Posted on: 7th January 2025

How to Evaluate the Performance of Your Investment Portfolio

Keeping track of your investment portfolio’s performance is crucial for staying on course towards your financial goals. But how do you measure success, and what should you focus on?

Let’s dive into the key steps and metrics that can help you assess how well your portfolio is performing.

Start with Your Investment Goals

Before anything else, it’s important to remind yourself why you started investing in the first place.

Are you looking to grow wealth long-term , generate income, or keep your money safe? Clear goals make it easier to evaluate if your portfolio meets your needs.

It’s also essential to think about time. For instance, are you investing for a short-term goal like buying a home or a long-term goal like retirement ? Knowing your time horizon helps you measure performance in the proper context.

1- Measure the Returns

Your portfolio’s return is a simple measure of how much you’ve gained or lost. Total return includes capital gains and any income earned, like dividends or interest.

There are two key ways to measure returns:

• Time-weighted returns : These show how your investments performed, excluding the impact of deposits or withdrawals you’ve made. This is useful to see if your investment choices were good.

• Money-weighted returns : These take cash flows into account, showing how your timing of deposits and withdrawals affected your results.

Both methods give you valuable insights, so it’s worth looking at both.

2- Factor in Risk

Investing isn’t just about making money; it’s about managing risk, too. Risk-adjusted performance measures show how well your portfolio has performed relative to the amount of risk you’ve taken. Some valuable metrics include:

• Sharpe Ratio : This tells you how much return you’re getting for each unit of risk. A higher Sharpe Ratio means you’re being rewarded more for your risk.

• Alpha : This measures how your portfolio did compared to a benchmark, such as a stock index. A positive alpha means your investments outperformed.

• Beta : This shows how volatile your portfolio is compared to the market. For example, a beta of 1.2 means your portfolio is 20% more volatile than the market.

3- Compare with a Benchmark

A good way to measure performance is by comparing your portfolio to a benchmark. This could be an index like the FTSE 100 or another relevant measure that reflects your investment strategy.

Choosing the proper benchmark is essential. For example, if your portfolio includes a mix of stocks and bonds, compare it to a balanced index. If you’re focused on Asian markets , look for benchmarks that reflect this.

4- Check Your Diversification

Diversification is a cornerstone of smart investing. A well-diversified portfolio spreads risk across different asset classes, sectors, and regions.

• Asset Allocation : Are your investments balanced between equities, bonds, real estate, and other asset classes?

• Sector and Geographic Exposure : Are you too heavily invested in one industry or country? For instance, relying too much on tech stocks or one Asian market could increase your risk.

Reviewing diversification ensures you’re not putting all your eggs in one basket.

5- Keep an Eye on Costs

Costs can eat into your returns, so staying on top of them is important. Common costs include:

• Management Fees : These are the fees charged by fund managers or advisers.

• Trading Fees : Every time you buy or sell an investment, you may incur charges.

• Taxes : Don’t forget to factor in the impact of capital gains tax and other taxes on your investments.

Minimising these costs can make a big difference to your overall returns.

6- Analyse Your Holdings

Not all investments will perform equally, and that’s fine. But it’s important to know what’s working and what isn’t.

• Performance Attribution : Look at which investments have contributed the most to your returns. Are some consistently underperforming? If so, it might be time to consider selling them.

• Rebalancing : Over time, some investments will grow faster than others, which can throw your portfolio’s balance out of sync. Regularly rebalancing helps maintain your desired mix of assets.

7- Consider the Bigger Picture

External factors can impact your portfolio’s performance. These include:

• Market Conditions : Economic trends, interest rates, and geopolitical events can all influence returns.

• Regulatory Changes : Stay aware of any changes in laws or regulations that might affect your investments, particularly in the fast-changing markets of Asia.

8- Use Technology to Your Advantage

Modern tools make it easier than ever to track and evaluate your portfolio. Many apps and platforms offer detailed performance reports, risk analysis, and even suggestions for rebalancing. Leveraging these tools can save you time and provide valuable insights.

9- Regular Reviews Are Key

Evaluating your portfolio isn’t a one-off task. Make it a habit to review your performance regularly. This could be quarterly, semi-annually, or annually, depending on your investment goals.

By taking the time to measure your portfolio’s performance, you can make smarter decisions and stay on track to achieve your financial goals.

Conclusion

Evaluating your investment portfolio doesn’t have to be complicated. By following these steps, you can clearly understand how well your investments are doing and make any necessary adjustments.

Remember, it’s not just about the numbers—it’s about ensuring your investments align with your goals and give you peace of mind.

Need help getting started? We’re here to help you make the most of your investments. Contact us today to find out how we can help you.