The Ultimate Guide To Measure Investment Performance | INVESTEDMOM
Many people have invested in hopes of growing their money and preparing for the future. Whether that be mutual funds, stocks, or even a savings account, investments can successfully provide you with the expected return if you make sound investment decisions and continually measure your investment performance.
Taking the time to explore your investment performance measurement and determine what changes need to be made to your investments is important. It can be easy to forget about your investment objectives and let the money sit there without considering your portfolio performance. To maximize your profits though, you must learn how to calculate investment performance.
Running successful investments requires that we evaluate their performance so that we can modify them accordingly. In the event that we lose money, we can make adjustments to increase the return on our investments. There really is only one way to do this, though, and that is to get a good grasp on how to measure investment performance.
What is investment performance?
Investment performance, in simple terms, is how much of a return you have on your investment or how much of a loss you have on your investment. It requires you to understand whether your investment has a positive or a negative performance measurement so that you can make any required changes to your portfolio.
For example, you might have an investment account that is considered a high-risk investment. Most high-risk accounts will have a higher return in the event that they make a profit, but similarly, they will have a higher loss if there isn't a profit made.
What types of investments require an investment performance measurement?
While it is good practice to check the investment performance of all of your portfolios, some require more attention than others.
Holdings and Assets
Holdings are anything that is within your investment portfolio and is held by someone else. These holdings can include stocks, bonds, mutual funds, and many other types of investments.
Assets already hold value for you in the event that you were to sell them in the future. Asset classes are those investments that are grouped with similar financial characteristics.
The market conditions determine the amount of risk on your investment portfolio value, so you want to make sure that you understand your specific investment in order to be able to calculate its performance. For example, if the market is in a great position financially, then your investments are probably worth more, but if the market is crashing or it is in a bad position financially, your investments will suffer. That is why investment performance is so important.
How to measure the performance of your investment?
Yield is defined as the income that an investment generates. It is usually determined as a percentage of the price that was paid to attain the investment.
Yields on bonds
When it comes to bonds, yield is determined by taking into consideration the return an investor has from the bond itself. Yield for bonds is calculated by the following formula:
Yield = coupon amount/price
This may be pretty simple, but different factors can affect the pricing within the formula, making it difficult to get an accurate yield measurement. Bond prices change every day, and when they do, you have to take that into consideration to get the correct performance of your investment.
Yields on stocks
When it comes to stocks, yield measures the amount of income that is made aside from the principal amount. The price and market value affect the amount of yield for your stocks, so it is important that you stay informed on the latest data in regard to stocks to make the most out of your investment. Yield is calculated using the following formula:
Yield = price increase + dividends/ purchase price
Yields on CDs
When it comes to a CD, the yield is the amount of interest that is paid by the CD in a year. CDs work like a savings account, and the amount of interest earned is then added to your principal. Some CDs have a high yield, while others don't. The CD is purchased by you, and the bank where you purchased it from then agrees to pay out the interest that it made on whatever date you both decided on. The CD yield can be calculated using the following formula:
Yield = (1 + annual interest rate/number of periods per year) X number of periods per year - 1.
Rate of Return
The rate of return is the total money made or lost on an investment from when you purchased the asset. This is calculated by using a percentage determined by taking a percentage of the cost of the investment. This type of return can be calculated for any type of investment as long as the purchase of the asset occurred before its cash flows.
Other important things to consider when measuring your investment performance
There are other things to consider to help you better understand the performance of your investment and portfolio performance.
Standard deviation
Standard deviation can help you determine the risk of your investment. This is helpful because once you understand what the standard deviation is, you can determine whether you are more likely to make money or lose money.
Standard deviation is calculated by subtracting the mean from each of the values and then squaring, adding, and averaging the differences. Once you have this determined, you can then conclude that the higher the standard deviation, the more risk your performance will have.
Beta
Beta measures the volatility of returns when compared to the entire market portfolio. If certain companies have higher betas, their investments will have a greater risk, but that also means that they will have a higher return potential. In the event that the company loses money, though, the amount lost will be much greater due to its higher risk.
Transaction Fees
When calculating the overall performance of your investment, don't forget about transaction fees that you may encounter. There are multiple fees associated with your investments which typically occur any time you buy a stock or mutual funds.
Transaction fees can include the following:
Commissions
Markups
Sales loads
Surrender charges
Professional money managers
While you might have professional portfolio managers that track your investments and performance, you can't go wrong by keeping track of it all on your own spreadsheet. While your portfolio manager likely does a great job of taking care of your money, there is nothing like opening up a sheet to get an overall look at your performance. In the event that your portfolio return seems inaccurate, you can easily refer back to your spreadsheet for an overall look at the average performance.
Taxes
Depending on your own personal situation, you might need to pay certain taxes on your investments, especially if you withdrew the money from certain accounts before the agreed-upon timeframe. In general, taxes are paid twice within investments. The first time occurs when you receive the income from your portfolio return. The second time that you pay taxes occurs when you sell your investments, either for a profit or for a loss.
Understanding what the tax situation is for your stock portfolio can help you avoid paying unnecessary taxes. Rather than withdrawing money early or selling your stocks, you can analyze whether you can wait until the profit is higher. Keep in mind you will always pay taxes, but it is a great idea to understand how much and when you will pay them.
Conclusion
It is important that you have a clear understanding of everything that occurs with your investments, especially how to measure their performance. This can help determine risk and give you a better idea of what type of market return you can expect from it.
We understand it can be difficult to understand this entire process, but Invested Mom is here to help you! Sign up for Invested Mom’s new course to learn everything about investment performance and how to maximize their return today!
Meet the Author:
Inge was born and raised in Cape Town, South Africa, and moved to Canada in 2010 looking for a better life. She always had an entrepreneurial spirit and started her first side hustle when she was 9 years old – selling fudge at school during lunch breaks.
It wasn’t until much later that she realized that saving isn’t enough to get ahead. She was always very interested in real estate, but saving up for a down payment was grueling and slow, and the demands of life kept getting in the way.
She started investing in herself and upgrading her skills while learning how to invest. She quickly became debt free and compounded her money at a staggering rate.
It wasn’t until she became a coach that she realized how significant an impact she can make in people’s lives by sharing her journey, learnings, and processes.
So here she is, advocating for everyone who is invested and wants to build their wealth, especially the mommas!