Family Business: Investment portfolio performance

Kim Kantor

Photo by Lexey Swall, Naples Daily News

Kim Kantor

An investor recognizes the importance of measuring the performance of their investment portfolio. A successful investment strategy is when the long-term goals at origination of the portfolio design have been achieved.

However, what is the portfolio to be measured against, and over what time period?

Historical performance is used by some as a guide in measuring their performance, but past performance is never a guarantee of future results. How do you measure past results? Doing a comparison of your portfolio against benchmarks could work. But which benchmark(s) do you use as a comparison?

Market indexes or a "blend" of indexes are used to represent a comparison on investment performance. Understand the benchmarks and which ones are best to measure against with your portfolio. Generally your adviser concentrates on understanding the makeup of your accounts, the indexes, and the diversification of your portfolio.

In measuring the performance of a broad portfolio selection, the most commonly known indexes may not be the best measurements of an investment strategy. Advisers usually lean toward benchmarks that are representative of the investment objective and the individual stocks that may be held in the portfolio.

Are you aware of the Dow Jones Industrial Average, the S&P 500, or the Barclays Aggregate Composite? How will these help in understanding your portfolio? The following do not include any international holdings:

The Dow Jones industrial average is a widely quoted market measure. It is an accepted method of measuring stock market performance representing 30 U.S. Large Cap stocks (large capitalized companies) and is "price weighted." The higher the price, the more weighting that stock has on the movement of the index. The stocks are selected by the editors of The Wall Street Journal representing the U.S. market; this index is not widely used as a benchmark for actual portfolio performance.

The S&P 500 index is a measure of broad stock market performances and is commonly used as a measure of Large Cap performance. It represents 80 percent of the total U.S. stock market capitalization with 500 Large Cap stocks. It is "market capitalization" weighted; each company is selected by Standard & Poor's according to market size, liquidity, and industry group representation.

Membership criteria are based on the strong liquidity and high quality of the stock company, but it has a narrow focus of only the Large Cap segment. Diversified portfolios may have Mid/Small Cap company ownership. It does not differentiate between Growth and Value stocks which can provide substantial variations in performance.

One of my favorite barometers of the U.S. marketplace is the Wilshire 5000 Index. It is a representation of the U.S. equity market.

If a U.S. stock has pricing data, it is included in this index so more than 7000 U.S. stocks might be represented and can change; some have limited liquidity. The index is "market capitalization" weighted and comprehensive with a clarity as to what makes a stock part of the index, but limiting the ability to replicate the index within a portfolio like one might do holding an S&P 500 or Dow Jones Industrial Average portfolio.

Kim Ciccarelli Kantor is president and founder of Ciccarelli Advisory Services Inc., a family owned and operated firm in Florida and New York, which provides financial investment and estate planning services for individuals, families and businesses. Her book is "Preserving Family Wealth & Peace of Mind." Ciccarelli Advisory Services, Inc. is at 3066 U.S. 41 N., No. 202, Naples. 239-262-6577

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