DISQUS

Clever Dude · 2 years ago

Also consider whether you're borrowing money for the investment (what's that rate), investment fees (could rack up alot here), and inflation rate.

William Wallets · 2 years ago

This is a pretty neat question. Unfortunately, it does not have a simple answer.

First, I think one needs to take a look at the risk of his/her portfolio. There are many ways to do this. I find that the simplest is calculating the standard deviation of daily returns. If this is not available, try a weighted average of the standard deviation of the individual components. This might become cumbersome, but it is somewhat important to assess the risk of your portfolio in SOME way.

Once you have done this, you can find other INDEXES that have a comparable risk to your portfolio. If you find that your portfolio risk was very close to the risk of the S&P 500 index, then you can use the S&P 500 as a benchmark. If your portfolio was very conservative and had a standard deviation of maybe 3 or 4, as opposed to 9+, then maybe you could compare your returns to that of a bond index.

Ultimately, the pure return you get from your portfolio may sound good or bad based on the "averages" you see quoted around and the standard "8% assumed growth" you see everyone talking about, but it doesn't mean much without assessing risk.

To summarize... Assess the risk of your portfolio. Compare the returns of your portfolio to indices with similar risk.

Hope that helps.

-William
A Financial Revolution

Jeremy · 2 years ago

It really all depends on the makeup of the portfolio being considered. Clearly the S&P is going to be the primary benchmark for equities, but without knowing the actual asset allocation of the portfolio it could be completely inaccurate.

If your portfolio is 100% domestic stocks, then yes you would like to see something in line with the S&P. But if you have any sort of mix, whether you own some bond funds, international funds, sector funds or cash then you likely won't find a single one benchmark that will be comparable.

So if you have a portfolio that was say 80% equities and 20% cash or bonds, then it is reasonable to assume a slightly lower return than a pure equity index.

Determining your performance to a benchmark is easy if you own a few index funds which have exact comparisons, but a mixed portfolio will be more difficult to find one benchmark to compare to.

ciwood · 2 years ago

Any rate-of-return has to consider inflation and taxes. Any net-rate-of-return (after subtracting inflation and taxes) above 4% is good and 6% is great. In a tax-deferred account, any net-rate-of-return above 6% is good and 8% is great. Remember, a 20% loss requires a 25% gain just to equal 0% and a 4% gain in a 4% inflationary environment is negative after taxes and inflation.

1st rule of Investing---Do Not Lose Money
2nd rule of Investing---See 1st Rule

William Wallets · 2 years ago

ciwood, I have to say that I disagree with your assessment. I do think the point about inflation and taxes is very good, but classifying returns as good and great, I don't like.

I would consider a 4% net rate of return (after inflation and taxes) on an international small cap equity fund abyssmal because of the high volatility involved and because of the high growth rate an similar index would have achieved.

Similarly, a 3% net rate of return on investment grade bonds would be considered spectacular, given that a investment grade bond index would have yielded 2% on average.

Just my 2 cents on the relativity. I just don't think classifying returns by themselves without a look at risk, makes sense.

-William
http://www.afinancialrevolution.com/

Doobie · 2 years ago

Thanks everyone. As I was telling Flexo before, I was just trying to get a rough idea as to whether or not my 10.0% ROR on my Fidelity 401K portfolio was any good. I knew I wasn't losing money...always a plus...but I didn't know what was considered good, bad, or damned good.

Doobie · 2 years ago

Note: that 10.0% ROR was for all of 2006.
Note #2: I'm not exactly a financial wizard when it comes to investing. I drop 6% of my income into my 401K and check my investments a few times a year. I'm spread all over the board with large cap, mid cap and baseball cap funds. And when Fidelity started offering real estate indexes, I jumped on those too. If some of them look like they're poor performers, I change my contributions and just keep the money where it was. Christ, now that I think about it, I'm like some kid at a candy shop with $10 who's trying to get as many different treats as possible. I think I need to get a financial advisor to get me in a headlock and drag me away from the computer.

mbhunter · 2 years ago

10%? That's all?!

Just kidding.

If you're happy with 10%, then it's a decent rate of return. If you aren't, then it isn't. On my stock portfolio I'd be ecstatic with 10% (it didn't do that this year).

As one newsletter I subscribed to at one point said after every successful trade, "Congratulations on your gains."

klerg · 2 years ago

I aim for a 12% ROR but chat an be tough if you wanna diversify properly, and do it with one investment firm. It may be possible to do with Fidelity, then again, I don't own any Fidelity mutual funds.

SAM · 2 years ago

I have been thinking about this lately. I had a great 401(k) year of 20% but I no longer feel comfortable with my strategy (I invested some in my company's stock)

I like to balance myself with 25% in 4 types of funds:
25 % Small Company Equity
25 % Mid-Size Company Equity
25 % Large Company Equity
25 % International Equity

Anyway, I have now tweaked it for a little more international exposure at the expense of small and mid sized companies.