There are a number of different ways to measure portfolio performance. Perhaps the most accurate method compares the annualized internal rate of return (IRR) for the portfolio with an index fund such as the Vanguard Index 500 Fund or the Vanguard Total Stock Market Fund. As we are using the term, IRR means the annualized rate of return for the portfolio taking into account the timing of all member investments and withdrawals. See answers.com for a more complete definition. Prior to the age of computerized spreadsheets, this calculation was somewhat tedious. (What ever happend to VisiCalc and SuperCalc?!)
A very clever spreadsheet created by a long term NAIC member does exactly that. (The Bivio website will generate a similar report called the performance benchmark.) Using data that shows the purchase and sale of member shares, the spreadsheet calculates the annualized internal rate of return for the club. It also calculates the annualized internal rate of return if the same funds had been invested in either the Vanguard Index 500 Fund or the Vanguard Total Stock Market Fund.
Here are the results comparing Moose Pond Investors with these two index funds for the period from 6 October 2000 to 5 August 2005:
Our return is line with these index funds. It also takes into account expenses such as brokerage fees and commissions. As we go forward, we hope to beat both indices. The spread sheet with the calculations for Moose Pond Investors is here.