measurement of success of investment(s)

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wstalcup
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measurement of success of investment(s)

Post by wstalcup » Mon Sep 18, 2017 2:28 pm

Hi,
How do you measure success of a certain stock, etf, etc. I pretty much go by the S&P500 (i.e. basically if I beat SPY or VOO). just wondering is this still standard. Thanks!
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livesoft
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Re: measurement of success of investment(s)

Post by livesoft » Mon Sep 18, 2017 4:48 pm

Since my ETFs track their indexes extremely well, I don't need to measure the success of them. But I do want to measure the success of whether I am market timing successfully my buys and sells of them.

It just makes no sense to compare the performance of VSS to SPY or VOO since VSS is not US large-cap stocks. However, I can calculate the total return of my holdings of VSS and VFSVX using the XIRR() algorithm found in Excel or MS Money and then compare that number to the published total return of VSS for the same time period. If I have made no trades, then the 2 numbers should be the same. If I have made trades, then I want my total return to be higher than the no-trades number published at Morningstar.com or Vanguard.com which both give the same total return of course.
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alex_686
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Re: measurement of success of investment(s)

Post by alex_686 » Mon Sep 18, 2017 4:52 pm

How are you progressing towards your goals?
wstalcup wrote:
Mon Sep 18, 2017 2:28 pm
I pretty much go by the S&P500 (i.e. basically if I beat SPY or VOO). just wondering is this still standard. Thanks!
The problem with this is that it assumes that 100% of your assets are in large cap domestic stock. I have bonds, real estate, and international equity. You can analyze each asset class by itself. That has some value. What is better is to analyze your portfolio as a whole. What was the overall performance and risk of my portfolio. If you want to do it correctly you would use the Sharpe Ratio but that is more work then most are willing to do.

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Portfolio7
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Re: measurement of success of investment(s)

Post by Portfolio7 » Mon Sep 18, 2017 5:09 pm

Michael Kitces has a good article about tracking your overall progress towards your goals: https://www.kitces.com/blog/funded-rati ... ngs-goals/. I think this is the most important metric I have.

In an individual fund/stock basis, I first decide on my approach. My asset allocation is of primary importance, equity vs fi, and then what specific sub-classes I want to invest in. All my investments are geared to fit into a particular asset slot. Fees, management tenure, past performance, valuation vs long term trends all play a role in selection.

If you are trading stocks, well, that's a whole different ballgame, and one with the deck stacked against you. I admit I do track performance vs the S&P500, but more for curiosity sake and I throw in an FI adjustment now. Because most established markets appear to return about 10% long term (with heavy caveats), I figure if over the long term my equity investments track to the S&P500, adjusted for my FI allocation, then I've done ok.
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patrick013
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Re: measurement of success of investment(s)

Post by patrick013 » Mon Sep 18, 2017 6:26 pm

The Market Portfolio is the standard for most investors.
Even with high volatility and unexpected bad years.
age in bonds, buy-and-hold, 10 year business cycle

wstalcup
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Re: measurement of success of investment(s)

Post by wstalcup » Mon Sep 18, 2017 9:06 pm

livesoft wrote:
Mon Sep 18, 2017 4:48 pm
Since my ETFs track their indexes extremely well, I don't need to measure the success of them. But I do want to measure the success of whether I am market timing successfully my buys and sells of them.

It just makes no sense to compare the performance of VSS to SPY or VOO since VSS is not US large-cap stocks. However, I can calculate the total return of my holdings of VSS and VFSVX using the XIRR() algorithm found in Excel or MS Money and then compare that number to the published total return of VSS for the same time period. If I have made no trades, then the 2 numbers should be the same. If I have made trades, then I want my total return to be higher than the no-trades number published at Morningstar.com or Vanguard.com which both give the same total return of course.

ok, thanks! haven't looked at investing this way.. although at this point, I am not going to attempt to "Time" the market..more of a Boglehead! :P
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wstalcup
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Re: measurement of success of investment(s)

Post by wstalcup » Mon Sep 18, 2017 9:26 pm

alex_686 wrote:
Mon Sep 18, 2017 4:52 pm
How are you progressing towards your goals?
I'm doing great since my current presumptions are just to beat S&P500 index!
wstalcup wrote:
Mon Sep 18, 2017 2:28 pm
I pretty much go by the S&P500 (i.e. basically if I beat SPY or VOO). just wondering is this still standard. Thanks!
The problem with this is that it assumes that 100% of your assets are in large cap domestic stock. I have bonds, real estate, and international equity. You can analyze each asset class by itself. That has some value. What is better is to analyze your portfolio as a whole. What was the overall performance and risk of my portfolio. If you want to do it correctly you would use the Sharpe Ratio but that is more work then most are willing to do.
Sharpe Ratio seems to use an "average" or "expected" rate of return. I guess this is the value I'm looking for.. or maybe just what the average American's return on investments are.
I guess what I'm getting at is that using an "expert financial planner" that nets you a 20% gain sounds great!.. until you see that something simple like VOO would have made you 30%!
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wstalcup
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Re: measurement of success of investment(s)

Post by wstalcup » Mon Sep 18, 2017 9:38 pm

patrick013 wrote:
Mon Sep 18, 2017 6:26 pm
The Market Portfolio is the standard for most investors.
Even with high volatility and unexpected bad years.
ok, so how would I find this? the only info I found is that its "a compounded real return of 4.38% with a standard deviation of 11.6%" If this is true, then means the average global investor obtains a gain of 3.87% - 4.88% a year?
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alex_686
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Re: measurement of success of investment(s)

Post by alex_686 » Mon Sep 18, 2017 10:18 pm

wstalcup wrote:
Mon Sep 18, 2017 9:26 pm
Sharpe Ratio seems to use an "average" or "expected" rate of return. I guess this is the value I'm looking for.. or maybe just what the average American's return on investments are.
I guess what I'm getting at is that using an "expert financial planner" that nets you a 20% gain sounds great!.. until you see that something simple like VOO would have made you 30%!
The Sharpe measures return per unit of risk. It uses actually historical data of the portfolio.

And in that above senerario I might be very happy. Is my goal to outperform the market? For some people yes, but not for me. I want to meet my goals with the least amount of risk. I may not want to hazzard 100% on VOO, maybe I want something a bit more consersative. Sharpe lets me figure if I am getting a good performance for the extra risk that I am taking.

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Re: measurement of success of investment(s)

Post by wstalcup » Mon Sep 18, 2017 10:25 pm

Portfolio7 wrote:
Mon Sep 18, 2017 5:09 pm
Michael Kitces has a good article about tracking your overall progress towards your goals: https://www.kitces.com/blog/funded-rati ... ngs-goals/. I think this is the most important metric I have.

In an individual fund/stock basis, I first decide on my approach. My asset allocation is of primary importance, equity vs fi, and then what specific sub-classes I want to invest in. All my investments are geared to fit into a particular asset slot. Fees, management tenure, past performance, valuation vs long term trends all play a role in selection.

If you are trading stocks, well, that's a whole different ballgame, and one with the deck stacked against you. I admit I do track performance vs the S&P500, but more for curiosity sake and I throw in an FI adjustment now. Because most established markets appear to return about 10% long term (with heavy caveats), I figure if over the long term my equity investments track to the S&P500, adjusted for my FI allocation, then I've done ok.
Hi, thanks for the article.. although after a couple of read-troughs I'm not sure if I fully understand it ! :P
I think a problem with the "Funded Ratio" is that how its depicts most of the gain is in the final years when at that time people should be taking less risks.
Anyway, for reaching the retirement goals, I believe I am "way ahead" of the game but still investing aggressively (100% ETFs & stocks) because if I continue to do well.. then can retire early! or if aggressive investing turns sours than I still have about 20 years to recoup anyway.
what the Fi in (equity vs fi) mean?
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Re: measurement of success of investment(s)

Post by patrick013 » Tue Sep 19, 2017 12:07 pm

wstalcup wrote:
Mon Sep 18, 2017 9:38 pm
patrick013 wrote:
Mon Sep 18, 2017 6:26 pm
The Market Portfolio is the standard for most investors.
Even with high volatility and unexpected bad years.
ok, so how would I find this? the only info I found is that its "a compounded real return of 4.38% with a standard deviation of 11.6%" If this is true, then means the average global investor obtains a gain of 3.87% - 4.88% a year?
Most Finance colleges and Investment firms routinely use the 500. Lately it's
10 year return before taxes is over 7%. You're free to use other indexes but
info for the 500 is usually abundant. So if some fund is beating the 500 that's
considered an excellent return.
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Re: measurement of success of investment(s)

Post by rkhusky » Tue Sep 19, 2017 12:11 pm

Personally, I compare to the Vanguard Target Retirement fund that has about the same stock/bond ratio as I do. If I can't beat that, I might as well just put all my money there and let Vanguard do the work.

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Re: measurement of success of investment(s)

Post by wstalcup » Tue Sep 19, 2017 12:23 pm

yes, I guess I will just stick with the S&P500 has the measurement to beat.. its just been so easy to outperform with VGT, VO, VBK.. I was just wondering if S&P500 was still considered the "average".
Vanguard Target Retirement fund seems to really underperform but may switch to it nearing retirement!
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Re: measurement of success of investment(s)

Post by livesoft » Tue Sep 19, 2017 12:41 pm

wstalcup wrote:
Tue Sep 19, 2017 12:23 pm
Vanguard Target Retirement fund seems to really underperform ....
I certainly hope so because its benchmark is not the S&P500.
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Re: measurement of success of investment(s)

Post by triceratop » Tue Sep 19, 2017 12:49 pm

wstalcup wrote:
Tue Sep 19, 2017 12:23 pm
yes, I guess I will just stick with the S&P500 has the measurement to beat.. its just been so easy to outperform with VGT, VO, VBK.. I was just wondering if S&P500 was still considered the "average".
Vanguard Target Retirement fund seems to really underperform but may switch to it nearing retirement!
I would benchmark a 100% equities portfolio to Vanguard's Total World Stock Index Fund. The S&P500 is far too undiversified to be an appropriate benchmark.

This is also why the Target Retirement funds "underperform" right now; they are much more diversified, into domestic and international bonds, small cap US stocks, and international stocks than the US large cap S&P500.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: measurement of success of investment(s)

Post by patrick013 » Tue Sep 19, 2017 1:00 pm

I don't think a fund's index benchmark and the market portfolio
mean the same thing. But whatever...
age in bonds, buy-and-hold, 10 year business cycle

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Re: measurement of success of investment(s)

Post by wstalcup » Tue Sep 19, 2017 1:07 pm

yes, the vanguard retirement fund would most likely underperform S&P500 since its not benchmarked to it.
In my case, I feel I would rather go more aggressive than it, since I have ~20 years to retirement and I "believe" bonds are still paying next to nothing.. I guess that could change if feds increase the rate in December.

Certainly seems like Vanguard Total World Stock Index Fund ( VT and VTWSX ) are incredibly diversified! Is there an "expected return" for this index and has it ever beat the S&P500 in the long term? Of course, past performance doesn't predict future performance, but if the average return for the S&P500 beats VT or VTWSX by a great deal, for me, 500 US stocks are diversified enough!
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Re: measurement of success of investment(s)

Post by triceratop » Tue Sep 19, 2017 1:08 pm

patrick013 wrote:
Tue Sep 19, 2017 1:00 pm
I don't think a fund's index benchmark and the market portfolio
mean the same thing. But whatever...
What do you mean?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: measurement of success of investment(s)

Post by Toons » Tue Sep 19, 2017 1:13 pm

I don't compare.
As long as my investements are providing me with growth or income for which I invested,
then I am Satisfied. :happy
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Re: measurement of success of investment(s)

Post by patrick013 » Tue Sep 19, 2017 1:19 pm

triceratop wrote:
Tue Sep 19, 2017 1:08 pm
patrick013 wrote:
Tue Sep 19, 2017 1:00 pm
I don't think a fund's index benchmark and the market portfolio
mean the same thing. But whatever...
What do you mean?
The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
age in bonds, buy-and-hold, 10 year business cycle

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triceratop
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Re: measurement of success of investment(s)

Post by triceratop » Tue Sep 19, 2017 1:23 pm

patrick013 wrote:
Tue Sep 19, 2017 1:19 pm
triceratop wrote:
Tue Sep 19, 2017 1:08 pm
patrick013 wrote:
Tue Sep 19, 2017 1:00 pm
I don't think a fund's index benchmark and the market portfolio
mean the same thing. But whatever...
What do you mean?
The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
That is absolutely not the market portfolio for the US, and absolutely-certainly-100% not the market portfolio for global equities.

The market portfolio for the US is a Total Stock Market Index (Dow Jones, CRSP, etc)

The market portfolio for equities is a Total World Stock Market Index (like the one Vanguard's fund holds)

Those are facts, not opinions.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: measurement of success of investment(s)

Post by wstalcup » Tue Sep 19, 2017 1:29 pm

The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
[/quote]

So if I wanted to compare my portfolio performance to the "Market portfolio" than a close and easy measurement would be my performance vs S&P500?
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Re: measurement of success of investment(s)

Post by triceratop » Tue Sep 19, 2017 1:34 pm

wstalcup wrote:
Tue Sep 19, 2017 1:29 pm
The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
So if I wanted to compare my portfolio performance to the "Market portfolio" than a close and easy measurement would be my performance vs S&P500?
It would be a close and easy measurement if patrick013 were correct. However he is completely incorrect, as I explained above.

The S&P500 is just large cap stocks in a single country's stock market. It cannot be reasonably taken as the market portfolio.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: measurement of success of investment(s)

Post by alex_686 » Tue Sep 19, 2017 1:37 pm

patrick013 wrote:
Tue Sep 19, 2017 1:19 pm
The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
The Russell 3000 has the 3,000 larges stocks. The Russell 2000 has the 2000 of the smallest stocks from the Russell 3000. Then you can slice and dice by value, growth, momentum, etc. And then there are the bond indexes, the REIT indexes, etc.

And there are dozens, if not 100s, of funds that follow the S&P 500. So indexes are not unique to funds. In fact, the index for public mutual funds must be created, maintained, and licensed from a 3rd party. that 3rd party has a strong interest in licensing their index to as many funds as they can.

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Re: measurement of success of investment(s)

Post by jebmke » Tue Sep 19, 2017 1:42 pm

The only things I keep track of now are unrealized gains and losses in taxable, allocation balance and whether the total is enough to get me to the end.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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patrick013
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Re: measurement of success of investment(s)

Post by patrick013 » Tue Sep 19, 2017 2:17 pm

triceratop wrote:
Tue Sep 19, 2017 1:23 pm
patrick013 wrote:
Tue Sep 19, 2017 1:19 pm
triceratop wrote:
Tue Sep 19, 2017 1:08 pm
patrick013 wrote:
Tue Sep 19, 2017 1:00 pm
I don't think a fund's index benchmark and the market portfolio
mean the same thing. But whatever...
What do you mean?
The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
That is absolutely not the market portfolio for the US, and absolutely-certainly-100% not the market portfolio for global equities.

The market portfolio for the US is a Total Stock Market Index (Dow Jones, CRSP, etc)

The market portfolio for equities is a Total World Stock Market Index (like the one Vanguard's fund holds)

Those are facts, not opinions.
Nope, then we differ. Walk into any advanced finance class and see what
they say. The US market portfolio is the S&P 500 not a proprietary index.
Not talking about small caps, global, REIT's or anything else. It's OK to differ.
Vanguard doesn't decide that. I know Fama would like TSM to be the market
portfolio also, but the 500 is most commonly used. Check your beta calculation,
but that can be deselected also. :)
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wstalcup
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Re: measurement of success of investment(s)

Post by wstalcup » Tue Sep 19, 2017 2:18 pm

ok, well this has been fun! :P

So whatever the US Market Portofolio is.. S&P500, Russell 3000, CRSP.. for my purposes it doesn't matter too much because for short term; 1 yr, or YTD they are all pretty close and no need to split hairs..

Official Index Tickers:
CRSPTM1 Total US Stock Market index
RUA Russell 3000
.INX S&P500 index

These tickers have an average of Year to Date gain: ~11.5

I have been mostly invested in VGT this year which is currently blowing away all of these indexes.. so I guess I can tell the wife I'm a great investor and possibly get lucky tonight! :D or she thinks we have a lot of money and great time to divorce me..hmmm.. we'll see! :P
Thanks everyone!
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Re: measurement of success of investment(s)

Post by triceratop » Tue Sep 19, 2017 2:24 pm

patrick013 wrote:
Tue Sep 19, 2017 2:17 pm
triceratop wrote:
Tue Sep 19, 2017 1:23 pm
patrick013 wrote:
Tue Sep 19, 2017 1:19 pm
triceratop wrote:
Tue Sep 19, 2017 1:08 pm
patrick013 wrote:
Tue Sep 19, 2017 1:00 pm
I don't think a fund's index benchmark and the market portfolio
mean the same thing. But whatever...
What do you mean?
The market portfolio is the 500 best stocks in the country based
on large cap performance. A particular fund has an index which
is unique to that fund. Like a dividend fund based on a dividend
index perhaps, it's benchmark. That's all.
That is absolutely not the market portfolio for the US, and absolutely-certainly-100% not the market portfolio for global equities.

The market portfolio for the US is a Total Stock Market Index (Dow Jones, CRSP, etc)

The market portfolio for equities is a Total World Stock Market Index (like the one Vanguard's fund holds)

Those are facts, not opinions.
Nope, then we differ. Walk into any advanced finance class and see what
they say. The US market portfolio is the S&P 500 not a proprietary index.
Not talking about small caps, global, REIT's or anything else. It's OK to differ.
Vanguard doesn't decide that. I know Fama would like TSM to be the market
portfolio also, but the 500 is most commonly used. Check your beta calculation,
but that can be deselected also. :)
"The US market portfolio is the S&P 500 not a proprietary index"

What? :shock: Do you know what the "S&P" in "S&P 500" stands for? It is the proprietary name for the corporation which constructs the index.

The US market portfolio must include US small caps and REITs. You're simply mistaken.

(It is true that the US market portfolio will not include global stocks, but i didn't claim that it would)

"I know Fama would like TSM to be the market portfolio also, but the 500 is most commonly used. "

Not to make an appeal to authority, but just to be clear you're stating that a Nobel laureate in economics is incorrect about what the market portfolio is? And you're still confident in your assertions?

You are disseminating falsehoods.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: measurement of success of investment(s)

Post by patrick013 » Tue Sep 19, 2017 2:39 pm

triceratop wrote:
Tue Sep 19, 2017 2:24 pm

Not to make an appeal to authority, but just to be clear you're stating that a Nobel laureate in economics is incorrect about what the market portfolio is? And you're still confident in your assertions?

You are disseminating falsehoods.
Current research doesn't really interest me. I will continue to use and advise
the S&P 500 as the US market portfolio, even a barometer to beat for other
geographic areas. Sorry.
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Re: measurement of success of investment(s)

Post by Portfolio7 » Tue Sep 19, 2017 3:02 pm

wstalcup wrote:
Mon Sep 18, 2017 10:25 pm
Hi, thanks for the article.. although after a couple of read-troughs I'm not sure if I fully understand it ! :P
I think a problem with the "Funded Ratio" is that how its depicts most of the gain is in the final years when at that time people should be taking less risks.
Anyway, for reaching the retirement goals, I believe I am "way ahead" of the game but still investing aggressively (100% ETFs & stocks) because if I continue to do well.. then can retire early! or if aggressive investing turns sours than I still have about 20 years to recoup anyway.
what the Fi in (equity vs fi) mean?
You are right. Kitces is talking about the same issue you are. That's why he introduces the Present Value measurement, to give you a sense if you are 'on target' (or how much above or below target you may be.) It confirms my other analysis... I'm ok, but slightly below being on track for my stretch target. I track investments, I compare to a 70/30 account, I compare to the PV of my target, I use on-line calculators, I am at 80% of paw (don't ask), I estimate future expenses, multiply by 25, and back out SS. All of these gauges have issues. There is no perfect metric. PV of Target is pretty good though.

FI is Fixed Income. I use this term rather than 'bonds' because some people use cash, or gold, or like myself, stable value fund (which are bonds in an insurance wrapper, but they don't behave like other bonds.)

Benchmarking. I try to use the index(es) which matches my investing universe. I doubt that's the S&P500 (large cap only) for your case, but If you use the S&P500 as a rough guage, I suppose it's fine, but TSM is likely better, maybe Global equities? However, if you are building analyticals and projections off of it, I'd zero in on the salient index.

I agree, early is the time to be aggressive. I tell my 15yo son this same thing... you probably don't want to retire at 35 or 40, but Financial Independence means you can have freedom to work, not work, switch careers, take a sabbatical, etc. Still, 10% of his Roth is in bonds.
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Re: measurement of success of investment(s)

Post by wstalcup » Wed Sep 20, 2017 2:22 pm

You are right. Kitces is talking about the same issue you are. That's why he introduces the Present Value measurement, to give you a sense if you are 'on target' (or how much above or below target you may be.) It confirms my other analysis... I'm ok, but slightly below being on track for my stretch target. I track investments, I compare to a 70/30 account, I compare to the PV of my target, I use on-line calculators, I am at 80% of paw (don't ask), I estimate future expenses, multiply by 25, and back out SS. All of these gauges have issues. There is no perfect metric. PV of Target is pretty good though.

FI is Fixed Income. I use this term rather than 'bonds' because some people use cash, or gold, or like myself, stable value fund (which are bonds in an insurance wrapper, but they don't behave like other bonds.)

Benchmarking. I try to use the index(es) which matches my investing universe. I doubt that's the S&P500 (large cap only) for your case, but If you use the S&P500 as a rough guage, I suppose it's fine, but TSM is likely better, maybe Global equities? However, if you are building analyticals and projections off of it, I'd zero in on the salient index.

I agree, early is the time to be aggressive. I tell my 15yo son this same thing... you probably don't want to retire at 35 or 40, but Financial Independence means you can have freedom to work, not work, switch careers, take a sabbatical, etc. Still, 10% of his Roth is in bonds.
just having a Roth at age 15 tells me, he's not going to have any problems even with 10% bonds. LOL

I think I found a good present value calculator and I looks like I am ahead of the game but still not sure what to do with this info!
with 20 years out to retirement, looks like I could drop my estimated growth rate per year from 7% down to 4% and still hit my goal. So I could take less risks but then again.. keeping at 7% could net me a lot more (nothing wrong with that!) and possibly retire earlier (I'm lazy!)
still good info though.. maybe 10 years from now, I should start doing safer investing..
Best investment advice: "Invest in your education" -Bill Gates

Sailor36
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Re: measurement of success of investment(s)

Post by Sailor36 » Wed Sep 20, 2017 5:36 pm

Remember if you are comparing your returns to an index like the S&P 500, that the usually-quoted S&P 500 just looks at share prices and does not include dividends.

Unless you are spending the dividends and do not want to count them as part of your portfolio's performance, you should use Total Return version of the index. The difference currently amounts to about 2% per year.

This is what mutual funds compare themselves to, assuming that all of their distributions are re-invested. For example if you look at the charts on Morningstar, the index is listed as S&P 500 TR.

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patrick013
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Re: measurement of success of investment(s)

Post by patrick013 » Wed Sep 20, 2017 6:33 pm

Sailor36 wrote:
Wed Sep 20, 2017 5:36 pm
For example if you look at the charts on Morningstar, the index is listed as S&P 500 TR.
I think the majority of chart and information services use the 500, Morningstar,
Yahoo Finance, etc., to calc TR, price, and beta comparisons. Can't think of one
that doesn't. Some let you choose the index used for comparisons.
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Re: measurement of success of investment(s)

Post by MnD » Thu Sep 21, 2017 7:26 am

I have 7 accounts and 18 individual positions (funds, stocks, etf's, cash), 70/30 stock to fixed income+cash ratio, global market cap in equities.
I compare my performance to the most simple real world construction of my asset allocation which is 70% Vanguard Total World Stock (VT), 25% Total Bond Market (BND) and 5% Vanguard Prime Money Market (VMMXX).

I outperform somewhat in up markets and underperform somewhat in down markets so it's pretty clear I have more risk.

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Re: measurement of success of investment(s)

Post by bobcat2 » Tue Sep 26, 2017 12:53 pm

The funded ratio is not the present value of a wealth target at retirement as Kitces mistakenly believes. It is instead the present value of the retirement income target. Therein lies an ocean of difference.

The funded ratio is a metric used to monitor your retirement investment plan. It is simply the ratio of assets to liabilities, where the assets are the size of your portfolio and the liabilities are the present value of your targeted retirement income stream.

The easiest way to estimate the liabilities in the denominator is to price a deferred real life annuity that has payouts that match your targeted retirement income that is derived from your portfolio and begins payments in your expected retirement year.
Link to thread on funded ratio - viewtopic.php?f=10&t=219878&hilit=funded+ratio


Another way to calculate the funded ratio is to estimate the length of your planned retirement horizon and find the present value of your targeted income stream over that span using the duration matched safe interest rate.
Link - https://finpage.blog/2017/01/15/monitor ... ded-ratio/

However you calculate the funded ratio, it is the ratio of current assets to the present value of your targeted retirement income stream – not a wealth target at retirement. Kitces completely defeats the purpose of the funded ratio, which is to get people away from setting misleading retirement wealth targets. That’s mainly because how much income that can be derived from a given level of wealth is conditional on the level of interest rates. From the mid-1980s to the early 2000s the level of real LT interest rates was about 4%. In recent years the level of real LT interest rates has been about 1%. A million dollar portfolio supports a much more retirement income when rates are 4% instead of 1%.

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In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

slowbutsteady
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Re: measurement of success of investment(s)

Post by slowbutsteady » Tue Sep 26, 2017 1:11 pm

Your benchmark should be your alternative investment...meaning if you have not picked those stocks, what would you have invested in?

That said, I will look also look at the S&P. Simple, easy, clean.
The tortoise wins every time I read that story.

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Re: measurement of success of investment(s)

Post by dbr » Wed Sep 27, 2017 10:07 am

slowbutsteady wrote:
Tue Sep 26, 2017 1:11 pm
Your benchmark should be your alternative investment...meaning if you have not picked those stocks, what would you have invested in?

That said, I will look also look at the S&P. Simple, easy, clean.
I agree with your first sentence. Your second sentence is dead wrong.

I would advocate for measure of success how effectively my investment meets my objectives.

Success is an odd word to apply to investments.

Iliketoridemybike
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Re: measurement of success of investment(s)

Post by Iliketoridemybike » Wed Sep 27, 2017 10:18 am

I know what my "number" is, the % amount I need overall to hit my goals long term. If it meets or beats that, it is a success.

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Re: measurement of success of investment(s)

Post by slowbutsteady » Thu Oct 05, 2017 11:11 pm

dbr wrote:
Wed Sep 27, 2017 10:07 am
slowbutsteady wrote:
Tue Sep 26, 2017 1:11 pm
Your benchmark should be your alternative investment...meaning if you have not picked those stocks, what would you have invested in?

That said, I will look also look at the S&P. Simple, easy, clean.
I agree with your first sentence. Your second sentence is dead wrong.

I would advocate for measure of success how effectively my investment meets my objectives.

Success is an odd word to apply to investments.

You disagree with the explanation of alternative investment or the selection of S&P500 as a benchmark criteria?

I, and I'm sure the OP, would agree with your broad consideration of success being anchored to one's investment objectives. But the stated question is around quantitative benchmark to evaluate possible stock or etf selections. I use the S&P500 for several reasons stated up thread.
The tortoise wins every time I read that story.

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Re: measurement of success of investment(s)

Post by dbr » Fri Oct 06, 2017 7:54 am

slowbutsteady wrote:
Thu Oct 05, 2017 11:11 pm
dbr wrote:
Wed Sep 27, 2017 10:07 am
slowbutsteady wrote:
Tue Sep 26, 2017 1:11 pm
Your benchmark should be your alternative investment...meaning if you have not picked those stocks, what would you have invested in?

That said, I will look also look at the S&P. Simple, easy, clean.
I agree with your first sentence. Your second sentence is dead wrong.

I would advocate for measure of success how effectively my investment meets my objectives.

Success is an odd word to apply to investments.

You disagree with the explanation of alternative investment or the selection of S&P500 as a benchmark criteria?

I, and I'm sure the OP, would agree with your broad consideration of success being anchored to one's investment objectives. But the stated question is around quantitative benchmark to evaluate possible stock or etf selections. I use the S&P500 for several reasons stated up thread.
I disagree with the S&P 500. It is indeed convenient and well defined but how is it meaningful to make that comparison? To look at it differently, what has been evaluated? I would suggest that what has been evaluated in comparing the immediate past performance of any two different sets of stocks is no more than the random variation in the returns they have had. What the investor will learn from that is that a set of stocks that is not the S&P 500 will have returns that are different from the S&P 500. A completely different and difficult problem is that of trying to estimate the future expected return of any given selection of stocks, including the S&P 500.

slowbutsteady
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Re: measurement of success of investment(s)

Post by slowbutsteady » Fri Oct 06, 2017 3:33 pm

dbr wrote:
Fri Oct 06, 2017 7:54 am
slowbutsteady wrote:
Thu Oct 05, 2017 11:11 pm
dbr wrote:
Wed Sep 27, 2017 10:07 am
slowbutsteady wrote:
Tue Sep 26, 2017 1:11 pm
Your benchmark should be your alternative investment...meaning if you have not picked those stocks, what would you have invested in?

That said, I will look also look at the S&P. Simple, easy, clean.
I agree with your first sentence. Your second sentence is dead wrong.

I would advocate for measure of success how effectively my investment meets my objectives.

Success is an odd word to apply to investments.

You disagree with the explanation of alternative investment or the selection of S&P500 as a benchmark criteria?

I, and I'm sure the OP, would agree with your broad consideration of success being anchored to one's investment objectives. But the stated question is around quantitative benchmark to evaluate possible stock or etf selections. I use the S&P500 for several reasons stated up thread.
I disagree with the S&P 500. It is indeed convenient and well defined but how is it meaningful to make that comparison? To look at it differently, what has been evaluated? I would suggest that what has been evaluated in comparing the immediate past performance of any two different sets of stocks is no more than the random variation in the returns they have had. What the investor will learn from that is that a set of stocks that is not the S&P 500 will have returns that are different from the S&P 500. A completely different and difficult problem is that of trying to estimate the future expected return of any given selection of stocks, including the S&P 500.

OK to disagree, just curious about the partial disagreement. The second sentence (OK to use S&P) is a logical continuity of the first (compare to performance of what you would have otherwise invested in). A well-used index like the S&P is a simple (and meaningful) benchmark for a bh.

Trying to computationally find a comparable holding is an intractable and frankly impractical approach. Agree we should keep it simple. The OP is asking a practical question about how to evaluate/contextualize the size of his ETF/Stock account when reviewed at any moment(s) in the future.

Btw, I can relate to the OP as I also have some fun brokerage account where I'm experimenting with some equity combinations that are statistically meant to perform well. In year 3 now and doing well...up 25% YTD. I compare to the S&P, not because my selections have any semblance to the index, but because the money would have been in the S&P otherwise. Fair enough?
The tortoise wins every time I read that story.

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Re: measurement of success of investment(s)

Post by staythecourse » Fri Oct 06, 2017 3:46 pm

wstalcup wrote:
Mon Sep 18, 2017 2:28 pm
Hi,
How do you measure success of a certain stock, etf, etc. I pretty much go by the S&P500 (i.e. basically if I beat SPY or VOO). just wondering is this still standard. Thanks!
Great question, but unless you are 100% Large cap U.S. terrible answer. For a passive investor success ii is measured by how much one trails a portfolio of weighted averages of benchmark indexes to the same asset classes that are in your portfolio. That is what is successful. If your portfolio goes up or not all depends on: 1. What asset classes you hold and 2. What the weighted averages are to those asset classes. Nothing more and nothing less. If my portfolio returns -40% and the weighted average of a benchmarks of the same asset classes returns -40% then I have succeeded. Being a successful passive investor means eliminating negative or positive alpha has much as possible.

If you are comparing yourself to an arbitrary benchmark then you are in essence INDUCING frame of reference risk.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: measurement of success of investment(s)

Post by patrick013 » Fri Oct 06, 2017 4:01 pm

staythecourse wrote:
Fri Oct 06, 2017 3:46 pm

If you are comparing yourself to an arbitrary benchmark then you are in essence INDUCING frame of reference risk.
There are qualitative reasons the 500 is the market portfolio. Pragmatically
it is accepted nationally as such. As the 500 goes so goes the market...

Internally VG can use whatever it wants to. If I have a REIT that returns 6.5%
to the 500's 7% I have underperformed on that fund. If I have a dividend fund
that returned 11% to the 500's 7% I have a fund that is overperforming compared
to the accepted market average.

Comparing small caps to small caps or sectors to sectors is slightly different than
the market return. And yeah, the 500 is mostly large caps, so be it. Nothing of
small stature. A wonderful thing to argue about.
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Re: measurement of success of investment(s)

Post by staythecourse » Fri Oct 06, 2017 4:08 pm

patrick013 wrote:
Fri Oct 06, 2017 4:01 pm
staythecourse wrote:
Fri Oct 06, 2017 3:46 pm

If you are comparing yourself to an arbitrary benchmark then you are in essence INDUCING frame of reference risk.
There are qualitative reasons the 500 is the market portfolio. Pragmatically
it is accepted nationally as such. As the 500 goes so goes the market...

Internally VG can use whatever it wants to. If I have a REIT that returns 6.5%
to the 500's 7% I have underperformed on that fund. If I have a dividend fund
that returned 11% to the 500's 7% I have a fund that is overperforming compared
to the accepted market average.

Comparing small caps to small caps or sectors to sectors is slightly different than
the market return. And yeah, the 500 is mostly large caps, so be it. Nothing of
small stature. A wonderful thing to argue about.
Boy, some reading is in order.

Yes I agree sp500 is GREAT proxy of the US equity market return as a whole, but who cares unless you are actually 100% in US large cap. If your 20/80 (SP500/ cash) and had a return of 2% when the SP500 returned 10% is that a failure? No, you are 1/5 in the benchmark so that 20% did what it was supposed to. The fact your overall return is lower is NO fault on yours or portfolio. It only trailed based on using the wrong benchmark. If you used an appropriate benchmark of 20%sp500 and 80% cash you would be okay with the 2% return as it would be close to such a benchmark return.

I'm a bit cynical so I really do believe the sp500 is used as a benchmark over and over again on financial porn to scare investors they are under performing and scaring them to dump a more conservative approach and chase the a higher equity return.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

dbr
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Re: measurement of success of investment(s)

Post by dbr » Fri Oct 06, 2017 4:12 pm

slowbutsteady wrote:
Fri Oct 06, 2017 3:33 pm


OK to disagree, just curious about the partial disagreement. The second sentence (OK to use S&P) is a logical continuity of the first (compare to performance of what you would have otherwise invested in). A well-used index like the S&P is a simple (and meaningful) benchmark for a bh.

Trying to computationally find a comparable holding is an intractable and frankly impractical approach. Agree we should keep it simple. The OP is asking a practical question about how to evaluate/contextualize the size of his ETF/Stock account when reviewed at any moment(s) in the future.

Btw, I can relate to the OP as I also have some fun brokerage account where I'm experimenting with some equity combinations that are statistically meant to perform well. In year 3 now and doing well...up 25% YTD. I compare to the S&P, not because my selections have any semblance to the index, but because the money would have been in the S&P otherwise. Fair enough?
Oh sure, if comparison is meaningful to someone, then they might use it. I go the opposite direction and don't see that benchmarking is meaningful at all. In fact I take back even looking at what one would otherwise have invested in. That would be meaningful in theory but in practice is not helpful because investment results in stocks are too variable and make comparisons impractical. It is an example of confusing outcome and strategy.

The one exception about benchmarking is that it does make sense to compare an index fund to the behavior of the index it wants to track to see if the fund has indeed represented the index also without having noticeable costs.

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Re: measurement of success of investment(s)

Post by patrick013 » Fri Oct 06, 2017 4:15 pm

staythecourse wrote:
Fri Oct 06, 2017 4:08 pm

Yes I agree sp500 is GREAT proxy of the US equity market return as a whole
Aha, then we are in complete agreement.
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Re: measurement of success of investment(s)

Post by triceratop » Fri Oct 06, 2017 5:03 pm

patrick013 wrote:
Fri Oct 06, 2017 4:15 pm
staythecourse wrote:
Fri Oct 06, 2017 4:08 pm

Yes I agree sp500 is GREAT proxy of the US equity market return as a whole
Aha, then we are in complete agreement.
You are not in agreement. You are pulling out one element of agreement to paper over the substantial disagreement (and the source of your error of thinking).

The market portfolio for an investor who does not wish to be home biased is the Total World Stock index. A reasonable fund to compare portfolio returns to is the Vanguard Total World Stock Index Fund.

The SP500 is a fairly good proxy of the US equity market. It is not a good proxy for a generic equity investor.

By the way I didn't see a refutation of this post anywhere. Please re-read the wise comments on this thread (mostly not by myself) and reconsider, because you have a mistaken belief about this.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: measurement of success of investment(s)

Post by staythecourse » Fri Oct 06, 2017 5:18 pm

patrick013 wrote:
Fri Oct 06, 2017 4:15 pm
staythecourse wrote:
Fri Oct 06, 2017 4:08 pm

Yes I agree sp500 is GREAT proxy of the US equity market return as a whole
Aha, then we are in complete agreement.

I am assuming that was tongue in cheek. Either way I am not trying to change your mind. If you think SP500 is a suitable benchmark for all investors despite their actual asset allocation then there is nothing else to say.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: measurement of success of investment(s)

Post by patrick013 » Fri Oct 06, 2017 5:19 pm

triceratop wrote:
Fri Oct 06, 2017 5:03 pm
The SP500 is a fairly good proxy of the US equity market.
Then we are in complete agreement. Ask any other firm in the
country. It is the US market portfolio. VG's statisticians sure
do have some other ideas.
age in bonds, buy-and-hold, 10 year business cycle

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patrick013
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Re: measurement of success of investment(s)

Post by patrick013 » Fri Oct 06, 2017 6:37 pm

triceratop wrote:
Fri Oct 06, 2017 5:03 pm
The market portfolio for an investor who does not wish to be home biased is the Total World Stock index.
Rather unconvincing. All those value traps buried in static
statistics. Has no utility to me for investment comparison.
A beta statistic based on that index won't be any good at all.
Sorry. Fine without it.
age in bonds, buy-and-hold, 10 year business cycle

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