How to Evaluate Your Portfolio

Are you one of those investors basing your portfolio’s success on its returns? While great returns are nice, they’re not the only indicator of a well-performing portfolio. In fact, most investors never even think about all the risks taken to get those returns. Sometimes, it’s not enough to just go with your gut or listen to just any analyst—instead, it’s necessary to evaluate your portfolio from time to time. And that means from every angle.

What does it mean to evaluate your portfolio?

When you started out on your investment journey, you likely had a few goals in mind. Over time, those goals may change—you might get married, start a family, or switch careers. Plus, you need to evaluate your portfolio against inflation. 

The most important aspect of evaluating your portfolio is this: If events in the overall market tend to affect your investments in the same way (when one spikes, they all spike), your portfolio may not be diversified enough. If all your investments tend to spike at the same time, this means that any negative market events could cause your investments to bottom out together, wiping out any progress you may have made.

So, what’s the best portfolio evaluation method?

A quick search will return dozens of tools you can use to evaluate your portfolio. Here are a few ways you can do it:

1. Use an online portfolio evaluation tool

These tools are handy because they do all the math for you, with one catch — you might have to enter all your investments manually. Some tools let you upload a spreadsheet of your investments, but if you don’t have one made, that could take some time, depending on how many investments you have. If you don’t want to use an online tool, you can also reach out to a full-service firm for a portfolio evaluation.

Online tools divide your investments into asset categories, such as stocks or bonds, and can also divide by sector, such as technology or industrial. While the exact lingo isn’t necessarily important, what is important is that your portfolio isn’t too heavily concentrated in one category or sector. Diversifying your portfolio is key to withstanding market upheavals.

2. Look at your portfolio’s overall performance

If this is the first time you’re evaluating your portfolio, take a look at its overall performance. How is it performing as a whole? In relation to indexes or ETFs? If your portfolio is heavily weighted with tech stocks, match it up against the Nasdaq. Also, review your investments’ price-to-earnings, or P/E, ratios, dividend yields, and projected growth.

3. Look at each investment individually

Say your portfolio is a mix of stocks, bonds, and ETFs. Take a look at how each category is weighted in the portfolio and assess each category’s allocations.

Stock allocation should be viewed from a personal perspective. For instance, what are the P/E ratios of the stocks you hold? Are they all from companies located in the United States? It wouldn’t hurt to diversify with some global holdings. Finally, your personal beliefs should play a role too. For instance, if you have strong feelings about human interest sectors, you can invest in companies that line up with your personal views.

Your bond investments can generate stable income, which is one of the reasons a portfolio manager typically suggests these as part of a well-rounded portfolio. The thing a lot of today’s investors don’t know is that your greatest returns from bonds come from the reinvestment of your bonds’ interest payments. You should have a plan for reinvesting.

Adding alternative investments, such as fractional real estate (wink wink), can act as an overall stabilizer for your portfolio’s returns.

Finally, your portfolio should be rounded out with mutual funds or exchange-traded funds (ETFs). Make sure you evaluate their performance over time, just as you would with any other investment. It also doesn’t hurt to review the tenure of the funds’ managers. What is their history? Plus, are the funds themselves diversified enough? Do your mutual funds tend to see overlap in certain sectors?

4. How much are the management fees?

If your portfolio manager charges exorbitant fees, it can kill any returns you might have seen. That said, though, if one of the funds in your portfolio is continuously outperforming the index, even after fees, it’s not a bad deal to pay higher fees when you’re seeing higher returns. But don’t pay your portfolio manager a higher percentage than the index fund itself calls for, especially if the fund is underperforming.

5. Consider your long-term goals

After all, your investments can pave the way for a successful future. Once you’ve reviewed all the aspects outlined above, it’s time to look at this from the standpoint of “does it meet my long-term goals?”

Well, first—what are your long-term goals? Investors nearing retirement age typically have a different allocation of assets than someone just starting out. Someone nearing retirement has had several decades to tweak their portfolio, whereas someone in their 20s has plenty of time to see what works and what doesn’t.

Then, decide how much skin you’re willing to put in the game. What market events or economic developments strike fear in your heart? If you fear a coming recession, investing more into commodities such as gold, silver, or real estate is better than dumping your life’s savings into stocks. The amounts are less important than the percentages and allocation strategy.

Portfolio evaluation is a necessary part of responsible investing

If you’ve ever heard the term “active portfolio management,” it means doing what’s outlined above on a semi-regular basis and rebalancing your investments as necessary. Think of your favorite cake or pie a family member makes on holidays—it tastes good (or not so good) because of its ingredients. Putting the best “ingredients” in your portfolio will yield the best results, too. But it’s important that you also monitor how individual investments interact with your portfolio overall. Because even the best apples and cinnamon can sour if the ratios are off.

Evaluating your portfolio is a powerful way to help you raise your returns and minimize risks. It takes time to get a portfolio into that sweet spot, that Goldilocks zone. And it changes over time. If you’re unsure of the right combination of ingredients, it helps to have pros on your side to help you get into the right mix of assets for you.

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