In the tough times of market volatility or poor portfolio performance, investors will naturally question why they are not seeing the returns they had predicted or why they are losing value of their investment. Experts, fund managers and seasoned investors will all agree upon one simple element. Understanding how your portfolio has been performing overall, not just in the last month, is the best antidote to help you make the best decision in the future.
You may be reading this and questioning how can you analyze your investment portfolio on an individual basis. Well, this article looks to answer this very question and provide you with a lens to monitor the health of your investment portfolio.
Methods to analyzing your investment portfolio
Depending on who you talk to and the current market conditions, you will naturally will receive differing methods or tools to analyze your investment portfolio. This article will provide a collection of ways you can implement straight away.
Annualize your total performance
Although you may place your investments through an investment trust, you have an external broker, or you manage your investment portfolio yourself, keeping track of your total performance is essential in ensuring the health of your portfolio. Not only will keeping track of your annual account will help you understand how your investments are doing, but it will also help you make informed decisions in the future.
When we talk about annualizing your portfolio performance, you must track everything. There are often times, even for the more skilled investors, who aren’t calculating their actual returns or gloss over a certain aspect of your portfolio, which provide investors with an incorrect view of their true performance. Although this point may be evident in no small proportion reading this article, you must not become naïve with your analysis and tracking. It is here where you could miss a crucial element, which comes to hurt you later down the line.
Dividend Yield
Depending on the type of investment strategy you pursue, growth dividends are more than likely to make up part of your performance returns. Like the point above, if you are not tracking them, you are not getting the full picture.
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A number of you will be questioning why is this the case, but several online tracking tools, portfolio managers and investors do not factor dividends into their overall return figures. In essence, this means you are not getting the complete picture of your performance.
In similar nature to the point above, you must understand the role of dividends in your portfolio. In doing so, it is recommended you know how to properly track the funds you receive from your investment and the tax implications. Unfortunately, tracking dividend yields is one of the labor-intensive tasks you will undertake. To aid you in this process, investors can take advantage of smart pieces of technology and services.
Asset allocation
One of the simplest and most effective ways to monitor the health of your investment portfolio is to review the impact of your asset allocation. Reviewing your asset allocation lets you understand the critical elements to your portfolio’s performance, be that asset type, location, or sector. Furthermore, asset allocation also helps you to quickly identify where portfolio diversification is needed, either to reduce the risk or take advantage of growing dividends/return opportunities.
If you are wondering how you should review your asset allocation, here are some helpful methods:
- Market
- Sector
- Asset classification
- Industry classification
- Investment type
- Location
Portfolio Comparison
While it is essential to analyze your portfolio to protect it in the future, you mustn’t over compare your portfolio just against indexes you seen in the media. Instead, it is recommended to compare against indexes relevant to your and your portfolio. It is here where you will be able to receive the greatest and most useful forms of comparisons.
Benchmarking your investment against the relative indexes and understanding the core factors of your performance will allow you to know what you need to do to “beat the benchmark”.
Although this point is about comparing your portfolio to those around you, it is important not to get ahead of yourself in terms of your investment journey. Every investor has their core goal they would like to reach with their investment and it is vitally important to keep this in mind when going forward.
The core factor to the health of your portfolio is understanding what factors ‘tick’ at what point and understanding where you may need change.
