How to analyze portfolio performance

Portfolio performance: Points to know

• Your "total return" includes both the gain (or loss) from changes in share price and any income you received, like dividends or interest.
• Your personal performance results can differ from the reported performance of your investments if you make changes during the period being reported.

Risk versus reward: Why both matter

Returns are key indicators of performance, but assessing risk is equally important to ensure that the potential rewards justify the volatility and uncertainty you might face.

As an investor it's important to keep performance in perspective. By weighing returns against risk—and keeping your long-term goals in view—you'll get a clearer picture of how healthy and effective your portfolio really is.

What is "total return"

Total return is a comprehensive measure of how much an investment earns over time, combining both the income it generates and any change in its value. Unlike simple price appreciation, total return accounts for all sources of earnings—such as dividends, interest, and capital gains—which makes it a more accurate reflection of an investment's overall performance.

For example, your stock fund's share price may have gone from $50 to $60 during the reporting period, which would be a 20% capital gain. If the fund also paid a dividend of $5 per share, your total return is 30%.

How to calculate total return

To measure the total return of an investment, you add the income generated (like dividends or interest) to the change in the investment's price, then divide that sum by the original purchase price. A total return formula would look like this:

This formula helps you calculate total returns whether you're evaluating a single stock or an entire portfolio. If you're wondering how to find total returns for your investments, many brokerage platforms and portfolio tracking tools will calculate it for you automatically, including reinvested dividends for a more complete picture.

What is a "30-day yield?"

The 30-day yield, sometimes referred to as the 30-day SEC yield, is a specific measure of income generated by an investment over a 30-day period, expressed as an annual percentage. While it focuses on income, it can be used alongside market appreciation to give you a more detailed view of your investment's performance, especially in terms of its income-generating capability.

How to calculate 30-day yield

To calculate the 30-day yield of an investment, add up all dividends and interest paid over the past 30 days and multiply that number by 12. Then divide the result by the net asset value (NAV) of the investment at the end of the 30-day period and multiply that number by 100. Here's what that formula looks like:

The 30-day yield can fluctuate over time due to changes in an investment's underlying assets, market conditions, and the frequency and amount of dividend or interest payments. Understanding the 30-day yield calculation helps you track these fluctuations and assess the ongoing income potential of the investment.

My fund shows a 10% return last year. Why is my actual return lower?

Investment companies report performance assuming someone made a lump-sum investment on the first day of the reporting period and then did nothing until the end of the period. But that might not match with your experience.

If your investment company reports that your fund returned 10% over the past year, but you feel you didn't make nearly that much, there are a few possible reasons for this discrepancy. Some common factors that can lead to a difference between the reported fund return and your personal return include the timing of your investments, fees, and taxes.

To better analyze your portfolio performance, consider looking at the annualized return, which smooths out the returns over a longer period, and the risk-adjusted return, which takes into account the level of risk taken to achieve those returns. Standard deviation is another important metric, as it measures the volatility of your portfolio—essentially, how much it fluctuates as compared to the average return.

In the next section, we'll dive deeper into how to apply what's called the Sharpe ratio—which measures risk-adjusted return—and standard deviation when evaluating your portfolio's performance.

Portfolio performance evaluation methods

Every investor is unique, and your needs may evolve over time. Depending on your risk profile, your goals, or your stage of life, you may be more concerned with volatility than you are with rapid growth or outperformance.

Vanguard's investment philosophy has always been guided by the 4 core principles of goal setting, balance, cost management, and discipline. When evaluating your portfolio, we recommend a holistic approach—one that looks at your long-term objectives, return potential, and risk tolerance.

Here are some common methods and metrics that can help you assess portfolio performance:

• Benchmark comparison, where you measure your portfolio's returns against a relevant index such as the S&P 500 or Dow Jones. This is particularly useful for both index and actively managed funds, helping you determine if your investments are outperforming or underperforming the market.
• Annualized return shows the average yearly growth of your portfolio over a specific time frame. It smooths out ups and downs and accounts for how long your money was invested, so you can compare performance more accurately. In other words, it answers: "If my investment had grown at a steady rate each year, what would that rate have been?"
• Standard deviation measures what's known as the variability of returns. In other words, how much are your returns bouncing around from the average for this investment? A lower standard deviation suggests more stable returns, which is important for investors who prioritize risk management over higher returns.
• The Sharpe ratio helps you understand how much return you're getting in exchange for the amount of risk you're taking on a particular investment. It compares your investment's extra earnings (above a safe option like Treasury bills) to how much those earnings fluctuate. A higher Sharpe ratio means you're getting more reward for each unit of risk.
• Risk-adjusted return measures, like the Sharpe ratio, show how much excess return you earn relative to the level of risk you take. They calculate an investment's excess return above a risk-free benchmark, such as U.S. Treasuries, and compare it to a measure of risk, often volatility. These measures can be applied to stocks, funds, or entire portfolios. If 2 investments deliver the same return, the one with less risk scores higher. Even when returns differ, lower volatility can still be appealing. For example, short-term bond funds usually earn less than long-term bonds but with lower volatility—making them attractive if your goal is capital preservation.

I see "after-tax return"—how do they know my taxes?

First, you can ignore "after-tax return" if you hold the mutual fund or ETF in a tax-advantaged account like an IRA , because all your earnings in this account will be deferred or exempt anyway.¹

If you do own the fund in a taxable account, the after-tax return is simply an approximation of how much of the return will be left after taxes are taken out, for the average investor. It may not (and probably won't) match your specific situation.

But if you're comparing 2 similar funds, the after-tax return can be helpful. Depending on the funds' investment and trading strategies, 1 fund may be subject to more taxes than the other.