Sunday, March 25, 2007

Benchmarking Your Performance

I've been teaching Yoyo and you, the reader, how to compute your investment performance. In today's class we'll compare our results to some broad market indices and get to make a colorful chart. Yoyo definitely prefers pictures to numbers :)

There are two indices I compare my performance to - the MSCI World Index and the S&P500 Index. I use these because one is a broad measure of global stock market performance and the other has traditionally been used as a US market benchmark. But very importantly I have free access to total returns for both indices. This last point is very important. A lot of people out there and especially those in financial publications (like Barrons) compare total returns of a mutual or hedge fund to just the price performance of a stock index. This totally ignores the dividends received by the stocks in the index and dramatically exaggerates the relative performance of the fund in question!

You can download total returns for the S&P 500 here. The monthly total return is the second to last column. You are going to need to construct the total return index yourself as I showed you in the day before yesterday's class. For the MSCI I go to this page to get the latest number for the "All Countries", "Standard", "Gross" World Index. Gross indicates that all pre-tax dividends are reinvested. The option "Net", takes out local taxes from dividends, and "Price" is, well, just the price without dividends. Make sure you also use the number in US Dollars. If you click on the name of the index, you'll be asked to register for free to get to download the historical data.

OK, so I've downloaded the data, computed a total return index for the S&P 500 and come up with the following table:

At the bottom of the table I've given the total return since the end of 2004 and the annualized rate of return, which we learned to compute yesterday. Clearly, being invested in the S&P 500 instead of global stocks resulted in a much lower rate of return over this period (9.8% vs. 16.02% per annum). My returns are somewhere between the two (12.88%).

We still need to do one more thing before graphing these indices - set the values for December 2004 equal to 1000 for all indices. Using Excel we can paste the following formula into a new column:


where b2 is the value of Moom's index in Dec 2004. And then paste =1000*b3/b$2 etc. in the cells beneath it to get a new column with Moom's total returns index standardized to start at 1000 in Dec 2004. Does that make sense? We do the same for the MSCI and then we can finally get the pretty picture that Yoyo has been waiting for:

I chose the colors to reflect how hot the performance has been :)


ML said...


How does the dividend adjusted EFA compare with the MSCI world index? I have found it a very tough benchmark to beat as well.

Thanks, ML

mOOm said...

That's a very good point, we might want to compare our performance to an index fund or ETF which we actually can invest in, instead of an index we can't actually invest in. But as you say you need to compute performance with dividends reinvested. The MSCI index does include the US market though, which EFA does not. Yahoo does provided the adjusted close series which is the equivalent of the total return index. I'll run the numbers on that.

mOOm said...

Wow - EFA returned 48.95% in that period or 19.37% annualized!