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How to Measure Your 2009 Performance

2009 is drawing to a close. Whether you are a professional money manager or an individual investor, it's time to measure your performance for 2009. This is a time when you can bask in your glory while also reflecting upon your mistakes.

First, let me reiterate the Finance Professor's Portfolio Grading System. This system incorporates both absolute and relative performance measures. (Please note: Performance should be calculated after you subtract all fees and expenses.)

  • Grade A: Your rate of return substantially outperformed your benchmark by more than 5 percentage points.
  • Grade B: Return performance beat your benchmark by at least 0.25 percentage points but less than 5 percentage points.
  • Grade C: Return performance met your benchmark (or was within a reasonable margin of +/-0.25 percentage points).
  • Grade D: Return performance was below your benchmark by at least 0.25 percentage points but less than 5 percentage points.
  • Grade F: Return performance was substantially below your benchmark, by more than 5 percentage points.
  • Add a "+" to your letter grade if you were profitable and a "-" if you lost money.
  • My grade is an A+ for 2009, and you can take a closer look at my performance on my LakeView Asset Management Web site.

    The most important thing is to properly select a benchmark. If you are investing in a broadly diversified portfolio of stocks, perhaps the S&P 500 is your index. If you prefer to invest in small-capitalization stocks, you might select the Russell 2000. Bond portfolio managers might seek to benchmark their performance again the Barclays Capital U.S. Aggregate Bond Index, which can be replicated to some extent with iShares Barclays Aggregate Bond (AGG).

    For example, let's suppose that you made 28% this year, and your benchmark is the S&P 500, which for purposes of this example rose 25%. You would receive a B+ as a performance grade this year, because your return performance beat your benchmark by 3 percentage points and you were profitable.

    Now let's try to examine some of the root causes for this year's over-and-under performance.

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