How to Evaluate Portfolio Performance

Evaluating your portfolio’s performance is crucial to ensure you’re on track to meet your financial goals. Here’s how to do it effectively:

Key Metrics to Track

  1. Return on Investment (ROI)
    • What It Measures: The percentage gain or loss on your investments.
    • How to Calculate: (Current Value – Initial Investment) / Initial Investment * 100.
    • Example: If you invested 10,000andit’snowworth10,000andit’snowworth12,000, your ROI is 20%.
  2. Volatility
    • What It Measures: The degree of fluctuation in your portfolio’s value.
    • Why It Matters: High volatility means higher risk.
    • How to Assess: Use standard deviation or compare your portfolio’s performance during market downturns.
  3. Sharpe Ratio
    • What It Measures: Risk-adjusted returns.
    • Why It Matters: A higher Sharpe ratio indicates better returns relative to risk.
    • How to Calculate: (Portfolio Return – Risk-Free Rate) / Standard Deviation of Portfolio Returns.
  4. Benchmark Comparison
    • What It Measures: How your portfolio performs relative to a benchmark (e.g., S&P 500).
    • Why It Matters: Helps you determine if your portfolio is underperforming or outperforming the market.
    • Example: If your portfolio returned 10% but the S&P 500 returned 12%, you may need to adjust your strategy.

How to Improve Portfolio Performance

  1. Rebalance Regularly: Ensure your asset allocation aligns with your goals.
  2. Cut Underperforming Investments: Sell assets that consistently drag down your portfolio.
  3. Diversify Further: Add new asset classes or sectors to reduce risk.
  4. Review Fees: High fees can erode returns, so switch to low-cost options if necessary.

Example of Portfolio Evaluation

  • Portfolio Value: $100,000.
  • ROI: 8% over the past year.
  • Benchmark (S&P 500): 10% over the past year.
  • Action: Analyze underperforming assets, rebalance, and consider adding growth-oriented investments.

Related Posts