Stern Advice: It's report card time for your portfolio

WASHINGTON Wed Jan 26, 2011 1:46pm EST

WASHINGTON Jan 26 (Reuters) - Here's one key practice that separates individual investors from the professionals: The pros get report cards.

Investment managers who choose stocks, bonds and mutual funds for a living are constantly being evaluated and given performance scores. Are they getting superior (or at least average) returns? Are they minimizing risks?

If you want to be serious about the investing decisions you and your adviser make, you must monitor your actual returns and compare them to the performance of key benchmarks. Then you can decide whether you are on a good path or whether you need to make changes.

Here's how to do that.

-- Don't just celebrate the happiness that was 2010. Last year the Standard & Poor's 500 stock index was up 15.06 percent, and smaller stocks, commodities and foreign stocks did even better. "Almost everybody beat the S&P 500 this year by sleeping," says Mitch Tuchman, of MarketRiders, an investment management website. So, just having done well in 2010 isn't enough; you have to do the math to see whether your investments matched or surpassed the markets in which they were deployed.

-- Figure out how much you actually made. That should be easier to do than it is, but do-it-yourself brokers like Charles Schwab (SCHW.N) don't make it easy; they often give you an annual performance figure that counts all of your new deposits and contributions in your return. If you have a financial adviser, ask her to tell you what your portfolio's total return was in 2010. If you use software to track your investments, you should be able to pull the figure from that.

-- Or, do your own rough math -- a back-of-the-envelope computation like this: Start with your balance on Dec. 31, 2009. Add to that any money you deposited during the year, and subtract anything you withdrew. (This won't work if you have been putting in regular amounts all year long or if you made a large deposit at the end of the year. In those cases, try to guesstimate a time-weighted average amount that you put in for the year -- if you deposited $1,000 every month, for example, add $6,000 to your starting figure instead of $12,000). Then subtract your new starting total from the amount in your account on Dec. 31, 2010. Divide that remainder by the starting number and the resulting number is your annual return for the year.

-- Make the right comparisons. Don't benchmark your portfolio to the S&P 500 or any other single index; compare it to an investment mix that is like your investment mix. You can do that at the MarketRiders' online portfolio manager website, (here), where Tuchman has posted the 2010 returns of a variety of fund portfolios composed of different stock/bond mixes. You can also compare each portion of your portfolio to a like index, by doing the above calculation separately for domestic stocks, foreign stocks and bonds, for example. Or, compare your own performance in each asset category to the average mutual fund performance for that category published at Morningstar.com (www.morningstar.com). But since those 'average' fund portfolios include some dogs and some high-fee choices, you should really aim to best it.

-- Take appropriate action. If you like the "grades" you see, don't fix what's not broken. But if you think you got a bad report card, make some adjustments for 2011. Decide whether your sub-par performance is your own fault: Did you try to time the market and end up missing out on the year-end rise in share prices? Consider the possibility that your disappointing grades are the result of someone else's failings: If you've got mutual funds that are not meeting their objectives or charging too much in management fees, you can look for cheaper and better alternatives.

-- Find an easier way to do this next year. Ask your brokerage firm or 401(k) provider to give you performance data that is net of your deposits and withdrawals. If they won't do that (they can), resolve to track your investments in software that will give you reports like this. Having the data is the first step toward making the money. (The Personal Finance column appears weekly. Linda Stern can be reached at linda.stern(at)thomsonreuters.com) (Editing by Gunna Dickson)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.