Photograph: Dome of Blue Mosque in Istanbul, Turkey
If you hear someone come across a bit strong when it comes to portfolio performance, ask a few simple straight-forward questions.
1. How is the performance measured and does it meet AIMR standards? Professionals will know AIMR stands for Association for Investment Management and Research. ITA Wealth Management readers know performance as the Internal Rate of Return (IRR) since we are calculating one portfolio at a time and we are not comparing portfolios.
2. How is portfolio uncertainty or volatility measured? One expects better performance from high volatile portfolios. We also expect high volatile portfolios to do worse in bear markets.
3. What is the Return/Uncertainty ratio for the portfolio and is uncertainty measured using mean-variance or semi-variance? Once more, ITA Wealth Management readers understand what is going on with the Sortino and Retirement Ratio calculations. At least those experienced with the TLH spreadsheet understand the importance of using semi-variance where the money manager is only penalized when the portfolio under performs the benchmark.
4. Mention of benchmark brings to mind the fourth question. What benchmark is used as a portfolio standard? How is an appropriate benchmark defined and what are the requirements?
While the TLH spreadsheet seeks to answer the above questions, it is not a perfect tool. Despite our best efforts, there remains some "splinters" in the calculations and I've pointed them out in past blog posts. When I spot new issues, I will bring them to readers attention. If there is one thing that is needed in the world of investing it is honesty. Rather than cover up inherent performance problems we seek to uncover them and make corrections when possible.