CHAPTER 4

Measuring Performance

Correctly measuring one’s own investment returns may seem to be an insultingly basic topic to address. It’s so rote. Professional fund managers in particular may be quite comfortable with their tried-and-true methods, thank you very much. But practices turn out to be so disparate, and the chance of self-deception so high, that it’s worth reviewing.

Calculating one’s historic performance correctly is useful. It provides a baseline, as well as a template for tracking future returns. Plus it reveals whether or not there’s any room for improvement.

The calculation should be honest. It should be harsh in the way that a scale is harsh with a dieter. Brokerage statements are confusing, peppered with the obscurities ...

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