Answering this simple question can be one of the most important things you do to help you reach your financial objectives. Unfortunately, getting the “right” and complete answer may not be easy. There are two parts of your portfolio’s performance that you should examine:

• How is it doing in an “absolute” sense? How much income (dividends) did it produce, and did it go up or down in value?
• How is it doing in a “relative” sense? How did its income level and change in value compare to other benchmarks?

Reviewing Absolute Performance

The best way to calculate portfolio performance is to use a method called the “time-weighted internal rate of return.” This method considers the timing of any additions or withdrawals to the portfolio, as well as dividends and changes in the portfolio’s value. Some websites offer online calculators for this calculation.

The other way is to start with the beginning value of your portfolio and simply add any additions you made and subtract any withdrawals. You then compare that total with the ending value. The difference is your net positive or negative return. Dividing that difference by the beginning value will give you a percentage gain or loss. This method isn’t perfect because it does not reflect the timing of additions or withdrawals, but it should get you relatively close.

Reviewing Relative Performance

While knowing whether your investments are gaining or losing is essential, you must also remember that they are part of the overall financial market. Changes in the overall market will impact your performance. Therefore, you should see how your portfolio’s performance compares to the overall market or some other “benchmark” that is comparable to your portfolio. If your equity portfolio is up 6% and the stock market is up 12%, you have gained, but have not done as well as the rest of the market. Likewise, if your portfolio is down 6% and the overall market is down 12%, you have done very well in comparison.

What should you do?

First, be realistic about your expectations. The year 2008 was a bad one for stocks, with the S&P 500 index falling 37%, but it has risen each year since then. Over the 10-year period ending in 2023, the average total return for large company stocks (comparable to the S&P 500 index) was 8.9%. The best year (2013) had a return of over 32% and the worst year was 2008, when the return was a negative 37%. While the bull market of 1995 to 1999 produced average returns of over 28% and the bear market of 2000 to 2002 saw the market fall by over one-third, returns during those years were well outside the long-term average returns.

Second, establish some “benchmark” with which to compare your portfolio. The S&P 500 is a good stock market comparison, comprising only very large companies. If your portfolio contains more small and mid-size companies, you may want to use the S&P 1000 or the Wilshire 5000 to get a better comparison.

Finally, use these comparisons to determine if you should change your investment strategy or the way you invest. If your portfolio consistently underperforms the market, consider changing how you select stocks. Discuss your strategy with your investment advisor, spend some time studying the market, or read investment books. You may also want to consider using mutual funds, even some form of index mutual fund, to try to do better.