Already have your investment portfolio, but don’t know how to evaluate its performance? Don’t worry, in this article, we will explore the key tools and metrics for evaluating the performance of your investments, ensuring that you can make informed decisions and adjust your strategy as needed.
Why is it important to evaluate the performance of your investment portfolio?
Analyzing the performance of your portfolio is critical to understanding whether you are achieving your financial goals. Without periodic evaluation, you could lose sight of how your investments are performing and whether adjustments are needed. It also allows you to identify opportunities to maximize your returns or reduce risk. In short, it’s crucial to ensure you’re on the right track toward your financial objectives.
Key metrics to evaluate your portfolio’s performance
The selection of these metrics is based on their ability to measure relevant aspects such as profitability, risk and comparison with market benchmarks. These tools allow us to analyze and understand investment performance in a quantitative and qualitative manner, facilitating informed decision making and risk management. In addition, they are widely used in the industry to evaluate and compare the performance of different investment strategies.
Total yield
Total return is an essential measure that indicates how much your portfolio has grown or declined over a specific period. To calculate it, consider both capital gains and dividend or interest income. Total return gives you an overview of how well your investments have performed.
Risk-adjusted return
Evaluating the risk-adjusted return is important to understand whether the returns obtained justify the level of risk assumed. A commonly used metric is the Sharpe ratio, which measures the excess return over the risk-free rate per unit of risk assumed. A high Sharpe ratio indicates good compensation for the risk taken. So consider this metric in your evaluation.
Benchmarking
Comparing your portfolio to a reference index, or benchmark, allows you to evaluate its relative performance. If your portfolio is not outperforming or at least matching the benchmark, it may be time to review your strategy. For example, if you invest in technology stocks, you could use the Nasdaq as a benchmark.
Alpha
Alpha is a risk-adjusted performance measure that shows the performance of a portfolio compared to its benchmark (as we saw in the previous point), considering the risk that has been assumed. A positive alpha indicates that the portfolio has outperformed the expected return based on the risk taken, while a negative alpha suggests that it has underperformed. It is a useful metric for evaluating the investment manager’s skill.
Beta
Beta measures the volatility of a portfolio relative to the overall market. A beta of 1 indicates that the portfolio moves in line with the market, while a beta greater than 1 indicates higher volatility and a beta less than 1 indicates lower volatility. This metric is useful for understanding how the portfolio is expected to react to market movements, helping investors assess the risk associated with their investments.
Portfolio turnover rate
The portfolio turnover rate indicates how often you buy and sell assets within your portfolio. A high turnover rate can generate transaction costs and potential tax implications, which could negatively affect your net return. It is important to find a balance between adjusting the portfolio and keeping costs low.
Remember that these metrics have been developed and refined by economists, financial analysts and fund managers to provide an accurate and consistent assessment of the effectiveness and efficiency of an investment strategy, but you should consider them according to your investment objectives and strategies.
Tools and methods for evaluation
- Investment tracking platforms. Today there are many support options to track your investments, monitor the performance of your portfolio in real time, perform a detailed analysis and comparisons with benchmarks, to facilitate decision making based on quantified information. Among the platforms, Morningstar and Bloomberg stand out.
- Fundamental and technical analysis. As mentioned in our previous articles, integrating fundamental and technical analysis into your assessment can provide a more complete perspective. Combining them can improve your understanding of your investment performance.
- Consulting with financial advisors. Another of the most important tools for evaluating the performance of your investment portfolio is to consult with a financial advisor. This instrument can be invaluable, especially if you have no investment experience. An advisor can provide a professional evaluation of your portfolio, identify areas for improvement and suggest personalized strategies to achieve your financial goals.
What’s next?
After you have evaluated the performance of your investment portfolio, you need to take action to improve or optimize it. So how do you adjust your portfolio based on the evaluation? Here are the recommendations:
- Portfolio readjustment. Rearranging your portfolio involves adjusting the proportions of your assets to maintain your desired level of risk. For example, if an asset class has performed exceptionally well, it may represent a larger portion of your portfolio than is appropriate for your risk tolerance. Optimizing your portfolio ensures that you maintain adequate diversification and a controlled level of risk.
- Adjustment of investment objectives. Financial strategy can change over time, and your portfolio should reflect these changes. If, for example, your investment horizon has shortened, you may opt for safer, lower-risk assets. It is essential to review and adjust your investment objectives regularly to ensure that your portfolio is aligned with your current goals.
- Evaluation of costs and rates. Additional costs? be prepared for them! Consider expenses associated with managing your portfolio, including management fees, transaction fees and tax costs. High costs can significantly erode your returns. Consider low-cost investment options, such as index funds or ETFs, to minimize these expenses.
As you have seen, these recommendations to evaluate the performance of your investment portfolio are the key to maximize your returns and reduce the possible risks you may face. Remember that the safest option is to count on the help of professionals. At Algo Global, we have a team of highly qualified professionals who are passionate about the financial world. Our experts combine in-depth knowledge and practical experience to offer you solutions that are tailored to your specific needs and financial goals. Contact us!
