# How best to evaluate my performance against a benchmark?



## lemongrass1 (2 April 2015)

I've been investing for a little while and my research has primarily focused on determining a strategy for stock picking. Now that I have that clear in my head, I would really like to have a more objective, simple way of comparing my performance against some benchmarks (probably the ASX200 and S&P 500).

I'm not a big fan of creating and maintaining complicated excel spreadsheets. Is there any software I can use where I can enter relevant info and it can do all the comparisons for me? How do others measure their performance?


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## DeepState (2 April 2015)

lemongrass1 said:


> I've been investing for a little while and my research has primarily focused on determining a strategy for stock picking. Now that I have that clear in my head, I would really like to have a more objective, simple way of comparing my performance against some benchmarks (probably the ASX200 and S&P 500).
> 
> I'm not a big fan of creating and maintaining complicated excel spreadsheets. Is there any software I can use where I can enter relevant info and it can do all the comparisons for me? How do others measure their performance?




Well, there are software systems available to do it....at a price. Things like Barra, FactSet, Axioma...will give you this, but it will drain your bank account for the privilege.  I think you are talking about something called an 'attribution analysis'.  Basically, it slices up the difference between your portfolio return and that of some comparative portfolio a gazillion possible ways...and then some.

What are you hoping to get out of it?  A simple performance comparison between your portfolio and that of your benchmark is a low load.  Any further analysis that you conduct needs to be useful for the way you manage money to be valuable beyond curiosity.  There is less point in determining that your tilt to 'Quality' earned you 30bps in the last six months if the concept doesn't enter your mind.  More straight forward analysis simply breaks it up to stock level contributions and yet others will break it up to sector allocation first and then stock selection within those.

What questions are you hoping to answer?

Ultimately, I do not know of a simple software mechanism which is freely available.  If you are seeking a stock level comparison against ASX 200, for example, the platform would need to link up with your accounting info and also a feed which contains the constituents of the ASX 200 [which, surprise, comes at a fairly serious cost]. Ultimately, I have not looked for low cost solutions.  However, this is a truly excellent thing to be seeking as part of your process.  I hope you find something which work for you.


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## craft (2 April 2015)

lemongrass1 said:


> I've been investing for a little while and my research has primarily focused on determining a strategy for stock picking. Now that I have that clear in my head, I would really like to have a more objective, simple way of comparing my performance against some benchmarks (probably the ASX200 and S&P 500).
> 
> I'm not a big fan of creating and maintaining complicated excel spreadsheets. Is there any software I can use where I can enter relevant info and it can do all the comparisons for me? How do others measure their performance?




Nice to see a desire to objectively review your performance.

Chart below is from a fairly simple piece of software called Insighttrader. It allows you to track your equity curve against any data you have. I have included the ASX200; ASX200 accumulation and S&P500 as examples of comparisons. Can be produced with the press of a few buttons.




Is that the sort of thing you are after?

I would think that any software that incorporates both a charting package and a portfolio manager would/should be able to produce similar - but that's a bit of a guess because I haven't looked into new software for years.


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## systematic (3 April 2015)

lemongrass1 said:


> I've been investing for a little while and my research has primarily focused on determining a strategy for stock picking. Now that I have that clear in my head, I would really like to have a more objective, simple way of comparing my performance against some benchmarks (probably the ASX200 and S&P 500).
> 
> I'm not a big fan of creating and maintaining complicated excel spreadsheets. Is there any software I can use where I can enter relevant info and it can do all the comparisons for me? How do others measure their performance?





I would've thought a basic index (as mentioned) would suffice for the individual investor.
Otherwise something more like an equal weight version of same index.

What more do you need?  I mean, really it's kind of irrelevant anyway (in the sense that the best investor in the world could have a sub-period of poor relative performance....e.g. Buffett in the late 90's; considered out of touch).  It's irrelevant in that sense; but we're all going to do it, regardless.  
Of course, we all realise that there's no point active investing if we can't outperform an index (and at least one study shows that many/most investors seriously exaggerate their returns).

Colin Nicholson, on his site, does it nicely.  He uses a comparison to accumulation index (all ords I think)...along with a comparison to his own, minimum return required.  Very cool.

The trouble is, in my opinion - you're waiting at least a decade to have some kind of comparison worth something.

Mind you, I'm glad you mentioned it.  I'm actually really slack with this.  I'll look at maybe calendar year end or whatever, but I don't keep a nice equity graph or anything (don't need to - not accountable to anyone).  I think I'll get something a bit more organised happening for new financial year.

So my short answer would be...
an accumulation index (theortical preference would be for equal weight, but why bother?) that is closest to the universe of stocks you usually choose from (e.g. no good using S&P500 if you only pick micro-caps)


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## galumay (3 April 2015)

This is actually an interesting question - and one I thought I knew the answer to! I set off by tracking against the ASX 200 Accumulation Index, after a while I realised there were some shortcomings with the way I was doing it because as i added capital and reinvested dividends it was getting distorted. Someone here pointed me to using a TWIRR setup, (Tine Weighted Internal Rate of Return.), I created a spreadsheet for that and in general was happy that I was evaluating against a benchmark that had some relevance to my investing universe.

Some unease remained with the dilemma that i was measuring performance on an extremely short time frame, when my strategy was long term and subconciously I realised that was counter intuitive at best.

Reading Seth Klarman's Margin of Safety I found someone articulating my concerns with using relative performance benchmarking and arguing for absolute perfomance measurement. I havent finished my thinking on this and still currently using my TWIRR based on the AXJO, but I am now considering what an appropriate target for absolute performance would look like. 

Of course the natural inference to draw is that if your strategy is a long term one, then any sort of measurement of performance be it absolute or relative should also be long term as there may be massive underperformance or over performance in the short term that is actually irrelevant and misleading by comparison to the strategies timeframe.


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## howardbandy (3 April 2015)

Greetings --

You might consider the "risk-normalized profit potential" I describe in my newest book.  It is as near a universal objective function as I have found.  It allows comparison of alternative uses of funds, including different trading systems.

The technique is:
1.  Define a personal risk tolerance.
2.  Using trades taken at a single contract or fixed dollar amount, determine the risk associated with the basic system.
3.  Determine the position size that normalizes the risk to agree with your personal preference.
4.  Compute the profit potential -- to be used for comparison.

You can read much of it at either its Amazon page using the "Look Inside" feature, or at the book's webpage.  The title is Quantitative Technical Analysis.

Best regards,
Howard


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