Comparing your investment portfolio’s performance to the S&P 500 is a crucial step in evaluating your investment strategy. This benchmark comparison helps determine if your active management is outperforming or underperforming a passive index fund strategy. Here’s a practical method to accurately compare your portfolio to the S&P 500, even considering deposits, withdrawals, and dividends.
Using Historical SPY Data for Comparison
The most effective way to compare your portfolio performance is to use historical data from the SPDR S&P 500 ETF Trust (SPY), an exchange-traded fund (ETF) that closely tracks the S&P 500 index. SPY data is available back to 1993, providing a substantial historical record for comparison.
The process involves recreating your investment history as if you had invested in SPY instead of your actual portfolio.
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Gather Your Transaction Data: Compile a detailed record of all your investment transactions, including:
- Date of each transaction (purchase or sale)
- Amount of each transaction (in dollars)
- Any associated commissions
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Convert Transactions to SPY Shares: Using historical SPY prices from a reliable source like Yahoo Finance, determine how many SPY shares you could have purchased with each investment amount on the corresponding transaction date. For withdrawals, calculate how many SPY shares you would have sold.
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Account for Dividends: SPY distributes dividends quarterly. On each dividend distribution date, calculate the dividend amount you would have received based on your SPY share holdings. Then, using the SPY price on that date, determine how many additional SPY shares you could have purchased with the dividend.
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Factor in Commissions: Include the commission cost you would have incurred for each SPY transaction, using your broker’s fee schedule.
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By meticulously replicating your investment history with SPY, you can generate a hypothetical portfolio performance based on the S&P 500. Comparing this hypothetical performance to your actual portfolio’s return provides a clear picture of your investment strategy’s effectiveness relative to the market.
Conclusion
This method allows for an apples-to-apples comparison by considering the timing and amount of all your transactions. Remember, while comparing to the S&P 500 is valuable, it’s crucial to consider your individual investment goals, risk tolerance, and time horizon when evaluating your overall investment success. This method solely focuses on performance comparison and doesn’t account for other factors that might influence investment choices.
