How to Evaluate Portfolio Performance: Look Beyond Returns

“My portfolio is up 15% this year!”

Sounds great, right? But hold on:

• What if IHSG (Indonesia Composite Index) went up 20% in the same period?
• What if you took on massive risk to get that 15%?
• What if after fees, your actual return is only 12%?

Evaluating your portfolio based solely on absolute returns is a common mistake. A 15% return could be great or terrible — it depends on the context.

This article will teach you how to properly evaluate your portfolio using metrics that are more meaningful than just “how many percent did it go up.”

1. Why Absolute Returns Aren’t Enough

Example: Two Investors with the Same Return

Investor A: 12% annual return, portfolio 100% money market funds

Investor B: 12% annual return, portfolio 100% small-cap stocks

Who performed better?

Answer: Investor A is far better (if these numbers are realistic).

Why? Because:

• Money market funds typically return 4-6% — getting 12% would be exceptional
• Small-cap stocks are highly volatile — a 12% return might actually be underperformance

The point: the same return can be achieved with vastly different risk levels.

Returns Must Be Viewed in Context

For meaningful evaluation, you need to answer:

1. Compared to what? (benchmark comparison)
2. With how much risk? (risk-adjusted return)
3. At what cost? (cost analysis)
4. Aligned with goals? (goal alignment)

2. Benchmark Comparison: Compared to What?

What’s a Benchmark?

A benchmark is a standard of comparison for judging performance. Without a benchmark, you can’t tell if your return is good or bad.

Analogy: Is an exam score of 80 good or bad? It depends on the class average. If the average is 60, 80 is great. If the average is 90, 80 is below average.

Choosing the Right Benchmark

Investment Type	Relevant Benchmark
Indonesian stocks (general)	IHSG (Indonesia Composite Index)
Indonesian stocks (blue chip)	IDX30 or LQ45
Indonesian stocks (sharia)	JII (Jakarta Islamic Index)
Equity mutual funds	IHSG
Bond mutual funds	Government Bond Index (IBPA)
Money market funds	BI rate or average deposit rates
US stocks	S&P 500
Government bonds	Latest SBN (government securities) yield
Mixed portfolio	Weighted average of respective benchmarks

Example: Benchmark for a Mixed Portfolio

If your portfolio is:

• 60% Indonesian equity funds
• 30% bond funds
• 10% money market funds

Then your appropriate benchmark is:

• (60% × IHSG return) + (30% × bond index return) + (10% × BI rate)

If IHSG is up 10%, the bond index is up 6%, and BI rate is 5%:

• Benchmark = (60% × 10%) + (30% × 6%) + (10% × 5%) = 6% + 1.8% + 0.5% = 8.3%

If your portfolio returned 9%, you outperformed the benchmark. If it returned 7%, you underperformed.

Common Benchmarking Mistakes

Mistake 1: Comparing apples to oranges

• A conservative portfolio (70% bonds) compared to IHSG → unfair
• A US stock portfolio compared to IHSG → irrelevant

Mistake 2: Cherry-picking a favorable benchmark

• Choosing a lower benchmark to appear as if you’re outperforming
• Example: comparing an equity fund to deposit rates

Mistake 3: Not accounting for dividends

• IHSG is a price index (doesn’t include dividends)
• For accurate comparison, use a total return index or add an estimated dividend yield (~2-3%)

3. Risk-Adjusted Returns: Is It Worth the Risk?

The Basic Concept

Two portfolios with the same return but different volatility:

• Portfolio A: 12% return, 5% volatility
• Portfolio B: 12% return, 20% volatility

Portfolio A is better because it achieved the same return with lower risk.

Risk-Adjusted Return Metrics

Sharpe Ratio

Formula:

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Volatility

Interpretation:

• Sharpe Ratio > 1: Good
• Sharpe Ratio > 2: Very good
• Sharpe Ratio < 0.5: Suboptimal

Example:

• Portfolio return: 12%
• Risk-free rate (SBN): 6%
• Volatility: 10%

Sharpe Ratio = (12% - 6%) / 10% = 0.6

This means: for every 1% of risk (volatility) you take, you’re getting 0.6% return above the risk-free rate.

Sortino Ratio

Similar to Sharpe Ratio, but only considers downside volatility (negative fluctuations). More relevant because investors typically only worry about losses, not gains.

Maximum Drawdown

Definition: The largest drop from peak to trough within a given period.

Example:

• January: Rp 100 million
• March: Rp 120 million (peak)
• June: Rp 90 million (trough)
• December: Rp 110 million

Maximum Drawdown = (Rp 120 million - Rp 90 million) / Rp 120 million = 25%

Why it matters: A 50% drawdown requires a 100% gain to get back to the starting point. Large drawdowns can be devastating both psychologically and financially.

Risk-Adjusted Performance Table

Portfolio	Return	Volatility	Max Drawdown	Sharpe Ratio
A (Aggressive)	15%	25%	35%	0.36
B (Moderate)	10%	12%	15%	0.33
C (Conservative)	7%	5%	8%	0.20
Benchmark (IHSG)	12%	20%	30%	0.30

Analysis:

• Portfolio A has the highest return, but its Sharpe Ratio isn’t much better than the benchmark
• Portfolio B has lower returns but is more efficient (same Sharpe Ratio as A)
• Portfolio C is safe but has the lowest return per unit of risk

4. Time-Weighted vs Money-Weighted Returns

This concept is often confusing but important to understand, especially if you invest gradually through DCA.

Time-Weighted Return (TWR)

Definition: Measures investment performance without the influence of deposit/withdrawal timing.

When to use it:

• Comparing fund manager performance
• Comparing with benchmarks
• Evaluating the quality of the investment itself

Calculation: Compound return from each sub-period, ignoring cash flows.

Money-Weighted Return (MWR) / Internal Rate of Return (IRR)

Definition: Measures the return you actually experienced, including when money flowed in and out.

When to use it:

• Evaluating your personal investment results
• Comparing DCA vs lump sum strategies
• Calculating your portfolio’s real return

Example: TWR vs MWR Difference

Scenario:

• January: Invest Rp 10 million, month-end value Rp 11 million (+10%)
• February: Add Rp 10 million (total Rp 21 million), month-end value Rp 18.9 million (-10%)

TWR:

• January: +10%
• February: -10%
• TWR = (1.10 × 0.90) - 1 = -1%

MWR/IRR:

• Cash flow: -Rp 10 million (Jan), -Rp 10 million (Feb), +Rp 18.9 million (end)
• IRR ≈ -5.2%

Why the difference?

• TWR considers the investment’s performance as -1% (neutral to timing)
• MWR shows you lost more (-5.2%) because you added money before the decline

Lesson: The timing of your contributions affects your actual results.

Which Should You Use?

Purpose	Use
Compare with benchmark	TWR
Compare fund managers	TWR
Evaluate your own investment decisions	MWR
See your personal portfolio’s actual return	MWR

Most investment apps display MWR (what you experienced), but fund fact sheets usually show TWR.

5. Cost Analysis: What Are You Paying?

Returns that look great can become mediocre after accounting for costs.

Types of Investment Costs

Cost	Mutual Funds	Stocks	ETFs
Expense ratio	0.5-3% per year	-	0.1-0.5% per year
Subscription fee	0-2%	-	-
Redemption fee	0-2%	-	-
Brokerage fee	-	0.15-0.35% per trade	0.15-0.35% per trade
Tax	0%	0.1% (sell) + 10% dividend	0.1% (sell)

Long-Term Impact of Expense Ratios

Example: Invest Rp 100 million, 10% annual market return, over 20 years

Expense Ratio	Final Value	“Lost” to Fees
0.2% (ETF)	Rp 646 million	Rp 26 million
1.0% (cheap fund)	Rp 558 million	Rp 114 million
2.0% (expensive fund)	Rp 466 million	Rp 206 million
3.0% (very expensive fund)	Rp 389 million	Rp 283 million

A 2.8% expense ratio difference = losing Rp 257 million over 20 years!

Read more: Mutual Fund Expense Ratios

Calculating After-Cost Returns

Steps:

1. Calculate gross portfolio return
2. Subtract expense ratio (annual)
3. Subtract transaction costs (if trading)
4. Result = net return

Example:

• Gross return: 12%
• Expense ratio: 1.5%
• Trading fees: 0.5% (from rebalancing)
• Net return: 10%

6. Goal Alignment: On Track for Your Goals?

The best evaluation is: is your portfolio bringing you closer to your goals?

Goal-Based Evaluation

Goal	Evaluation Metric	Example
Retirement in 20 years	Projected value vs target	“Need Rp 5 billion, currently projected at Rp 4.8 billion”
Child’s education in 10 years	On-track percentage	“83% on track”
Emergency fund	Target reached?	“Target 6 months, currently have 4 months”
Passive income	Monthly yield/dividends	“Target Rp 5 million/month, currently Rp 3 million”

Self-Evaluation Questions

1. Will your projected portfolio reach the target at the designated time?

   • If yes: on track, continue
   • If no: need to increase contributions or adjust expectations

2. Does your asset allocation still match your risk profile and time horizon?

   • Short horizon + aggressive allocation = dangerous
   • Long horizon + too conservative allocation = opportunity cost

3. Have there been life changes that affect your goals?

   • Got a raise → can increase contributions
   • Had a child → add a goal (education fund)
   • Approaching retirement → reduce risk

7. Complete Portfolio Evaluation Framework

Annual Evaluation Checklist

A. Performance Review

• Calculate portfolio return (MWR for personal results)
• Compare with appropriate benchmark (TWR)
• Calculate Sharpe Ratio or other risk-adjusted metrics
• Record this year’s maximum drawdown

B. Cost Analysis

• Review total portfolio expense ratio
• Calculate transaction costs (if trading)
• Compare with cheaper alternatives

C. Allocation Check

• Is allocation still on target?
• Need rebalancing?
• Any assets to add/reduce?

Read: Complete Portfolio Rebalancing Guide

D. Goal Progress

• Update portfolio value
• Calculate projection to target
• On track or need adjustment?

E. IPS Review

• Re-read your Investment Policy Statement
• Is it still relevant?
• Anything to update?

Evaluation Report Template

## Portfolio Evaluation - [Year]

### 1. Performance Summary
- Portfolio return (MWR): X%
- Benchmark return: Y%
- Alpha (outperform/underperform): Z%
- Sharpe Ratio: W

### 2. Risk Metrics
- Volatility: X%
- Maximum Drawdown: Y%
- Worst month: Z%

### 3. Cost Summary
- Total expense ratio: X%
- Transaction costs: Y%
- Total drag: Z%

### 4. Allocation
| Asset | Target | Actual | Difference |
|-------|--------|--------|------------|
| Stocks | 60% | 65% | +5% |
| Bonds | 30% | 28% | -2% |
| Cash | 10% | 7% | -3% |

### 5. Goal Progress
- Target: Rp X
- Current value: Rp Y
- On track: Yes/No
- Action needed: ...

### 6. Action Items for Next Year
- [ ] ...
- [ ] ...

8. Common Portfolio Evaluation Mistakes

Mistake 1: Evaluating Too Often

Checking your portfolio daily or weekly is counterproductive:

• Short-term fluctuations aren’t meaningful signals
• Triggers emotions and impulsive decisions
• Time better spent on other things

Recommendation: Deep evaluation 1-2 times per year. Light check (total value) at most once a month.

Mistake 2: Focusing on Returns Without Context

“15% return!” is meaningless without knowing:

• What did the benchmark return?
• How much risk was taken?
• Over what time period?
• Are costs factored in?

Mistake 3: Comparing with Other People’s Portfolios

Other people’s portfolios have:

• Different goals
• Different time horizons
• Different risk profiles
• Different financial situations

Your friend’s higher return doesn’t mean your portfolio is bad.

Mistake 4: Chasing Past Returns

“Stock XYZ went up 100% last year, I need to buy it!”

Past returns do not guarantee future returns. Often, what has gone up significantly will come down (mean reversion).

Mistake 5: Not Accounting for Inflation

An 8% return looks good, but if inflation is 5%, your real return is only 3%.

The right evaluation:

• Nominal return: 8%
• Inflation: 5%
• Real return: 3%

9. Conclusion

Properly evaluating your portfolio requires more than just looking at “how many percent it went up.”

A good evaluation framework:

1. Benchmark comparison — compared with a relevant standard
2. Risk-adjusted return — is the return worth the risk?
3. Cost analysis — how much is “lost” to fees?
4. Goal alignment — are you on track toward your goals?

Practical tips:

• Deep evaluation 1-2 times per year
• Use MWR for personal results, TWR for comparisons
• Don’t compare with other people’s portfolios
• Focus on process, not short-term results
• Update your IPS if circumstances change

A portfolio that is consistent, diversified, and aligned with your goals is better than a portfolio with high returns but full of risk and no direction.

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Read also:

• Rebalancing: When and How
• Complete Portfolio Rebalancing Guide
• Investment Policy Statement
• Asset Allocation for Different Profiles

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Disclaimer: This article is not investment advice. The metrics and examples provided are for educational purposes only. Always do your own research and consult with a professional financial advisor for your specific situation.

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• Investment Policy Statement: The Blueprint for Disciplined Investing
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• Complete Portfolio Rebalancing Guide: When and How to Rebalance
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