The performance degradation assessment (PDA) of key components such as gears and rolling bearings is the core technology of prognostics and health management for rotating machinery. Most existing PDA methods may have two deficiencies: (1) the assessment indicator constructed does not consider capturing fault characteristics directly; (2) feature selection is generally based on the measured data of different fault levels, which is difficult to obtain in actual processes; moreover, the selection results lack universality and are difficult to extend to other equipment. To address these issues, this paper proposes a novel PDA method based on fault information and dynamic simulation. First, anomaly detection is performed using four well-known indicators in combination with Mahalanobis distance. Secondly, fault identification is performed using envelope spectrum analysis on anomaly signals to determine the fault type, e.g., gear fault and outer race fault. Thirdly, based on the fault type information, the candidate feature set including fault-domain indicators is selected based on the established dynamic simulation signals to obtain a preliminary assessment vector for the first stage. The stability of the fault domain indicators which capture fault characteristics directly is tested through actual measured normal data. It is used as the second stage of selecting to obtain the assessment vector. Finally, the PDA indicator is calculated based on the assessment vector and Mahalanobis distance. Four experiment case studies demonstrate the proposed PDA method can effectively isolate faults with different defect sizes as well as track the whole performance degradation. The above analysis indicates that the proposed PDA method is expected to be used for the actual rotating machinery.