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Portfolio Checkup: How are My Investments Performing?

SAN DIEGO (ETFguide.com) - The year 2010 is already half over and it's time to evaluate your investment portfolio to find out if it's delivering. Instead of focusing on the daily movements of interest rates or the financial markets, it's time for some honest self-examination. How are your investments really performing?

Warning Signs

The first tell-tale sign of a sub-standard investment portfolio is chronic underperformance relative to funds or ETFs that follow major stock and bond indexes. Over the past year (or past several years) how has your IRA, 401(k) plan or brokerage account performed relative to major stock and bond yardsticks? If you don't know the answer, then find out. Otherwise, you're shooting in the dark.

Using the Right Measurement Tools

Inexplicably, most people never bother to evaluate the performance of their IRA account, 401(k) plan and other investments. And Wall Street likes it that way too. If investors are unable to correctly analyze their portfolio's true performance, it allows financial advisors and money managers to escape accountability.

Furthermore, the mutual fund industry has done an excellent job at promoting distorted tools for measuring performance like the usage of peer group comparisons. For example, the performance of a large cap equity fund is compared to the collective performance of other large cap equity funds. If a fund is outperforming other funds within its peer group, the fund gets accolades. However, this methodology for performance is absolutely misleading.

'Peer group comparisons are dangerous,' observed Nobel Prize winning economist, William F. Sharpe in a research piece titled, 'The Arithmetic of Active Management.' 'Because the capitalization-weighted average performance of active managers will be inferior to that of a passive alternative, the former constitutes a poor measure for decision-making purposes. And because most peer-group averages are not capitalization-weighted, they are subject to additional biases.'

Put another way, the only way to accurately measure the true performance of your investment portfolio is to compare it versus passive alternatives or corresponding index funds/ETFs. By using anything else you'll wind up with skewed or distorted performance comparison results.

Focusing on Big Picture

Instead of focusing your attention on a few individual holdings within your portfolio, (i.e. the little things), it's better to analyze the collective performance of your entire portfolio (i.e. the big things). If your investments are not performing in line with either your expectations or up to par with major stock and bond yardsticks, it's probably due to deficiencies related to cost, diversification, risk and tax-efficiency. One of these things or all four are likely contributing to your lack of investment progress.

In many cases, sub-standard performing investment portfolios require remodeling or in extreme cases, complete demolition. If it's broken, fix it!

Only once a broken investment portfolio is completely dismantled can hope of forward progress be achieved. Getting rid of lousy performing stocks, mutual funds and other investments holding you back is an important step forward. Then, re-constructing your portfolio on a solid foundation of low cost index funds or ETFs comes next. By doing this, you'll avoid repeating your former mistakes. You'll also learn to trust the indexes and not the TV personalities or money managers that try to beat them and fail.

Finding a Winning Formula

Corn syrup, carbonated water, food coloring, and sugar are among Coca-Cola's famous ingredients. Even though getting your hands on these ingredients wouldn't be much trouble, it wouldn't do you much good. That's because only Coke's secret formula describes the exact quantity of each key ingredient. In other words, you can't successfully duplicate a bottle of Coke without the right formula.

Similarly, if you're going to build a successful investment portfolio, you need to use not just the correct ingredients but the right formula. Which investment strategies are producing results right now?

Despitea sinking euro dollar (NYSEArca: FXE) and falling stock prices (NYSEArca: VT), ETFguide's Contrarian Fox and World Traveler ETF Portfolio 's have proven themselves by increasing 3.24% and 7.03% year-to-date.* Because each of our ETF portfolios follows a specific pre-determined investment strategy, we are able to own the correct ETFs that best fit that particular game plan.

What's your game plan? Get a detailed analysis of our ETF portfolio holdings, our investment rationale and find out which ETFs we're buying or selling.

*Performance through 6/4/10 market close.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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