When I first started investing in stocks, the goal was simple: make money. But as I spent more time in the market, I realized that the true measure of success wasn’t just about how much money I made—it was about how well my investments performed compared to the broader market. I had to ask myself, “Are my stocks beating the market?” The answer to that question isn’t always clear, but there are ways to find out. In this article, I will walk you through how I assess my stock portfolio’s performance, how I compare it to the market, and what I’ve learned from the process. I will also use real-world examples, calculations, and comparisons to illustrate key points, so you can easily apply these principles to your own investment strategy.
Table of Contents
What Does “Beating the Market” Mean?
Before we get into the specifics of how to compare my stocks to the market, it’s essential to understand what it means to “beat the market.” In simple terms, beating the market means that my investments have outperformed a relevant market index. The most commonly used index for comparison is the S&P 500, which represents the performance of 500 of the largest publicly traded companies in the United States.
When I say my stocks are beating the market, I mean that the return on my stock portfolio is higher than the return on the S&P 500 over the same time period. If the market goes up by 10%, and my portfolio goes up by 12%, then I am beating the market by 2%. If my portfolio goes up by 8% while the market goes up by 10%, then I am underperforming.
How to Compare My Stocks to the Market
The next step is to compare my portfolio’s performance to that of the market. There are a few ways I can do this, but the most common method is to calculate my portfolio’s return and compare it to the return of a relevant market index, like the S&P 500.
Step 1: Calculate My Portfolio’s Return
To calculate my portfolio’s return, I need to consider the change in the value of my investments over a specific time period. The formula for calculating the return on my portfolio is:
\text{Portfolio Return (\%)} = \left[ \frac{\text{Ending Value of Portfolio} - \text{Beginning Value of Portfolio}}{\text{Beginning Value of Portfolio}} \right] \times 100For example, let’s say I invested $10,000 in a portfolio of stocks one year ago. At the end of the year, my portfolio is worth $11,500. My portfolio return for the year would be:
\text{Portfolio Return (\%)} = \left[ \frac{11,500 - 10,000}{10,000} \right] \times 100 = 15\%So, my portfolio has returned 15% over the past year.
Step 2: Calculate the Market’s Return
Next, I need to calculate the return of the market index, such as the S&P 500, over the same time period. If I’m comparing my portfolio to the S&P 500, I can simply check the S&P 500’s performance over the past year. For example, if the S&P 500 has returned 12% over the past year, then the market return is 12%.
Step 3: Compare the Returns
Now that I have both my portfolio return and the market return, I can compare them to see if my stocks are beating the market. If my portfolio return is higher than the market return, then I’m beating the market. If my portfolio return is lower than the market return, then I’m underperforming.
Let’s look at an example to see how this works.
| Year | Portfolio Value at Start of Year | Portfolio Value at End of Year | Portfolio Return | S&P 500 Return |
|---|---|---|---|---|
| 2024 | $10,000 | $11,500 | 15% | 12% |
In this case, my portfolio returned 15%, while the S&P 500 returned 12%. This means that my portfolio outperformed the market by 3%.
Adjusting for Risk: The Importance of Risk-Adjusted Return
While comparing returns is useful, it doesn’t tell the whole story. If my portfolio took on significantly more risk than the S&P 500 to achieve that 15% return, then it might not truly be “beating the market.” To get a better understanding of how well my portfolio is performing relative to the risk it’s taking on, I need to consider the concept of risk-adjusted return.
One common measure of risk-adjusted return is the Sharpe ratio. The Sharpe ratio helps me understand how much return I’m getting for each unit of risk in my portfolio. The formula for the Sharpe ratio is:
\text{Sharpe Ratio} = \frac{\text{Portfolio Return} - \text{Risk-Free Rate}}{\text{Portfolio Standard Deviation}}The risk-free rate is the return I would get from an investment that has no risk, such as a U.S. Treasury bond. The standard deviation is a measure of how much the value of my portfolio fluctuates. The higher the standard deviation, the more risk my portfolio is taking on.
A higher Sharpe ratio indicates that I’m getting more return for each unit of risk. If my portfolio’s Sharpe ratio is higher than the Sharpe ratio of the S&P 500, then I can confidently say that my portfolio is beating the market on a risk-adjusted basis.
Let’s look at an example. Suppose the S&P 500 has a return of 12%, but it also has a standard deviation of 15%. Meanwhile, my portfolio has a return of 15%, but its standard deviation is 20%. If the risk-free rate is 2%, then I can calculate the Sharpe ratio for both the S&P 500 and my portfolio.
For the S&P 500:
\text{Sharpe Ratio (S\&P 500)} = \frac{12\% - 2\%}{15\%} = 0.67For my portfolio:
\text{Sharpe Ratio (My Portfolio)} = \frac{15\% - 2\%}{20\%} = 0.65In this case, the S&P 500 has a slightly higher Sharpe ratio, meaning it’s providing a better return per unit of risk. Even though my portfolio has a higher return, it’s also taking on more risk, so it’s not outperforming the market when adjusted for risk.
The Role of Dividends in Beating the Market
When I’m comparing my portfolio to the market, I can’t forget about dividends. Dividends are payments made by companies to their shareholders, and they can significantly affect my portfolio’s overall return. Many investors, including myself, rely on dividends as a source of income.
The total return of the S&P 500 includes both price appreciation (the increase in the index’s value) and dividends. When I calculate my portfolio’s return, I need to make sure I include dividends if my stocks pay them. If I neglect dividends, I might be underestimating my portfolio’s true performance.
Let’s use an example to illustrate this. Suppose the S&P 500 has increased in value by 8% over the past year, and it has paid out 2% in dividends, for a total return of 10%. Meanwhile, my portfolio has increased in value by 12% but has paid no dividends. In this case, even though my portfolio has a higher price return, the S&P 500 has outperformed when dividends are taken into account.
| Year | Portfolio Value at Start of Year | Portfolio Value at End of Year | Portfolio Return | Dividends Received | Total Return (Including Dividends) | S&P 500 Price Return | S&P 500 Dividends | S&P 500 Total Return |
|---|---|---|---|---|---|---|---|---|
| 2024 | $10,000 | $11,200 | 12% | $0 | 12% | 8% | 2% | 10% |
In this case, the S&P 500’s total return is 10%, which is still higher than my portfolio’s return of 12% when dividends are not considered. This shows the importance of factoring in dividends when comparing performance.
Long-Term vs. Short-Term Performance
Another key consideration when assessing whether my stocks are beating the market is the time frame. Short-term performance can be volatile, and a portfolio may outperform or underperform the market in the short term due to factors like market sentiment or sector-specific trends. However, over the long term, the market tends to reflect the overall growth of the economy.
If my portfolio has been underperforming the market in the short term, but I’m still confident in the fundamentals of my investments, I’m less concerned. It’s important to have patience and allow my investments to grow over time. Conversely, if my portfolio has been underperforming the market for years, I might need to re-evaluate my strategy.
| Time Period | Portfolio Return | S&P 500 Return | Performance Comparison |
|---|---|---|---|
| 1 Year | 10% | 12% | Underperforming |
| 3 Years | 20% | 18% | Beating the Market |
| 5 Years | 35% | 30% | Beating the Market |
This table shows how my portfolio can underperform in the short term but outperform over the long term.
Conclusion
So, how do I know if my stocks are beating the market? By comparing my portfolio’s return to the return of a relevant market index like the S&P 500, adjusting for risk, and factoring in dividends, I can get a clear picture of how well my investments are performing. It’s important to keep in mind that beating the market is not always about having the highest return—sometimes it’s about balancing risk and return and being patient over the long term. I’ve learned that there’s no one-size-fits-all answer to this question, but with the right tools and a long-term perspective, I can confidently assess whether my stocks are beating the market.
