Investment Basics

This week's Short & Simple Investing Lesson is focused on how to evaluate an investment that you already own or are considering buying. We regularly evaluate everything in our lives that we do except for our money management, whether we personally oversee it or hire someone to oversee it. This may be because the thought of evaluating an investment seems intimidating or way too difficult, but this short lesson can easily change that.

First, let me give you an analogy. If you were going to sell your home, and the real estate agent came to you with an offer, you would compare this offer with the price that other houses in your neighborhood had sold. The houses would be comparable, since they are close in proximity and probably size and age. You would base this comparison on the square footage price that the other homes sold for, and evaluate whether or not the offer was good.

Similarly, there is a very simple tool called a benchmark that you can use to do this comparison with your investments to evaluate performance. You simply find out the benchmark that represents your investment most closely, just like those other homes in your neighborhood represented the price of your home most closely. You then compare the performance of the benchmark to the performance of your investment.

The benchmark comes from an index, which is simply a group or basket of securities, such as stocks or bonds. In the home price analogy, the group would be the homes in your neighborhood. The group represents a market or part of a market. By comparing the right index to any investment, you can easily evaluate how it has performed in comparison to its benchmark. Ideally, you want your investments to beat the benchmark after fees.

Now that you know about the benchmark, if you did not already, you can be on the lookout for the benchmark that applies to your investments to help you monitor them. There are usually a just few very common benchmarks that are used for most investments. For example, for most large company stock funds, the benchmark is simply a stock index, or group of stocks called the S&P 500, that is probably familiar to you. By simply comparing how this index performed against your stock fund, you have some extremely valuable information.

The benchmark is not hard to find. This information is always in the marketing material. When you are reviewing information about a fund you own, or are thinking of buying, you can look at the material and easily see how the investment performed in comparison to the related benchmark. Be sure to always compare the performance of your investments to the benchmark to take your wealth oversight to the next level.

Camille has studied extensively and implemented portfolio management using exchange traded funds and indexes, which can be either outsourced or self managed, and also technical market timing strategies to lessen exposure to major market corrections. She implements a covered call strategy she has developed over several years to generate income from stock holdings. Her website is http://FinancialWoman.com.