Mistake to Avoid: Not Monitoring Your
Financial Progress and Measuring

Taking control of your financial future is a process. As with any process, it is important to monitor your progress and measure your results. Doing so will help you understand how well you are doing and help you determine if the financial strategies you are using are working.

A balance sheet provides a business with a snapshot view of its financial status. An income statement measures progress. You should do the same with your personal finances.

Monitoring progress

Preparing a personal balance sheet annually should be part of your financial management strategy. You simply add up all your assets, and subtract your liabilities to determine your net worth.

When preparing your personal balance sheet, separate your investment assets into stocks, bonds, and cash. Understanding your personal asset allocation will help you organize your finances and your monitoring of them.

It also makes sense to track changes from year to year to monitor your progress and determine if you are on track to reach your financial objectives. Here is a chart that provides a basic format you may want to consider using.

Category 2005 2006 2007 2008 2009
Cash $ $ $ $ $
Equities $ $ $ $ $
Fixed income investments $ $ $ $ $
Real estate $ $ $ $ $
Personal assets $ $ $ $ $
Other assets $ $ $ $ $
Total Assets $ $ $ $ $
Less: Liabilities $ $ $ $ $
Net Worth $ $ $ $ $

Measuring your results

The other step, and the one that is more difficult, is determining how well you are doing. Determining your absolute results or whether your net worth increased from year to year is easy. Determining your relative results or how well you are doing compared to the rest of the financial world is not easy. If your stock portfolio went up 15 percent, that is good if the overall market was only up 10 percent. However, if the market was up 23 percent during that same period, a return of 15 percent is not so good.

Measuring your results can be difficult in two ways. First, just doing the calculation can be complex, especially if you added or withdrew money from your portfolio during the year. It is also difficult to know which formula to use.

There are rate-of-return calculation tools in many computer software programs. If you are using a spreadsheet program, use the internal rate of return function to calculate the total return on your portfolio.

Second, you must have some basis of comparison to measure how well you did compared to a benchmark. If your portfolio is all stocks, you may want to compare your returns with those of an index like the S&P 500. If your portfolio is all bonds, you may want to use the return on long-term government bonds as a comparison.

You can also compare your returns with quoted mutual fund returns. But remember to compare with a fund that has a similar make-up as yours. If you are a conservative investor with a portfolio of blue chip stocks, don’t compare your returns with an aggressive small company mutual fund.

Here is a chart of recent and long-term average returns for three classes of investments. You may find it useful for making comparisons. These returns take into account dividends, interest, and changes in value.  They also reflect an internal rate of return calculation that is akin to reinvesting your dividends and interest.

Period S&P 500 Long-term government bonds Short-term treasury bills
2006 15.80% 1.19% 4.80%
2005 4.91% 7.81% 2.98%
2004 10.87% 8.51% 1.20%
2003 28.70% 1.45% 1.02%
2002 -22.10% 17.84% 1.65%
2001 -11.88% 3.70% 3.83%
2000 -9.11% 21.48% 5.89%
1999 21.04% -8.96% 4.68%
1998 28.58% 13.06% 4.86%
1997 33.36% 15.85% 5.26%
5 years – ‘02 to ‘06 6.19% 7.19% 2.32%
10 years – ‘97 to ‘06 8.42% 7.83% 3.60%
20 years – ‘87 to ‘06 11.80% 8.61% 4.53%

Next steps

If your results meet your expectations, keep doing what you are doing. If your results don’t measure up, you may want to take action to improve them. This could include changing your stock selection process, urging your stockbroker to help you make better decisions, giving the responsibility to a professional investment advisor, or choosing a different mutual fund.


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