If you manage your own assets, knowing how well you did -- or didn't do -- is crucial to your success. To do this, you need a reliable method to measure yourself. Some of you may discover that it's cheaper, more tax-efficient, to simply index; you may ultimately generate better returns by avoiding stock selection and market-timing altogether.
But before you can make that decision, you need to know, in the immortal words of former NYC mayor Ed Koch, "How'm I doing?"
Last week we reviewed the importance of
memorializing what you were thinking when you bought a stock. This week, let's figure out how well you are doing with what you purchased.
Like most people, you
you know what your performance is. But I'll bet you cannot tell me what your returns were for the past one-, five- and 10-year periods. How did you do last month and last quarter? How have you fared relative to the
If you cannot answer these questions, you know far less about your own performance than you thought you did.
The Mighty Spreadsheet
The basic tool to help answer these questions is the spreadsheet. We start with an Excel template, and today we will review several ways by which you can evaluate your returns. You will be able to compare how well you are doing relative to the benchmarks over any time period you like (daily, weekly, monthly, quarterly, etc.).
it's something you can -- and should -- customize to your own needs. (Special thanks goes to fund manager Dave Edwards for creating the original version of this for a
column in 2000.)
The first thing you will notice is that the spread sheet contains many of the same topics we discussed
last week in the trading diary. This is no coincidence, as these two tools are designed to complement each other.
By entering the information from the diary to the spreadsheet, you will be able to examine and review five separate components to your portfolio:
Performance: Knowing how well you are doing -- on both a relative and absolute basis -- will help you determine if you need to make major or minor course corrections.
Asset Allocation: You can very easily see when a position becomes too large relative to the rest of the portfolio. If most of the asset percentages are between 1% to 5%, that one stock or fund that's 14% really sticks out like a sore thumb. Recognizing this at least gives you the opportunity to decide if you want that much risk in a given stock.
It's easy to see when your portfolio is being dominated by a given sector. In the 1990s, it was tech and telecom; these days, it seems to be energy and housing that are slowly taking over portfolios. There's a reason you want balance, especially after an outsized move in an extended sector.
Data Mining (Strategy review): Price-to-earnings, P/E-to-growth, market cap, growth rate, beta, dividend yield. These are just some of the criteria you can keep track of. This allows you to determine what criteria are working best, just at a glance. Are high P/E and big beta stocks doing well? Or are low P/E stocks with good dividend ratios what's working? Either way, that tells you something about your holdings -- and the overall market as well. It also shows you where some tactical adjustments might be necessary.
Charts & Graphics: If a picture is worth a 1,000 words, then a spreadsheet must be worth a million: That's because you can take any and all of the entered data and turn it into a pie chart or graphic.
Let's do a quick experiment: look at columns L and M, and rows 35-44. It's the sector totals for both your portfolio and the S&P 500. Highlight column L, rows 35-44, then click on the chart wizard button -- it looks like a chart with a wand. Select a chart type (I like the pie chart), and then a sub type (my favorite is the 3D exploded chart). Click your way through the four steps. On the last one, select new sheet. Then click finish. Do the same thing for column M. The tabs at the bottom of the spreadsheet will let you switch back and forth between charts.
Look at your sector holdings breakdown, and then the relative weighting of sectors in the S&P 500. Are you comfortable with how similar or different your holdings are from the index?
Record Keeping: Your spreadsheet becomes a backup to your regular statements. Trust me when I tell you, this is often a lifesaver in a pinch. Your purchase price, date of buy, quantity and commissions all have tax implications. Keeping a spreadsheet creates a powerful record-keeping system, including cost basis. When some crucial brokerage statement turns up missing around tax time, your accountant will be relieved you have a back up (he can thank me then).
Using a spreadsheet gives you the ability to see these items across your entire portfolio, and then to make whatever adjustments are necessary. You can "play with the numbers," to see how different alterations affect your overall holdings in real time.
The bottom line is that unless you know what the bottom line was, you cannot make adjustments. It's the key to good performance.
Caveats & Invites
Anything you do on a computer should be backed up, burned to CD or DVD, and stored in multiple locations (home, office, bank vault, lawyer, accountants, etc.). Excel files are small enough that you can email them to your
account monthly, and then save them. Again, you will thank me later for this.
Finally, I am making the same request/offer as last week: Play with the spreadsheet -- add to it, personalize it, make it your own. Anyone who feels they have significantly improved on it should email me an Excel copy. Fame and fortune await you; I may share truly outstanding improvements with your fellow readers in a subsequent column.
For instance, reader Perry Spector of Encinitas, Calif., made an astute observation regarding last week's column: Investors also need to keep a record of what and why a trade is passed over. That's a terrific suggestion. Knowing what you were thinking about the ones that got away can only help you with future stock selections.
Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback;
to send him an email.