Are you wondering how to measure investment performance for one of you accounts?
This week’s Short & Simple Investing Lesson is focused on how to evaluate an investment that you already own or are considering buying. We regularly evaluate everything in our lives that we do except for our money management, whether we personally oversee it or hire someone to oversee it. This may be because the thought of evaluating an investment seems intimidating or way too difficult, but this short lesson can easily change that.
First, let me give you an analogy. If you were going to sell your home, and the real estate agent came to you with an offer, you would compare this offer with the price that other houses in your neighborhood had sold. The houses would be comparable, since they are close in proximity and probably size and age. You would base this comparison on the square footage price for which other homes had sold, and then evaluate whether or not the offer was good. Every home owner has probably been through this simple process.
Similarly, there is a very simple tool called a benchmark that you can use to do this comparison with your investments to evaluate performance.
Here’s how to measure investment performance using this simple free tool:
You simply find out the benchmark that represents your investment most closely, just like those other homes in your neighborhood represented the price of your home most closely. You then compare the performance of the benchmark to the performance of your investment.
The benchmark comes from an index, which is simply a group or basket of securities, such as stocks or bonds. I have written several other posts about indexes. In the home price analogy, the group would be the homes in your neighborhood. The group represents a market or part of a market.
By comparing the right index to any investment, you can easily evaluate how it has performed in comparison to its benchmark. Ideally, you want your investments to beat the benchmark after fees without any more risk than the benchmark. Learn more about investment benchmarks here.