Recently, we’ve written about assessing the performance of your investments through both real return calculations and benchmark return comparisons. This article will focus on one other way that investors typically assess the performance of their portfolios: by comparing their returns against entire markets. This method of assessment helps investors to put the returns of their investments in context with the returns of entire markets, allowing them to compare their investments to similar investments that are available.
To make these kinds of comparisons between your assets and the markets, you will first need to determine which market sector your investments are in. For example, if you invested in McDonalds, you would be looking at investments in restaurants, which typically fall into the food and consumer staples sector. The specific sectors for different assets you might own can be found online, along with their average returns over particular periods of time.
With this information, you can then calculate the rate of return for your particular investment over the period of time that you’ve owned it. You can also assess it on a shorter period of time if you tend to evaluate your investments more periodically. However, once you have this number calculated, you can compare it to the return for its particular market sector. By comparing the two numbers, you will be able to have a better understanding of how the sector is performing, as well as how your investment is performing relative to similar companies.
You may also want to compare your investment to larger market indexes, such as the S&P 500. Indexes like the S&P incorporate companies from many different sectors and can therefore paint an even larger picture of where your investment stands. For example, if the energy sector is performing extremely well, but your stock is performing less well than the average, you may find that it still is performing above the S&P’s average rate of return. This may be a reason to consider keeping the stock, even though it is performing below its sector’s average rate.
Finally, by conducting this kind of analysis, investors put themselves in a better position to understand markets and sectors outside the ones that they have already invested in, which can lead to both improved diversification and more aligned portfolio outcomes.
All in all, by completing this kind of market-based analysis, investors open themselves up to seeing a bigger picture of how their stocks are performing with relation to the overall markets. As you have seen already, these portfolio-assessment calculations largely all begin with a stock’s real rate of return. From there, investors can set themselves up to change their portfolio as time goes by. Lastly, it may be a good idea to complete real rate of return calculations, benchmark assessments and market comparisons in order for investors to get a full picture of their investments. Understanding these three methods, you should be fully prepared to assess the performance of your stocks!