EVALUATING YOUR INVESTMENT PERFORMANCE
- philmcavoy
- Oct 22
- 4 min read
Most people track their investment results casually—or even emotionally—rather than empirically. They might have a rough idea of how their investments are doing from their account statements, but they rarely compare their results to objective benchmarks.If you have nothing to compare your performance against, how do you really know how you’re doing?
When I ask people about their investment performance, I often hear comments like these:
“We have a guy (or gal) who’s great. They have a knack for picking the right stocks. They got us into XYZ Company two years ago, and it’s done really well.”
“I just looked at my statements, and it showed that my investments had a 26% return over the last two years. I thought that was really good.”
“I’ve been using my advisor for ten years, and I’m very happy. They’re beating the estimates from the retirement plan we developed back then.”
“I do all my investing myself. I made a lot of money on lithium battery stocks (or marijuana companies, etc.) over the last couple of years.”
But when you ask these same people how their entire portfolio has performed compared to a benchmark like the S&P 500 over longer periods (3, 5, or 10 years), you often get blank stares or vague answers. Ironically, these are the same people who spend hours online comparing prices on vacuum cleaners to save $50—but when it comes to tracking something that could be costing them hundreds of thousands or even millions of dollars, they don’t know and often don’t want to know.
The Problem with Anecdotal Evidence
Those comments above are what we’d call anecdotal evidence. People love to share their good stock picks—but rarely mention the bad ones. And comparing actual performance to the conservative projections used by financial advisors isn’t valid either. Most advisors use assumptions of 6% or 7% annual growth in their planning models to ensure their clients don’t outlive their money. That’s prudent for planning—but not for measuring results.
The Importance of Long-Term Measurement
Many investors focus too heavily on recent performance because it’s easy to see on their latest statements. But recent performance tells only a small part of the story.The most meaningful measure of investment success is long-term performance. Investment results start to become reliable around the five-year mark, and ten-year results are even more telling. Why? Because the best way to evaluate a strategy is to see how it performs in both good markets and bad markets.Since a typical bull-and-bear market cycle lasts about 7.5 years, you need at least that much history to make a true performance judgment.
Example: My System vs. the S&P 500 (2002–2008)
Clearly, my system outperformed the S&P 500 over this seven-year period by about 9% per year. That level of outperformance is above average for my system, which typically beats the S&P 500 by about half that amount.
Focusing on Too Short a Timeframe
Now, let’s look only at the years between 2004 and 2006:
During those three years—average years for the S&P 500—my system underperformed by about 2.5% per year. If you had judged the strategy solely on that short window, you might have abandoned it—just before it dramatically outperformed in the following two years (2007–2008), gaining 56% compared to the S&P 500’s 43%.
The Danger of Short-Term Thinking
Many experienced investors actually make the mistake of evaluating performance over too short a time frame, simply because they watch the market more closely. They get caught up in daily or monthly moves—missing the forest for the trees.I’ve seen very smart investors switch strategies after just a couple of months of underperformance. But if you change investment strategies frequently, you don’t have an investment strategy at all. These folks become victims of a common mistake called Chasing Performance. These “experienced investors” end up making changes after a period of losses or underperformance—essentially “selling low and buying high.”
When It’s Right to Change Course
I’m not suggesting you stick with a bad strategy indefinitely. If your performance diverges dramatically from expectations, it may be time to make a change. For example, the S&P 500 was up 24% in 2023. If your growth strategy lost 10% that same year, it’s a clear sign something is wrong. In strong bull markets, all growth-oriented strategies should deliver solid gains.But no strategy will perform perfectly in all markets. My system prioritizes capital protection during bear markets. In the 2002 and 2008 downturns, my strategy lost just 4.6% per year on average—much less than the market (-31% per year)—and recovered much faster. In the up years, my system only modestly outperformed the market—by a few percentage points per year—and even underperformed during 2004–2006.
Winning the War, Not Every Battle
As a long-term investor, your goal is to win the war, not every battle.
If you’re 65 years old, your investment horizon is still likely 30 years or more. My system is designed to generate above-average returns over 10-, 20-, and 30-year periods while minimizing large losses in severe bear markets.
I wish I could beat the S&P 500 every month or every year—but that’s beyond my powers (and everyone else’s too).
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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