Portfolio management

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19. Benchmarking performance

Performance measurement is not just helpful in investment, it is essential.

The very idea of passive investment is that you are trying to match the performance of a benchmark index, such as the Footsie, less your costs. And the whole point of active investment is to do better than a passive benchmark, but without taking too many risks. Measuring your performance in this way will enable you to:

• Decide whether the results you are getting justify the time and effort you are putting in.
• Improve those results over time by applying the lessons of experience.
• Compare yourself against your pension managers, and perhaps determine whether you should be managing your own pension.

Which benchmark should you choose? The only fair method is to compare like with like. If you invest only in big UK companies, the appropriate index would be the FTSE 100 or 250. If, like most people, you can invest in a mixture of large and small firms, plus some trusts, the FTSE All-Share may be more suitable.

Below is a list of the main indices you may need to refer to. You can find all of them in the back pages of the FT:

You should measure each of your holdings against the appropriate benchmark. Note the value of the index the day you buy the holding. Note it again when you sell. Divide the second figure by the first. This shows you the percentage rise or fall of your benchmark, so you can compare it with your profit or loss:

Example

At least once a year, you should repeat this exercise to measure the performance of your whole portfolio. Don't make your performance look better than it is by counting any new cash you have contributed during the year as profit! But don't make it look worse, either, by adding that cash to the amount you started with. Instead, calculate the average amount of capital you have used during the year, as follows:

Example

The amount you have made over and above the average capital you have used represents your true annual profit. If you are ahead of your benchmark after two or three years, congratulations. If not, consider passive investment or handing your portfolio over to the professionals.

1. First things first 2. Should you invest before paying off your mortgage? 3. Do you want growth or income? 4. Diversification: summary 5. Diversification: Safe custody 6. Diversification: asset allocation 7. Diversification: shares 8. Diversification: sectors 9. Diversification: countries 10. Balancing your portfolio 11. What should you hold where? 12. Tips for married couples 13. Lump sum or drip feed? 14. The role of cash 15. Rebalancing your portfolio 16. What to do with dividends 17. All about bonds 18. What to do if you inherit a portfolio 19. Benchmarking performance 20. Setting up a portfolio spreadsheet 21. Conclusion

• One Up on Wall Street