3 Tips for Evaluating Portfolio Performance

Building a portfolio is a big effort. It requires considering your goals, time horizon, and risk tolerance. Once that’s settled, you’ll have to choose investments that match these criteria. And this is only the beginning. Portfolios require regular monitoring and performance evaluation to ensure that the assets you own are still working together to help you reach your financial goals.  

There are several ways to determine how well your investments are doing. Here are three things to bear in mind for putting gains and losses in your portfolio into a relevant context:

1. Your goals 

When you built your portfolio, you likely started with your financial goals and determined the average annual return you need to meet them. With that information in mind, review your investment performance to see whether you’re on track to meet those goals. 

Remember that investing is a long-term proposition. If you’ve only been investing for a few years, short-term market swings will have a greater effect on your portfolio and may not reflect the annual return of a long-term plan. If you’ve been investing for several years, you may be able to get a better sense of your portfolio’s longer-term performance. 

If your long-term annual returns are not enough to meet your goals, you may need to reconsider your objectives by choosing less expensive alternatives. Or you might reconsider your risk tolerance and allocate more of your portfolio to assets like stocks, which are riskier, but potentially offer higher returns. 

2. The broader market

One way to gain a relatively broad idea of how your portfolio is doing is by benchmarking it against a broader market index. For example, you could compare your stock portfolio to the S&P 500 for a general sense of how your portfolio is doing compared with the market. If your portfolio is down at the same time there is a market downturn, it’s likely there’s a systemic issue in the market rather than a problem with your portfolio. In some cases, lackluster returns in an up market may lead you to reconsider your portfolio allocation. 

That said, remember that your portfolio likely differs from market indices in several ways. For example, if you have a relatively low risk tolerance, you might hold more conservative assets that could cause your portfolio to underperform the market index slightly. 

3. Risk tolerance

Your personal risk tolerance plays an important part in how you invest — and it’s a critical consideration when evaluating performance. 

If you have a low risk tolerance, you’ll likely build a portfolio that smooths over volatility as much as possible. Say your target average annual return is 5%. In a volatile portfolio, you could hit your target with a -20% return one year and a 30% return the next. But that rollercoaster ride may leave your stomach churning. On the other hand, a portfolio that produces a 2% return one year and an 8% return the next might be more palatable. 

If you see that your low-risk portfolio underperforms a rising market, it might just be doing its job smoothing out ups and downs. Outperforming a rising market could even be a symptom of a portfolio overly concentrated in one investment type, such as technology stocks. 

Regular check-ins

Regularly revisiting your portfolio’s performance is an important part of investing. But for those evaluations to be useful, you must place your recent returns in their proper context. That requires focusing on your own financial goals, your investment preferences, and the larger economic issues at play. Your financial advisor can help you evaluate your portfolio performance using these and other metrics to help ensure that you’re on track to meet your financial goals. 

SOURCES:

https://www.finra.org/investors/learn-to-invest/key-investing-concepts/evaluating-investment-performance

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As we head into 2022, Amelia, Amy, and I are thrilled and excited to announce the merger of Howell Financial Advisors with Total Wealth Planning, LLC, based in Cincinnati, OH. We are now the Carmel, IN office of Total Wealth Planning and our office remains at its current location.

ENRICHING LIVES THROUGH FINANCIAL GUIDANCE

I have known the Total Wealth Planning team and their principals for over 12 years, which means we chose the right partners. Total Wealth Planning shares our same personal and professional values as objective, Fee-Only fiduciaries. Our common purpose is to deliver exceptional wealth management and life planning experiences for our mutual clients.

Amelia, Amy, and I, along with the entire Total Wealth Planning team, look forward to continuing to guide you through complex financial decisions that can impact you, your lifestyle, and your family’s financial future. We could not be more pleased about this new chapter in the life of our firm, and also for you, the most valued members of our business.

Learn more about our new venture with Total Wealth Planning and how this will benefit you at:

https://twpteam.com/howell/

As always, we are here for you.

We will see you in 2022!