I'll share my approach here: Essentially, I see my investments as if they were a business or a company by themselves and apply some basic accountancy principles in order to evaluate them. Since I have some experience valuing companies, this way of looking at my performance immediately lets me know how I'm doing.
Here is a practical example. The typical measure is comparing, in percentage terms, your performance relative to an index. The following table below shows the relative returns of my portfolio, a part of which can be seen here, compared to the S&P total return since 2006. Both returns include dividends.
Note that the results for the current year go up to August 7, the last time I checked them.
It gives confidence to do percentage points better than the S&P500, but what I care about are the absolute results. Relative results are nonetheless necessary. If your relative results are less than the market you should consider putting your money periodically, in equal amounts, in some market index funds with low commissions. Then you will accomplish two things: You will have more time for yourself and you will do better financially. If you manage your money, more than relative results should be sought. It’s not enough to say, “I did fine, I lost 15%, the market did worse.” Mutual funds reason that way because they are the ones measured relatively. Their managers will get paid and keep their jobs as long as they have good relative results, even if they lose your money in absolute terms. But I would be quite disappointed if I lost money, no matter how much better I did than the market.
For a private investor, relative results are necessary, but what is essential are 1) capital preservation and after that 2) absolute growth. Minimize your losses and strive to win in absolute terms decent amounts. Be selective and when you are convinced that the odds are clearly on your side, bet big. Character plays a big role too. Make sure you have it. Ask yourself if you panicked in 2008 instead of acting with conviction by deploying your cash after unique opportunities you knew about. But okay, enough words. Here are the absolute results:
2012 €113.553 €130.923 -€2.750/
2011 €112.127 €116.302 €14.854/
2010 €83.290 €97.273 -€11.259/
2009 €36.347 €94.549 -€10.337/
2008 €67.129 €46.684 €44.199/
2007 €24.136 €22.929 €0/
2006 €22.086 €24.136 €22.086/
(*) Invested amount is the amount used to invest during the year — the end amount coming from the previous year plus the cash inflows or outflows into the broker.
The information above may be seen as the evolution of a business: a company with a portfolio of assets composed of equity and liabilities. The assets that make up the portfolio is the value of all my brokerage accounts.
The portfolio equity are all the accumulated gains and losses on my accounts. The equity or the accumulation of gains and losses is obtained with both realized and unrealized gains and losses, with long and short positions, with or without margin and with multiple currencies. They include gains and losses obtained with dividends, interests, options, stocks, bonds, CFDs, futures, etc.
Liabilities is the total money sent to my accounts, like a loan to them that needs to be returned.
The equity or accumulated earnings is the accumulation of the yearly portfolio gains or losses. So the increase in equity in a given year can be seen as the portfolio earnings for that year. Equity has evolved from €2,049 by the end of 2006, to €74,130 as of August 7 of this year, passing through negative equity of minus €19,601 by the end of 2008 and recovering afterwards. The yearly earnings since 2006 up until this year to date have been (in thousand €): 2, -1, -20, 58, 14, 4 and 17 and their sum is €74 thousand, which corresponds to the portfolio equity or accumulated earnings. As expected, assets minus liabilities equals equity, since the current portfolio value of €130.923 (assets), minus all the money that I have sent to my brokers, adding up to €56.793 (liabilities), is what I have gained. In this case €74.130 is the portfolio equity or its accumulated earnings.
Anyone can value their investments in such a way. You just need to keep track of what you sent or withdrew from your broker and of the net value in your broker. You don't have to worry about interest, commissions or specific stock returns. All is added up on your broker statements. Note that this does not take into account the taxes on realized profits which you will have to deduct and can vary in each particular case depending on what country you are in and many other factors.
So you may simply see the performance above as a cash flow of earnings and of money sent or withdrawn. The assets (portfolio value) are now up to €130.923, and initially they were €22.086. The liabilities are the money I have sent to my brokers in order to invest, which is now up to €56.793. I like to think of the money I sent to my brokers as liabilities, as if it was a loan I took from myself in order to invest it in stocks and other things, but which should be repaid, money has to come back. Correspondingly, money withdrawn is a debt repayment. The equity is all I have gained each year, accumulated (accumulated earnings), or the assets minus the liabilities, which as expected, coincides and is now €74.130. Assets are now bigger, meaning I need to keep up a good performance so that the returns also get bigger. Hopefully I can manage not to lose.
I think it is interesting to measure your performance like the way outlined above. It's easy, clear and practical. I view my portfolio as if it was a company, a business, composed of fractions of other companies and investments of all kinds. Like that you can apply all your knowledge to evaluate how well that business (your portfolio) is doing. You can identify its equity, liabilities and assets and see its evolution. As a stock investor, you know how to read financial statements. Applying that same knowledge with my investments has allowed me to clearly evaluate their performance.
PD: The most recent performance update can be followed here. I try to keep it up to date to make sure I'm on the right track.