An investment portfolio is not something that you created and forgotten. It requires regular metrics to evaluate your portfolio. Key metrics are responsible to maintain the track of your financial goals. However, many investors lack transparency on how to assess their portfolios. It’s not about how much your wealth has grown but also how many metrics can help you understand the health and direction of your investment portfolio.
In this blog, we’ll delve into the key metrics that you should bring to action to evaluate your investment portfolio effectively.
Key Metrics for Portfolio Evaluation
- Performance Review
The first important step in a portfolio review is evaluating its performance. But that shouldn’t be limited to how much your portfolio has gained, you need to delve deeper to know how and why it’s performing that way.
XIRR (Extended Internal Rate Of Return) and CAGR (Compound Annual Growth Rate ) are two best analysis metrics that can track your portfolio records.
XIRR gives the account of irregular cash flows. Investments and withdrawals happen at different times and variable amounts. It considers the exact dates and amounts of these cash flows to show the accurate annualized return.
CAGR gives you an even annual growth on average each year over time, overlooking short-term market volatility.
Therefore, these two metrics can give you a vivid picture of your investment portfolio’s complete growth and performance trends.
- Mistakes to avoid
Performance assessment can be tough, and a few pitfalls must be avoided to make informed decisions. One such mistake is absolute returns, although it is quite satisfying to see high returns, at the same time look at whether those returns are sustainable or come with high risk. Therefore, it is important to look into risk-adjusted returns.
Another mistake that investors often make by investors is neglecting asset allocation. Diversification plays a significant role in investment portfolio performance that manages risk in market fluctuations.
- Planning realistic expectations
Investing is all about realistic profits and expecting the market highs and lows. When you are assessing your portfolio, you need to have proper realistic expectations.
Due to market’s volatility, returns can fluctuate in the short term. That’s the reason, it’s important to have a long-term investment portfolio perspective.
- Inflation account
Potentially one of the most neglected factors in portfolio evaluation is inflation. Inflation slowly diminishes the purchasing power of money. If your investment returns are not more than the inflation rate, you might not be growing your money.
A successful investment portfolio should at least beat minimum cost inflation consistently. This implies that your wealth retains its values and has a positive contribution towards financial independence. Hence, when assessing portfolio performance, ensure that you compare the returns with the current inflation rate to understand the real value of your investments.
Final words
If this blog has helped you clarify the importance of the metrics involved in portfolio evaluation, then it has achieved its motto. Regular evaluation is not only a good practice but also essential in optimizing performance to achieve financial goals.
Bear in mind that proper evaluation assists you in identifying which investments are working, which need balancing, and the goals that align with your portfolio objectives. Platforms like AS Portfolio Management Systems (ASPMS) offer personalized services to assist investors in remaining intact in the market in the long run.
