Transcripts

"Money File"-Portfolio Performance

SUSIE GHARIB: In the "Money File" tonight, a better way to assess your portfolio's performance. Here's Chuck Jaffe, senior columnist at Marketwatch.

CHUCK JAFFE, SENIOR COLUMNIST, MARKETWATCH: A lot of investors use 12-month numbers for stocks and mutual funds to determine what kind of year they've had. They're looking at the wrong thing. Year-end portfolio reviews should be more about net worth than absolute performance, more about total return than price movement. For proof, look no further than the Standard & Poor's 500, which is generally considered a proxy for the broad stock market. Index movements typically are quoted without consideration of dividends, even though an investor in those stocks gets the payouts.

Any true progress report must look inward, at the big picture, focusing less on the investments and more on the individual and the entire portfolio. Your year-end statements are a great starting point for reviewing your net worth, in part because they can help you calculate where you were 12 months ago. Add up everything you own, subtract everything you owe and the result is your net worth. Even in bad years on the market, your net worth can grow as you pay down debt or increase your financial set-asides. It's your net worth, rather than the performance of any one investment, that determines the kind of year you've had financially.

The moment you build a diversified portfolio rather than chasing hot investments pursuing maximum short-term profits, you should commit to judging every investment based on how it works for you on the grand scale. Without the context of your whole financial plan, 12 months of performance data on any single investment won't tell you much, good or bad, that's worth acting on. I'm Chuck Jaffe.