Evaluating Your Portfolio Performance

‘Let your money work for you.’

Now, that’s a phrase we’ve all heard before, right? But the common fallacy in this phrase is that most of us (not excluding the writer of these lines) understand it as ‘let your money work instead of you’. And, when it comes to managing your portfolio, letting it run amok simply won’t do.

In order for your portfolio to perform at its best, you need to stay involved. While it’s understandable that most of us don’t intend to spend a lot of time managing our investments – it’s utterly important to at least periodically pay attention to the way your portfolio performs. This means tracking your asset performance over any chosen time period. As well as determining whether your portfolio’s risk level continues to fit your current risk tolerance.

Where to start?

First – even before you’ve started investing, really – you should be able to set goals for why you want to invest. Whether that’s a short-mid-or-long-term goal – knowing this will help you both in choosing your initial asset classes and investments, as well as help in managing your investments later.

On top of that, pre-determining your risk tolerance is as-if-not-more important. Knowing your risk allowance helps you avoid moving your money in or out of investments that are a little more volatile than you can deal with at the moment.

Now, you’ve done all that and started building your investment portfolio according to your goals and limits.

How often should you check your portfolio?

There’s no correct or incorrect answer to this question, but be advised – if your risk and stress tolerances are low, you will have a bad time if you check your portfolio too often. Stock market volatility can be a lot for anyone, especially if you have a lot of money or even your whole life savings invested in it. You are much more likely to witness more asset worth fluctuations if you check your portfolio often.

Normally, you should check and maybe tune up your portfolio at least once a year if you’re a young investor with long-term goals. Since your age is a factor that makes you much less vulnerable to market volatility, the younger you are – the less attention your portfolio requires.

In turn, older long-term investors and investors with short-term goals would do well to evaluate and adjust their portfolios more often. Checking in once every quarter is fine, but so is doing it monthly or even more frequently. It’s up to individual goals, be they short-or-long-term.

What should I look for?

When evaluating your investment portfolio, first look at how it’s performed so far in comparison to market indexes. That should give you a general idea of whether your assets have the potential to earn both in the short-and-long-term.

After looking at your portfolio as a whole, you should naturally look at all the parts it’s composed of. First, if your portfolio has multiple asset classes, try and determine whether the portfolio is balanced and diversified well enough to help you on your path. Then, look at each asset class individually – does it perform up to par? What is the cost/return ratio of each of your assets, and are you maximizing the asset (reinvesting bond dividends, for example)? How much does your portfolio cost you in fees, and what can you do to reduce these costs?

Apart from looking at your portfolio, you should also look within yourself, so to say. Goals and expectations do change over time, and so does risk tolerance. These are just some of the factors that vary from one investor to another. Only you know what investment strategy and portfolio you’re comfortable with.

This seems like a lot of work!

Yes, at first all these tasks may seem a bit overwhelming. Yet, once you get going and start to understand what you want to achieve with your portfolio, it becomes much easier.

A simple Google search will help you find a portfolio assessment tool that will help you evaluate your assets and their individual metrics. These tools use algorithms in order to assess your investments and help you enhance your portfolio. The downside is you would have to share your investment data, and it’s very likely that you’d have to give input manually. However, if you want someone to do all this in your stead, you can always turn to a financial advisor. This way you could save a lot of time and energy, albeit at a cost.

If you don’t want to incur any additional costs, you’ll just have to learn how to evaluate on your own. Nevertheless, your effort will pay off down the road. Remember, portfolio evaluation and tune up done now can significantly reduce your workload and stress later. Simply due to the fact that a diversified, well tuned portfolio requires less attention and is far less likely to underperform than a neglected, unkempt investment portfolio.

The bottom line

Ideally, your investment portfolio would require little to no adjustments, but in real life that happens rarely or never. Especially if your investment goals change over time. Therefore, you would do well to keep track of your goals, both now and down the road. And then, adjust your portfolio accordingly, if there are any changes.

Portfolio evaluation can help you in more ways than one. For example, not only will it help keep your investments up to date – evaluating your own portfolio will give you more insight into how investing and portfolio construction works. If you’re just starting as an investor – that’s an experience you simply cannot let pass by.

Ultimately, a diversified portfolio that performs according to your plans is the goal that all investors look to reach. But this goal will require some doing on your part. Spare some time – you’ll be better for it.