Reading Your Quarterly Performance Reports

If you work with a fee-only financial advisor, you receive portfolio performance reports every three months—a form of transparency that financial professionals introduced at a time when the typical brokerage statement was impossible to decipher.  Taken by itself, however, the information you glean from any one quarterly report is virtually useless unless viewed in a larger context.  It’s very difficult to know if you’re staying abreast of the market, and for most of us, that’s not really the point anyway.


The only way to know if your investments are “beating the market” is to compare their performance to “the market,” which is not easy. You can compare your return to the Dow Jones Industrial Average, but that index represents only 30 stocks, all of them large companies.  Most peoples’ investment portfolios include a much larger variety of assets: U.S. stocks and bonds, foreign stocks and bonds, both including stocks of large companies (large cap), companies that are medium-sized (midcap) and smaller firms (small cap).  There might even be stocks from companies in emerging market countries from, say, Latin America.  There are often real estate investments in the form of REITs.

To know for sure that your portfolio of investments outperformed or underperformed “the market,” we would need to assemble a “benchmark” portfolio made up of index funds in each of these asset categories, in the exact mix that is in your own portfolio.  Even if we could do that precisely, daily, weekly and monthly market movements would distort the original portfolio mix by causing some of your investments to gain value (and become larger pieces of the overall mix) and others to lose value (and become smaller pieces), and those movements could be different from the movements inside the benchmark.  After a month, your portfolio would be less comparable to this custom benchmark so painstakingly created. In addition, indexes only track movements in security prices, without regard to the expenses necessary to manage any actual portfolio.

There are several keys to evaluating portfolio performance in a meaningful way—and the result is very different from comparing your returns with the Dow’s or the S&P 500’s.

1) Take a long view.  What your investments did last month or last quarter is purely the result of random movements in the market, what professionals call “white noise.”  Even one-year returns fall into the “white noise” category.  It’s better to look at your performance over five years or more; better still to evaluate through a full market cycle, from, say, the start of a bull market to the start of a new bull market.  However, you should remember that there are no clear markers on the roadside that say: “This line marks the start of a new bull market.”

2) Compare your performance to your goals.  Your financial plan (or your investment policy statement) might indicate that your investment goal is to generate (say) 4% returns above inflation for you to have a great chance of affording a long, comfortable retirement.  If that’s the goal, then chances are, your portfolio is not designed to beat the market; it represents a professionally educated guess as to what investments have the best chance of achieving that target return, through all the inevitable market ups and downs between now and your retirement date.

3) Recognize that some of your investments will go down even in strong bull markets.  The concept of diversification means that some of your holdings will inevitably move in opposite directions, return-wise, from others.  Ideally, the overall trend will be upward—the investments are participating in the growth of the global economy, but not at the same rate and with a variety of setbacks along the way.  If you see some negative returns, understand that those are the investments that might well give you positive returns if/when other parts of your investment mix are suddenly, probably unexpectedly, turning downward.

4) Keep in mind that if yours is an SRI portfolio it can be expected to perform differently from a non-SRI portfolio.  Sometimes the performance might lag, and sometimes there is outperformance.  Viewed in a larger context, if a “regular” portfolio is designed to participate in the growth of the global economy “as is,” your SRI portfolio is designed to help bring about, and participate in, a growing sustainable economy for our and our children’s future benefit.

None of this implies you shouldn’t look at your portfolio report when it comes out.  Make sure the investments listed are what you expect them to be, and let your eye drift toward the longer time periods.  Notice which investments rose the most and which were down and you’ll have an indication of the overall economic climate.  And if your overall portfolio beat the S&P 500 this quarter, or over longer periods of time, well, that probably only represents white noise.

Adapted from a Bob Veres draft, with permission.