How Do You Measure Up Against the Markets?

When you’re investing, it is easy to fool yourself into thinking that you’re doing great, when really you would have been better off just investing in an index fund.  Or maybe you have someone investing for you and you’re wondering if it is worth the extra cost.   Or maybe you are invested in a managed mutual fund and you want to know how the return of that fund compares with the rest of the market.

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What I typically do to check my performance is to compare against a set of appropriate indexes.  For large stocks, I compare against the S&P 500 or the S&P 100.  For small stocks, I compare against the Russell 2000.  I sometimes also just compare against an index fund, such as those offered by Vanguard, that invests in large or small stocks, as appropriate.  I sometimes also compare against a total market fund, since that basically compares my returns to what I would have if I just bought everything.

For example, my IRA increased by about 13.2% since the start of the year.  (To find your return, just take the current value and subtract the value at the start of the year, then divide that difference by the value at the start of the year and multiply by 100%).  Looking at the returns of the S&P500, I see that it has returned 9.12%, so I am doing fairly well.  The Russell 2000 has returned 1.50% year-to-date, so that makes me feel like I am doing well against both large and small stocks.  My IRA is mainly larger stocks, so comparing against the S&P 500 makes sense, but still maybe I would have invested in a spit between a large cap and a small cap index fund if I had not invested in individual stocks.

Be sure to check out this month’s book, The Bogleheads’ Guide to Investing.  We’ll be discussing this book at the end of the month.

Looking at 1-year and year-to-date returns is nice, since it shows if you are positioned well for the current time, but really if you’re investing for long periods of time, which is really the only thing to do if you’re picking individual stocks like me, such short-term returns don’t matter that much.  If you only have ten stocks and one of them is having a really bad year, you might lag the markets for the year.  This does not mean, however, that the company you invested in hasn’t done (or won’t do) well compared to the markets over long periods of time.  Perhaps it had a huge growth period where the price grew rapidly, so now the share price has been sitting idle while earnings catch up to the price, so year-to-date returns are lacking even though the stock has been a good performer.

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Picking a ten-year period is a better comparison since that should give plenty of time for your picks to pay off (or not).  You can still compare your returns against indexes, using historical data.  One way of making the comparison is to calculate your annualized rate-of-return.  This can be done using a formula:

APY = ((principal + gain) / principal) ^ (365/days) – 1,

if you’re mathematically inclined, or by simply plugging your starting value and contributions into an investment calculator (you can find a good one on the sidebar of this blog, or just search the web) and adjusting the rate-of-return until the end value matches what you have.  Using this method, I found that my son’s college account has returned a disappointing 5% annualized for the last 16 years that we’ve had it, compared with 6.3% annualized for the S&P 500 over the same period.  Unfortunately, a couple of bad investments (Pier One and Chico’s come to mind) hurt that account.


Note, a great site to determine the return of the S&P 500 for any given period is at: .  The nice thing about this calculator is that you can pick any period you want, and it also includes the effect of reinvesting dividends.  If that is included, my returns look even worse since the S&P 500 return with dividends reinvested is 8.3%.

An easier way is to compare over long periods of time is to simply calculate the total percent change in the index over the period compared with the total percent change in your portfolio.  Note that this only works if you have an investment account where you have not added or taken away money.  For example, the S&P went up 78% over the last five years, where one of my accounts has gone up about 52%, so I am lagging behind the S&P 500 somewhat.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

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