If you create a portfolio of individual stocks and bonds, it may be unique to you.
Creating a benchmark may take a little work.
If your invest in index funds, you will be able to easily find a relevant benchmark.
But I suggest you do not stop there in comparing your portfolio performance.
A great way to assess fund performance is to also compare results against the fund’s peers.
Compare Performance with Relevant Investment Style
A good way to review your portfolio is against funds of a similar style.
Your funds will follow a specific style. For example: U.S. large growth, pacific ex-Japan, European financial.
Each category will include both actively managed and passive index funds. So you can readily determine if active management for an investment style can outperform passive.
You can assess your fund performance against the average return for that category. Data is usually available for many categories. This allows you to see how your fund performs relative to the average fund in the class.
Obviously you want to invest in a fund that is above the average result. If your fund is not, consider the reasons why and take any necessary remedial action.
You can also compare against the top performers. Often, category leaders in a class are disclosed. Or you may find data that shows where your fund ranks in the entire category. Often disclosed by either quartile or percentage rank.
For example, consider the Vanguard Large Cap ETF (VV). Let us look at the information we can easily retrieve from publicly available information.
On Yahoo Finance, you can compare various return periods against the relevant index and the large cap category average. You can also rank funds from that class to see how your fund compares to top performers.
With Morningstar, you can compare your fund to the relevant index, the specific investment style, and look at how your fund ranks in the category on a percentage basis.
So you can often get plenty of comparative data from free sources such as Yahoo and Morningstar, as well as others.
One caveat. Depending on the fund and investment category, there may be more or less data available in public forums. You may need to look at multiple sources to get enough data.
Compare Expenses, Not Just Returns
While net performance figures factor in expenses and fees, it is a good idea to explicitly compare those to peers separately.
Expenses and fees can be a good indicator as to future performance. The more costs your fund incurs, the greater the likelihood that it will under-perform over time.
Again, public data provides plenty of information.
With VV, Morningstar compares actual fees and expenses to category averages. It also compares actual against expected fees and expense ratios disclosed in the prospectus.
Yahoo Finance compares the actual expense ratio to the category average. It also compares the fund’s annual turnover ratio to the category average.
Remember, with expenses and fees, lower is better.
Compare Risk Factors
Risk assessments may be a little advanced for now. But we will cover some of the key figures (e.g., Sharpe ratio, standard deviation, alpha) down the road.
Risk analysis is important as you always want to compare apples to apples.
As we have previously discussed, investors expect higher returns for incurring greater risk. If your portfolio has significantly higher risk than the category average, you will expect to earn higher returns. So by comparing your portfolio’s risk against its peers, you can determine if your returns are appropriate.
And yes, risk can differ between funds even in the same investment category. So you definitely want to compare the risk of your investments to its peer group.