Managing your portfolio: How do you measure success?

Posted by Stephen Sutherland on Sat, Jul 27, 2013 @ 01:30 PM

Measuring investment successThis is the fifth post in our series on managing your portfolio and we're going to look at measuring success. 

There is a psychological game being played by the financial services industry with unsuspecting consumers. In general, IFAs, fund supermarkets, wealth managers, banks and stocks brokers don’t tell their investor clients how important it is to measure their annual performance. They know that typically investors forget their losers and focus on their winners. Due to overconfidence, many investors tend to kid themselves into thinking they are doing much better than they are in reality. The result is that most market participants underperform the general market.

If the advice industry told their clients to measure their annual performance against a benchmark such as the FTSE 100, they’d end up losing a lot of business. Why? Simply because people using their services would eventually realise that what they were being sold may sound good in theory but, in reality, doesn't work. How many IFAs do you know who tell their clients how they’ve performed for them and whether their performance has beaten the market? The answer is probably not that many.

When you visit fund supermarket sites, how many of them tell you to measure your performance? I don’t know one that does and once again, it’s because they have to protect their business models – models that, in my opinion, are flawed. 

Aim to beat the NASDAQ and the FTSE 100

If you are seeking growth, our suggestion would be to try to beat the NASDAQ and the FTSE 100 over the long term. This means that the NASDAQ Composite and the FTSE 100 would be your benchmarks. Each year, make a note of the price that both these indexes are trading at, as well as noting your ISA and SIPP account value. 

Also, make a note of any additional capital injections, such as annual ISA additions and document any withdrawals you make.  At the end of each year, look at what the NASDAQ and the FTSE 100 are trading at and how much your account is valued at. Next, calculate the percentage change of the FTSE 100 for the year. If your account has grown by a larger percentage than the FTSE 100, it is classed as success. And if it’s outperformed the NASDAQ Composite, it’s classed as an even greater success. The idea is to keep a track of your annual performance as you move through time. Do this regardless of whether you are getting help or not. It’s important that you know how well or how badly you are doing so that you can either keep on doing what’s working, or change your approach – or adviser – because it isn’t working.

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Dealing with temporary losses

If you decide to invest in funds linked to the stock market, you must prepare yourself for temporary losses. The market does not go up in a straight line and must correct in price from time to time. Sometimes bull market corrections can be quite scary and they hurt. If you make the mistake of checking your account value each day, the short-term sharp drops could make you feel physically sick. Corrections over the latest bull market have been varied in length and size and the largest one was 22.9% in depth which began in the spring of 2011.

My belief is that you can only win in the long term if you accept volatility, risk and temporary losses in the shorter term. On rare occasions, we and our clients get caught in a bear market and when that happens, the losses are greater. Here’s a nice tip I learned. If your losses ever cause you to lose sleep, it means you are probably investing too much money and need to scale down. A good idea might be to switch some of your capital out of the market. Also remember that your investing does not need to be an all or nothing decision. When you begin, you can invest say, 50% and leave the other 50% in cash.

Let’s now look at how you would feel if you were to take a big percentage drop on your portfolio. This of course would be what we call a temporary or paper loss. If you are playing the long-term game, the loss should be viewed as a temporary setback. This means that you may have to be temporarily inconvenienced for some time, especially if the market becomes unhealthy. Let’s look at how this works.

Imagine that you invested £100 into the stock market. Then the market and your fund heads south over the next twelve months. The net result is your £100 dropping to £70, a 30% drop. How would you feel about that 30% loss?  Sitting on a paper loss of £30 may not seem too much of an inconvenience but what if the amount invested was more? What if your portfolio was valued at £250,000? In this case, sitting temporarily on a paper loss of £75,000 would cause some people tremendous stress and anxiety. On the other hand, people with the right mindset would be more comfortable. Imagine taking a temporary 30% loss on one million pounds. Can you imagine taking a £300,000 temporary paper loss?

What’s important to understand is that throughout your investing career, you are going to have ugly short-term periods in the market and you need to start preparing your mind now for how you are going to cope when it happens. Winning investors cope with paper losses by thinking long-term and expect ups and downs throughout their investing term. When an adventurous investor aims for double digit gains over the long term, they learn how to deal with temporary losses and see them as nothing more than a temporary set back.

As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.


ISACO is a specialist in ISA and SIPP Investment and the pioneer of ‘Shadow Investment’, a simple way to grow your ISA and SIPP. Together with our clients, we have £57 million actively invested in ISAs and pensions*. 

Our personal investment service allows you to look over our shoulder and buy into exactly the same funds as we are buying. These are investment funds that we personally own and so you can be assured that they are good quality. We are proud to say that by ‘shadowing’ us, our clients have made an annual return of 12.5% per year over the last four years** versus the FTSE 100’s 7.4%. 

We currently have close to 400 carefully selected clients. Most of them have over £100,000 actively invested and the majority are DIY investors such as business owners, self-employed professionals and corporate executives. We also have clients from the financial services sector such as IFAs, wealth managers and fund managers. ISACO Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Our firm reference number is 525147.

* 15th November 2012: Internal estimation of total ISA and pension assets owned by ISACO Investment Team and ISACO premium clients. 
** (31st December 2008 - 31st December 2012). 
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Topics: ISA investing tips, Investment funds, Investment strategy, Managing your portfolio