Unfortunately, a disturbingly large number of the individual investors I have worked with over the years put far too little thought and effort into measuring the performance of their portfolios, and therefore have little to no idea as to whether they (or their investment managers) are maximizing their portfolios’ growth on a risk-adjusted basis. To some degree it’s perfectly understandable since performance measurement can get complex very quickly, and most of the time individual investors don’t have either the data or the tools to do a proper job of it. In fact, often times their investment managers don’t, either, but there is no justification for that!
Here is a brief shortpaper, Measuring Performance (also available in the Research section of the Frontier Advisors website), that addresses the most important issues on the topic. Hopefully there won’t be anything in there you didn’t already know, but I don’t expect that to be the case for most. If your portfolio is managed by others, you can use the information in this shortpaper to press your investment advisors on their own measurement processes. Ask them directly if they follow industry standards for performance measurement, and have them justify the benchmark(s) they use for comparison.
Only by properly measuring performance will you be able to accurately identify areas for improvement, either within the portfolio itself or perhaps even with the person or team overseeing your portfolio. Measure, adjust, and then measure again, over time. It’s an ongoing process that is absolutely critical for any successful investment process.