free information resource. If you suspect this article for any copyright infringements, please read the Terms of service and contact us to investigate the problem.
2) The E-articles directory team is not responsible for inaccuracies, falsehoods, or any other types of misinformation this tutorial may contain and will not be liable for any loss or damage suffered by a user through the user's reliance on the information gained here. Please read the Terms of service
Useful tools and features
If you like this article (tutorial), please link to it from your web page using the information above. Linking to this page, this is the only way to help us improve our service, the same time providing your visitors with a way to improve their online experience.
related articles
In addition to bonds, banks and savings and loan associations have developed new ways of keeping customer assets in their financial institutions. They often offer a variety of investment plans that provide higher returns than traditional fixed-rate savings accounts. For example, many savings and loan associations allow their customers to invest in commercial paper (uninsured promissory notes to large business entities) instead of certificates of deposit (an insured type of time deposit)....
2. Using Free and Fee Based Online Investor Databases
Online investors have their choice of searching free or fee-based online databases. One advantage of both types of databases is that they’re constantly open. That is, you can access them 24 hours a day, 7 days a week. It’s a no-brainer that savvy online investors should start with the free databases. If the information you desire isn’t available in the free databases, try fee-based databases. If you carefully select a fee-based database for your well-constructed query, you can often get the informat...
3. Using the Internet to Make Financial Planning Easier
Many people find it difficult to shake off the notion that if they’re not wealthy, they don’t need to do any financial planning. Stock market volatility, inflation, changing interest rates, unemployment, illness, and hard times are part of life. To do no financial planning or to let others (your spouse, employer, broker, or financial advisor) do all your planning is to flirt with disaster. Remember that no one cares more about your financial well-being than you do. The Internet makes financial planning eas...
4. Maximizing Your Investments with Tax Deferred Accounts
An individual retirement account (IRA) is one of the best ways you can accumulate something to invest because making contributions and earnings is often tax-free. An IRA must be established with a financial institution that has received Internal Revenue Service (IRS) approval to offer IRAs. These financial institutions include banks, brokerages, federally insured credit unions, and savings and loan associations. IRA accounts can be established at any time. Contributions must be made by the IRA owner’s tax-filin...
Every online investor has his or her own research system for investigating investment candidates. What makes any system work is that it’s repeatable, and it ensures that you don’t make investment decisions based on emotional factors. The following guidelines can assist you in turning your hunches into investment strategies. You begin by gathering all the facts: 1. Find the candidates that you want to research. Match your hunches about stocks that are positioned to be top performers to your investor ...
6. Increasing Profits with Simple Order Specification Techniques
Traditional brokers recommend the order specifications for your stock transactions and confirm that your transactions were completed. (An order is a request to buy or sell a specified amount of a certain security or commodity at a specified price or at the market price.) Specifying security execution orders is one of the expert services that brokers use to justify their fees. Order specifications define how your request is completed. One type of order specification is called a day order. Day o...
7. General Criteria when Analyzing a Financial Statement
Companies often use their annual reports to attract new investors; you can guess that these reports contain some marketing fluff and exaggerations. Most of this embellishment is self-evident. Analyzing a company with a calculator, paper, and pencil will take you about an hour, and the results of this examination can help you make sound investment decisions. Buying stock in a company without reading the annual report is like buying a used car without seeing it. Here’s a checklist ...