Understanding Your Portfolio’s Investment Performance

In the days of 24/7 financial news networks it is easy to feel bombarded with market data and confused when it comes to knowing what data is related to your investments. Our “Market Update” posts (as seen below) summarize the most widely quoted market index returns and those we feel are most applicable when it comes to comparing your portfolio’s performance to the overall market.

However, you can’t just take your portfolio’s performance and bump it up next to one of the major index returns to judge how well your accounts are doing (and how well we are doing in managing your assets). This is because our client’s portfolios hold multiple asset classes, so if you compare your overall portfolio to one index you are potentially comparing a globally diversified portfolio to perhaps the S&P 500 (which only tracks performance of large U.S. based companies). Or, if you have a fixed income allocation then you are comparing a portfolio that contains a portion of bond returns to an index of all stock returns.

In your quarterly reports we provide a listing of your net of fees overall portfolio performance, and then we segregate your equity performance and your fixed income performance (if your portfolio holds bonds). Surprisingly enough we find that many firms in our industry do not readily provide this information to clients (along with a detailed fee invoice which we also provide each quarter). Beneath your returns we list the returns of several indices which I will explain below:

Russell 3000 Index: Tracks the returns on 3,000 of the largest publicly traded companies in the U.S.

MSCI EAFE Index:  MSCI is a firm that provides market data, and this index tracks returns of 22 developed nations across the globe, namely in the Europe, Australasia, and Far East (EAFE) regions

S&P 500 Index: Tracks the returns on 500 of the largest publicly traded companies in the U.S.

Barclays Intermediate Govt/Credit Index: Tracks the returns on intermediate-term US government bonds and investment grade corporate bonds

Barclays Muni Bond Index: Tracks the returns on long term bonds issued by U.S. municipal governments

For a client with a 100% equity allocation we feel the most comparable indices are the Russell 3000 and the MSCI EAFE. The Russell 3000 includes the performance of medium and small sized companies as well as large companies (a blend of which we allocate to all portfolios), whereas the S&P 500 only reflects the performance of the largest U.S. companies.

The MSCI EAFE Index is one of the most widely quoted international indices, and generally our portfolios allocate 15-25% of the equity allocation to international companies. The main goal behind this strategy is obtaining global diversification which over time should reduce portfolio risk since U.S. markets don’t always perform the same as international stock markets. You will see lately that international stocks have underperformed relative to U.S. stocks which makes comparing a globally diversified portfolio to a U.S. index look less favorable. However, we believe that over time that the benefits of decreased portfolio volatility outweighs short term performance gaps between U.S. and international stocks.

So, the performance of your overall stock portfolio is really best comparable to a blend of 2 indices, most heavily weighted to the Russell 3000 index but also including the MSCI EAFE index. For clients that hold bonds you should also account for that allocation in your overall return, so you might really be best comparable to a blend of 3 or even 4 of our quoted indices.

We encourage clients to place less importance on watching performance each quarter and to focus more on whether or not their portfolio is structured to meet their financial goals over the next 20, 30, or even 50+ years. But, we also feel it is important to fully disclose this information on a regular basis. If you have any questions about your portfolio performance please feel free to give us a call.

Travis Boyer, CFA
Financial Advisor

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