Assessing the performance of your savings and investments

Follow our quick steps to see how well your savings and investments are doing. Set up an email alert to ensure you make this a regular habit, at least once a year.

• How to check performance
• Step 1 – Work out your total real return on each investment
• Step 2 – Check your returns against a benchmark
• Step 3 – Compare performance against the markets

How to check performance

Whether your investments are:

• Bonds,
• Shares, or
• Property

You can use the same checks to compare them and decide if you need to move any money around.

For cash on deposit simply compare your current rates against the alternatives available.

Step 1 – Work out your total real return on each investment

Information you’ll need to hand:

• The paperwork showing how much your investment is worth now and how much it was worth at the beginning of the period you’re looking at. Although some investments such as property may not be easily valued.
• A note of any income you’ve received from the investment or asset during this time (eg dividends, rent, bonuses or interest).
• The rate of inflation (retail price index) over the period.

How to do your calculation

1. Start with the value of your investment today.
2. Take off the value at the beginning of the time period you’re assessing. This number is the change in value of your investment seen over this time period.
3. To this number, add any income or dividends paid out in that time, as long as they aren’t already included in the value of your investment today.
4. Take off any fees, trading costs, administration or legal charges and any withdrawals you made and adjust for any payments that you have made during the period – this gives you the actual return.
5. Divide the actual return by the value of your investment at the start of the time period you are assessing, and then multiply by 100 – this gives you the % rate of return.
6. Then deduct the rate of inflation over the time period – this gives you a quick figure close to the total real return from the investment over the period.

Step 2 – Check your returns against a benchmark

Benchmarks are standards you can use to measure your investment and put its performance in context.

Identifying and setting a benchmark can be an important aspect of investing for individual investors.

Has your investment made any money after inflation?

The Consumer Price Index (CPI) can be used as the benchmark for inflation. This benchmark is suitable for cash deposits and low-risk fixed interest assets such as cash bonds and fixed interest securities.

It tells you whether your investment has kept its value against inflation.

• If your rate of total real return is more than zero, it has beaten the zero return benchmark (the rate of inflation) and you’ve made a real gain after inflation.
• If it’s less than zero, it hasn’t beaten the benchmark and the value of your investment has fallen in real terms.

For a more personalised benchmark you can work out a more realistic inflation rate to use in your calculation.

Compare against the ‘risk-free’ benchmark

The risk-free benchmark is how much you could have earned on an investment with no risk.

The high street banks’ interest rates on basic deposit accounts are a good risk-free benchmark.

If you’re taking more risk than this, you should expect to see a higher return.

• Deduct the risk-free rate from your rate of total real return to see if your riskier assets are generating extra returns.
• The greater the risk you’re taking, the more your return should exceed the risk-free rate.

If your return is lower than the risk-free rate, you might want to move your money to cash investments.

Look at performance across previous years as well so your judgement isn’t too influenced by what’s happening in the short term.

Set your own personal benchmark

Lots of people set their own objectives and performance targets based on their own goals.

You can calculate the rate of return you need to get to a particular savings or investment goal – but you might need to adjust it in future as the performance of your investment changes.

Step 3 – Compare performance against the markets

You can put the performance of your investment in context by comparing it to other similar investments.

For example, if you have invested in different stocks, you will notice that the value of some will have increased, or decreased, more than others.

Compare against market sectors

Compare against the average performance of investments in similar markets or sectors.

Remember to allow for costs – the higher these are, the harder it is to meet performance targets over time.

Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.

We recommend the following websites for comparing savings accounts:

• Money Saving Expert
• Money Supermarket
• Which?

Remember:

• Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
• It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
• Find out more in our guide to comparison sites.

Check historical performance

Rather than forming judgements based on one year’s performance, consider how your asset has performed in previous years.

It’s generally felt that comparing investment performance is unlikely to tell you anything useful in under a five year time horizon.

Future performance

Past performance may not provide an accurate picture of future performance of your investments, as future projections are in no way guaranteed.

Next steps

If your review has got you thinking, follow the links below to compare products and find out more about your different investment options:

• Diversifying – the smart way to invest
• ISAs and other tax efficient savings and investments
• Cash savings at a glance
• Popular investments at a glance
• Do you need a financial adviser?

This article is provided by the Money Advice Service.