The Dow is down around 34% since mid-May. Or is it? Sometimes, performance is largely in the eye of the beholder.With all of the different ways to measure rates of return, the numbers you read in investment prospectuses and papers might not mean as much as you would think. So, want to know how to measure your investment performance objectively? Read on.
Here's why: They use different methods to calculate returns (we'll get to those in a minute). And in today's volatile markets, those differences can amount to a pretty big number, so let's take a look at how some of the big indices calculate returns.
Let's go back to our IBM and Exxon Mobil example. Right now, the daily returns (based on recent trading days) for each stock are -1.12% and +3.31%, respectively. Here's how we would calculate our portfolio's returns under each of these methods: Price-Weighted: Today's Combined Prices minus Yesterday's Combined Prices divided Yesterday's Combined Prices ($149.17 - $149.97) / $149.97 = -0.53% Value-Weighted: (Today's Values - Yesterday's Values) / Yesterday's Values ($459.12B - $455.44B) / $455.14B = +0.81% Equal-Weighted: Exxon's Daily Change + IBM's Daily Change -1.12% + 3.31% = +2.19% That's right, the way returns are calculated can mean the difference between gains and losses on a given day. As you can see, over time there can be a pretty material difference in returns depending on how they're calculated.
Fat Pitch Financials offers a tutorial on calculating your returns, as well as useful spreadsheets to help you calculate them for your holdings. Geometric Average Return. The most accurate way to look at your performance is by calculating this useful metric. TheStreet.com's Portfolio Yield Calculator offers a quick way to calculate the returns on your portfolio.