Income Artist

How To Track & Evaluate Your Portfolio’s Performance Over Time

Author: Jimmy Barron
Published:April 26, 2023
8 mins 9 secs

People of all income levels should start planning for retirement as soon as they establish a steady income stream.

And for many, secure golden years can come with proper investing begun early and professionally enough.

Even individuals in lower income brackets should look to the stock market, retirement plans, or buying shares in mutual funds to break the poverty cycle and create a nest egg that will guarantee that their non-working years will have as few worries as possible.

The investing process first begins with crafting a diversified and well-balanced portfolio, implementing a suitable strategy, and monitoring the performance of one’s held assets.

The latter is a mandatory step that lets traders assess the progress of their investing venture, understand the accrued risk, identify underperforming assets, facilitate adequate tax planning, and allows them to compare the well-being of their portfolio against an index to see how it is doing when stacked up against the broader market.

Thankfully, nowadays, most of these things can get done simply via affordable tracking apps, ones with advanced investment performance chart options, and various other tools that boost traders’ success rates.

These usually carry monthly or yearly fees but are more than worth their price for the value they offer.

Below, we get into how everyone can monitor the health of their assets, meaning what popular practices exist and what aspects should investors be wary of before seeking to undertake this task.

Choosing The Right Metrics To Evaluate Portfolio Performance

What are, in concept, investment performance key indicators, and which ones are the top ones in the sector? Firstly, they are metrics used to gauge the prosperity of assets over a distinct period.

Return on investment, better known under the acronym ROI, is likely the most famous of this bunch. And it refers to the return of a traded security relative to its expenses. It is the simplest way one can measure profitability.

On the other hand, total return is a metric that looks at the profit or loss generated while also factoring in the income generated and the capital gains created by the investment, meaning through means like dividends.

Risk-adjusted returns look at the return produced relative to the degree of risk incurred.

The criticalness of this measure is substantial because it permits a fair comparison of returns between trades made with varying degrees of risk involved.

The Alpha and the Sharpe ratio are two other measures that all investors must know.

The first tries to compute the excess return an asset has created compared to the expected one based on its degree of incurred risk.

A positive alpha specifies that a stock/bond/fund has produced higher than expected returns given the hazards undertaken with its purchasing/holding.

The Sharpe ratio, named after the 1990s winner of the Nobel Memorial Prize in Economic Sciences, William F. Sharpe, is a reward-to-variability ratio calculated by taking out the risk-free rate of return from a trade’s return and dividing that number by its standard deviation.

Each of the five metrics has a similar value yet serves slightly different purposes in the evaluation process. Hence, traders must grasp all of them. 

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Establishing Benchmarks For Comparison

Benchmarks indices are a tried-and-test method of evolution portfolio performance, which gets accomplished by comparing assets to a specific industry or market.

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Now naturally, that entails choosing an appropriate index that can act as a quality benchmark for one’s portfolio, which requires careful consideration of the investment style implemented, the set objectives, and the utilized asset allocation criteria and practices.

For an investor to pick a decent benchmark/index, he initially must consider the tactics he plans to incorporate in his trading endeavor and the classes his held assets fall into.

For instance, those with portfolios consisting of large-cap stocks may want to look into using the S&P 500 index as their benchmark because it tracks the most massive five hundred companies listed on the US stock exchanges.

Those considering smaller-cap stocks may want to check out and put the Russell 2000 to work as their yardstick index.

Once one has chosen a benchmark, one can overlay some of the metrics discussed above to analyze how their portfolio is doing compared to it.

A tracking error is something that did not get mentioned in the previous subheading. But it is quite essential in this performance scanning operation.

It measures the deviation of the portfolio’s returns from the one that the benchmark posts. It tells traders how closely a portfolio follows the picked benchmark index.

A higher one indicates that the portfolio’s returns are more volatile than what they have gotten compared against.

It also specifies that a portfolio manager is taking more active bets, which can result in better returns. But can generate higher losses.

Understanding Risk And Return In Portfolio Performance Analysis

Without question, the most fundamental concept in investing is the link, codependent on risk and return.

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Usually, the higher the danger level one accepts to take, the more that individual stands to gain.

The only reason one would choose to get exposed to high odds of losing invested funds would be to snag a lucrative prize that makes this trade worth it.

These days, traders can quantify risk in various ways, with the most established metrics used to do this being the beta, the Value at Risk, and Standard deviation gauges.

The beta informs traders of the sensitivity of an asset’s returns to movements in the market, while the standard deviation measures the variation in returns from an average over time.

VaR (Value at Risk) shows the potential loss one could incur at a specific confidence level.

Of course, before anyone gets into securities trading, they first must discover their risk tolerance.

They must also periodically review this standard to see if they can still take as much risk as they once did and adjust their portfolio according to the new set level while also looking at their performance in a new light, given the new set of circumstances that have popped up.

The Role Of Professional Help In Portfolio Performance Evaluation

For those who lack robust financial knowledge, seeking professional advice can be indispensable.

That is so because these experts can assist in building comprehensive financial plans using their years of accumulated market experience.

And they can deal with complex situations that feature handling vast amounts of assets and require specialized advice.

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Qualifications, experience, communication style, and fees are the main things novice investors should look for in an advisor.

They should also check to see if the person they are thinking about hiring has relevant certification, credentials, a track record of success, and has gotten registered with the appropriate regulatory bodies.

These professionals can do most of the portfolio performance evaluations themselves and supply info regarding the current state of affairs to the asset holders in simple terms, with recommendations on what the next moves should be so that the portfolio remains on track to hit its long-term financial objectives.

These kinds of experts can get found working for large portfolio management firms or as freelancers.

Tools And Resources For Tracking And Evaluating Portfolio Performance

While two decades ago, portfolio managers were in super high demand, today, they are getting slowly replaced by investment tracking software and artificial intelligence that deliver far more detailed data and sound advice than any single human can.

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Modern tracking apps, such as StockMarketEye, Kubera, and Sharesight, let users monitor hundreds of securities from every category imaginable, feeding them real-time data from top exchanges or world-famous media outlets.

These pieces of software have built-in stock alert functions, over a dozen technical indicators that can be utilized in analyzing an asset’s well-being, several chart styles, brokerage data importing options, benchmark functions, automated reports, and more.

They are virtual assistants that do the work of multiple people, providing invaluable insights into the investment process.

One feature of these apps most rave about is groups or the option for an investor to consolidate information across your many investment portfolios, so they can see their totals and create reports on combined holdings while also building a sense of hierarchy within these groups.

Parting Thought

When investing comes up in lay circles, many are swift to point out the significance of diversification and rebalancing to optimize returns and reach set monetary aims.

That said, something of equal importance that, in large part, fuels rebalancing is evaluating asset performance.

An investor can only make adjustments once they have spotted that modifications to their portfolio should get made.

Checking the prosperity of one’s investment necessitates employing a myriad of metrics like those explained in this article in the subheading dedicated to them.

To build a successful trading strategy, investors must know how to analyze their portfolio’s volatility and come to risk-adjusted returns.

Fortunately, financial software now does most of the legwork in this part of the trading process.

And the apps that make this happen have quite dramatically lowered the need for hiring financial professionals to manage investment portfolios.

However, these experts’ roles have not become entirely disposable, as their distinct perceptions can improve one’s chances of hitting their investment goals.

It goes without saying that when one takes a proactive approach to manage their investments, the odds of building a more secure future dramatically increase.

That is why evaluating the performance of a portfolio over time is so imperative. Optimizing one’s asset group periodically with apt tweaks goes a long way toward maximizing returns with minimal risk.

That is possible for almost any newbie investor if they are willing to shell out the monthly/yearly fee for premium tracking software or give a managing commission to a financial expert with solid credentials and a history of generating quality returns.