Investment Performance Analysis

How we perform investment performance analysis and provide our clients access to this information, on demand, with great technology.

“

“I want to be able to login and know how my accounts are doing at any time.”

About Investment Performance

It is important to feel confident in your investments. This web page will help you learn:

How we do performance

Learn a little bit more about investment performance so that you can make informed decisions.

How different companies report

Learn how companies report performance differently, so you can compare apples to apples.

How to compare

Learn some tips on how to compare and not to be misled by performance information.

How We Report Investment Performance

We provide two different websites for you to login to see your investment accounts.

E*TRADE Advisor Services

The first website shows your assets at ETRADE Advisor Services. This is where we custody most of our assets. For most of our clients, this is the only login they need.

Albridge

Some of our clients have assets like variable annuities, variable universal life insurance, 529 plans, and other investment accounts held away from ETRADE Advisor Services. We provide a second website that provides you a single place to find the information about all of your accounts. Each website has its own login credentials.

Client Access

All About Investment Performance

Learn a little bit more about investment performance and how not to be misled by performance information as well.

How to read your investment performance report

For most of us, we like to keep it simple: am I earning enough on my investments to achieve my goals?

Our websites will do all the performance calculation work for you. You are able to login whenever you want and see your performance information in almost any way you want. So, for people who like details, this is powerful. It can also be confusing if you have not already earned a college degree in finance. Even if you have those advanced degrees, the intricacies of performance calculations can be tough!

The more you learn, the more you will understand the information you will receive. And the more you understand, the greater your confidence. Read on to learn more.

Why is investment performance complicated?

It seems like it should be easy to calculate a percentage return. The formula should be something like this: ending value minus beginning value equals gains. Gains divided by beginning value is a percentage gain. Right?

Right…but what about the timeframe? The calculation becomes different when you want to know what percentage per year (annualized performance) you have earned. And it is really different if you want to know other timeframes—our websites allow you to choose any timeframe you want.

It gets more complicated in the real world because of cashflow. What happens when you are adding (or withdrawing) money to the account? The calculation becomes much more complicated when you add different dollars at different points in time. Do you start tracking each deposit/withdrawal separately?

What do you compare it to? How do you compare your account’s performance to a benchmark index or another mutual fund or a group of investments? To do that, you have to know all of the information above: dates, dollars in, dollars out, for all of your investments. You have to know it for all of the investments you want to compare. Plus, as discussed elsewhere, you have to know where else you could have been invested; they call this cost of capital, and/or the safe money rates of return.

Fortunately, our websites will do all this work for you. And the more you learn, the more you will understand the information you will receive.

How we calculate investment performance

For all the reasons outlined above, performance calculations are more complex than they first appear. We discuss different ways to calculate performance. Each method has advantages and disadvantages. And not every investment company calculates returns the same way. First, we look at the method our providers use, called the “IRR.”

Our providers use the Internal Rate of Return (IRR) Calculation method. The Internal Rate of Return (IRR) is used to calculate the money-weighted rate of return. Like the Modified Dietz calculation, discussed elsewhere, we value the portfolio at the starting and ending points of the period. Cash flows are included based on their timing.

The IRR is related to the time-value of money or present value formula. It calculates the discount rate which will take the starting value and all cash flows to result in the ending market value. This type of calculation looks at the actual returns on dividends, sales or other deposits, which is a clear difference from the other types of performance calculations.

Large cashflows dominate small cashflows—they have a much larger effect on your percentage returns. Similarly, the most recent period of time dominates returns—for better or worse. Keeping money in cash hurts returns because the cash is included in the calculation—this is different than the two other methods, discussed next.

To be clear, the providers we use for performance reporting show the internal rate of return (IRR), not any other calculation.

How most mutual funds calculate investment performance

Mutual funds and some other large investment companies use a performance calculation regulated by an international organization called GIPS. That organization requires these types of companies to use a performance calculation called Modified Dietz. To be clear, mutual funds do not calculate performance like you and I calculate performance.

The Modified Dietz calculation is useful for businesses and financial managers who are looking at a project. It is often shortened to the abbreviation MIRR: Modified Internal Rate of Return. From an investment standpoint, MIRR makes an assumption that any money an investor adds to the portfolio (or receives from a dividend or other means) is reinvested at “the firm’s cost of capital.”

For investors like you and I, who are people, the cost of capital is a largely irrelevant. If we did try to figure it out, each person’s cost of capital would be completely unique. For example, if you have a mortgage and you have investments, you could consider your cost of capital the same as your mortgage rate. Keeping money in cash, when it could pay off the mortgage, costs you a little bit of interest.

If you compare your personal returns with a mutual fund’s return, you are not comparing apples to apples. Performance may be over- or under-stated.

Big real estate firms use a different performance calculation

A quick note on a third type of investment performance calculation used in real estate, and REITs, but not used by us. It is called the financial management rate of return. This way to calculate performance includes the “cost of capital” and adds a third type of reinvestment, called the safe rate. Why do they do this?

Because a real estate investor who receives cash has at least three rates of return (or costs they must pay) on the cash. They might (but probably will not) earn a (hopefully high) appreciation rate on their real estate, they might earn (or pay) the cost of capital, or they might earn the (low) safe rate of return in a bank or wherever.

Again, for the real world, individual investor, the situation is unique. So we want to be careful when we compare these returns to those returns, because they may not be an apples-to-apples comparison.

Performance Calculations, a Summary

To summarize, we use IRR to report performance. It takes into consideration your deposits, withdrawals, and the passing of time. IRR is the most accurate calculation for our clients. It is also a more complicated calculation than most of us would do on our own.

Mutual funds and a large number of other investment companies usually use the Modified Dietz method. REITs and large, professional real estate companies use FMRR.

Understanding the decades of thoughtfulness that went into the different calculations may help you feel a little humble, and also empowered.

Why Investors Underperform Their Own Investments

Here are two big reasons investors often earn a lower return than they could.

We like to take action

As discussed in Investment Advice, investors often underperform their own investments. We believe the single greatest help we can provide our clients is behavioral. We help our clients understand where they are invested, why they are invested, and what the risks are (and are not) in their real-life financial journey.

Investors who tinker with their investments often do not earn the same rates of return as their investments. They “time” themselves out of earning better returns. Investors are hard-wired to feel more confident after they have experienced recent investment gains. But this means we buy high.

We are emotional

Similarly, we are hard-wired to want to sell after losses—or when we feel we may experience future losses. And, truth be told, no one knows the future and investments go up more often than they go down. So, when we sell, we have a higher probability to miss out on future gains than we do in avoiding future losses.

Our financial advisors help you understand the right amount of risk to take for your personal, real-life financial goals.

Asset Allocation & Portfolio Management

Balance the risk and reward between investments to achieve your real-life financial goals.

Stock & Stock Fund Investments

We build high-quality, actively-managed equity portfolios using academically-proven techniques.

Concentrated Equity Strategies

If you have a large amount of your net worth in the equity of a single company, learn how to reduce your risk, reduce your taxes, protect and grow your wealth.

Single Stock Diversification

Learn how we build an investment portfolio around your large equity position and help you diversify—not double-down (or worse) your risk.

Stock Option Planning

Learn about how we manage incentive stock options and nonqualified stock options to help you grow and protect your wealth, reduce your taxes, and achieve your personal goals.

Bond & Fixed Income Investments

Learn how our team makes recommendations for the portfolio we call “Foundation Income.”

Hedging Strategies & Alternatives

Learn how we carefully select some alternative investments to provide income and growth for some clients.

IRAs: Roth, Rollover, Inherited and More

Learn how we solve the complex problem of providing retirement income and reducing income taxes.

Annuities of All Kinds

For some clients, an annuity may provide a safe and prudent retirement income. We have independent, expert annuity agents with a huge array of providers to choose from.

401K Advice for Individuals and Businesses

Learn how we provide retirement plan advice for our clients 401k accounts, and for employers who want to provide advice to their employees.

Talk with an Expert

Our wealth management approach may be different from experiences you have had with other advisors.

Attend an upcoming event

We offer a broad array of events that broaden our knowledge and experiences.

View All Events

Recent Blog Post

Read this Periscope to learn what today’s politics might mean for our investments and also to get the short, (and long if you like), version of our investment and economic commentary.