how to evaluate your stock portfolio

^{How to Evaluate Your Portfolio}

1. Use a Stock Portfolio Analyzer. You can gain insights into your portfolio by putting your investments into an online investment analysis tool.
2. Evaluate How Your Portfolio Performs as a Whole. When you first look at your portfolio, look at it as a whole. How is it performing compared to other benchmarks?
3. Think About How Your Assets Perform Individually. Examine your stock allocations in light of your personal circumstances. ...
4. Evaluate Manager Fees. Fees are like blood pressure. They need to be kept low or they will silently kill your returns. ...
5. Think About Your Goals. Once you have examined your entire portfolio, as well as the individual components, it's time to figure out if they meet your goals.

Full Answer

How to evaluate an investment portfolio?

How to Evaluate an Investment Portfolio Step 1: Upload Your Portfolio to an Investment Tracking Tool The first step is to input your portfolio into an... Step 2: Evaluate Your Stock and Bond Allocation The most important investing decision you’ll make is how much capital to... Step 3: Evaluate Stock ...

How do you evaluate a stock?

To evaluate a stock, review its performance against a benchmark. You may be satisfied with a stock that generated an 8% return over the past year, but what if the rest of the market is returning a few times that amount?

What is the best way to measure portfolio performance?

Perhaps, a combination of all three. Portfolio performance measures are a key factor in the investment decision. There are three sets of performance measurement tools to assist with portfolio evaluations—the Treynor, Sharpe, and Jensen ratios.

What should I look for when reviewing my stock allocations?

Examine your stock allocations in light of your personal circumstances. If your home is your largest investment, is it located in the same city as the company that is your largest stock holding? Perhaps some diversification would benefit you. What is the average price-to-earnings ratio of the stocks in your portfolio?

How do you analyze a stock portfolio?

How to Evaluate Your PortfolioUse a Stock Portfolio Analyzer. You can gain insights into your portfolio by putting your investments into an online investment analysis tool. ... Evaluate How Your Portfolio Performs as a Whole. ... Think About How Your Assets Perform Individually. ... Evaluate Manager Fees. ... Think About Your Goals.

What is the best way to evaluate stocks?

The most common way to value a stock is to compute the company's price-to-earnings (P/E) ratio. The P/E ratio equals the company's stock price divided by its most recently reported earnings per share (EPS). A low P/E ratio implies that an investor buying the stock is receiving an attractive amount of value.

How do you tell if your portfolio is doing well?

Another way to measure how well you are doing is by measuring simply what your total net gain or loss is. If you're a more conservative investor, you might be much happier with a portfolio that returns 5% per year no matter what, even if the S&P 500 index happens to be up 30% in one of those years.

How do Beginners evaluate stocks?

Stock research: 4 key steps to evaluate any stockGather your stock research materials. Start by reviewing the company's financials. ... Narrow your focus. These financial reports contain a ton of numbers and it's easy to get bogged down. ... Turn to qualitative research. ... Put your research into context.

How do you analyze stocks for beginners?

How to do Fundamental Analysis of Stocks:Understand the company. It is very important that you understand the company in which you intend to invest. ... Study the financial reports of the company. ... Check the debt. ... Find the company's competitors. ... Analyse the future prospects. ... Review all the aspects time to time.

What is a good return on stock portfolio?

Expectations for return from the stock market Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market.

What does a healthy portfolio look like?

The long-term goal of every investor is to get the highest returns possible while at the same time minimizing risk. A typical portfolio should have a good spread of stocks and shares, bonds, and cash and equivalents. Some people also like to include gold.

How to evaluate a stock?

To evaluate a stock, review its performance against a benchmark. You may be satisfied with a stock that generated an 8% return over the past year, but what if the rest of the market is returning a few times that amount? Take the time to compare the stock’s performance with different market indexes, such as the Dow Jones Industrial Average, the S&P 500, or the NASDAQ Composite. These indexes can act as the benchmark against which to compare your own investments' performance. 1 

What is the purpose of looking at the change in a stock price?

Looking at the change in a stock's price by itself is a naive way to evaluate the performance of a stock. Everything is relative, and so that return must be compared to make a proper evaluation. In addition to looking at a company’s total returns, comparing them to the market and weighing them relative to competitors within the company's industry, there are several other factors to consider in evaluating a stock’s performance.

Is the S&P 500 a good yardstick?

If you invest in small speculative penny stocks, the S&P 500 will not be the right yardstick, as that contains only large-cap stocks listed on major stock exchanges. You may also want to look at how the economy has done during the same period, how inflation has risen, and other broader economic considerations.

Is a stock outperforming the market?

It could happen that a stock is outperforming the market but is nevertheless underperforming its own industry, so make sure to consider the stock’s performance relative to its primary competitors as well as companies of similar size in its industry.

Why is it important to keep tabs on your portfolio?

If done correctly, monitoring a portfolio enables an investor to make important adjustments to investments as needed. It also helps an investor stay on track toward their financial goals. For this reason, I've previously shared my top picks for investment tracking software.

What is the first data point to track?

The first and perhaps most obvious data point to track is a portfolio's performance. In the case of mutual funds and ETFs, a tool like Personal Capital makes tracking performance very easy. Once investment accounts are linked to the tool, it tracks the portfolio's performance automatically.

What is the second key item to track?

The second key item to track are investment fees. Expensive investment products, over time, can reduce a portfolio by tens if not hundreds of thousands of dollars. Here a good investment tracking tool can not only calculate your fees across your entire portfolio, but also show you how those fees will affect returns over your lifetime.

The past 12 months have been a better-than-average period to evaluate

There is a lot of “spaghetti” in that chart below, so allow me to summarize for you. In the past 12 months (5/8/2019 - 5/7/2020), the “headline” stock market index, the S&P 500, rose sharply, then plunged at record speed, then bounced back up. At the end of the 12 months, it was about 2% above where it was last year.

Analyzing performance from major market turning points can be very helpful

Above you see one more time period. This one starts on 10/3/2018. That’s when the stock market initially topped out. It then cratered for all of 3 weeks, rebounded on Christmas Eve, 2018, and flew higher until this past February.

What a bear market looks like

That graph is showing a period of about 19 months. Notice that many of the market segments on the chart produced similar returns over these 19 months than they did over the 12-month chart I showed you earlier. In other words, we have had a 7-month roller coaster that produced a near-zero S&P 500 return.

What is portfolio performance?

Portfolio performance measures are a key factor in the investment decision. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story.

Who was the first to provide investors with a composite measure of portfolio performance that also included risk?

Jack L. Treynor was the first to provide investors with a composite measure of portfolio performance that also included risk. Treynor's objective was to find a performance measure that could apply to all investors regardless of their personal risk preferences. Treynor suggested that there were really two components of risk: the risk produced by fluctuations in the stock market and the risk arising from the fluctuations of individual securities. 1 

Is unsystematic risk considered a performance measure?

Because this measure only uses systematic risk, it assumes that the investor already has an adequately diversified portfolio and, therefore, unsystematic risk (also known as diversifiable risk) is not considered. As a result, this performance measure is most applicable to investors who hold diversified portfolios.

When did investors start measuring risk?

Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, there are three sets of performance measurement tools to assist with portfolio evaluations.

Is Sharpe ratio the same as Treynor?

The Sharpe ratio is almost identical to the Treynor measure , except that the risk measure is the standard deviation of the portfolio instead of considering only the systematic risk as represented by beta. Conceived by Bill Sharpe, 2  this measure closely follows his work on the capital asset pricing model (CAPM) and, by extension, uses total risk to compare portfolios to the capital market line. 3 

What is portfolio analysis?

Portfolio analysis is when you study an investment portfolio to determine if it meets your investing goals and preferences. It's also a way to see if it meets the objectives you've set for your portfolios, such as risk, inflation, and performance. Think of a portfolio as a carton that holds all of your investments.

Why is portfolio analysis important?

Portfolio analysis will often result in higher returns and lower risks. In other words, it improves the odds of your success in the uncertainty of financial markets.

Why are bonds used in portfolios?

Evaluate Your Bond Allocation. Bonds are commonly used in portfolios to generate income and provide stability. Many investors do not focus on the fact that the largest part of the return from fixed-income investments over time comes from reinvesting bond interest payments (or “coupons”).

How does diversification improve portfolio performance?

Diversification improves your portfolio's ability to withstand shocks by lowering the correlation among assets (the extent to which they all move in the same direction.) 2. Evaluate How Your Portfolio Performs as a Whole.

What happens if all your securities move in the same direction?

If all your securities move in the same direction in response to market events, your portfolio's value may be wiped out by adverse developments. (It must also be said that the same portfolio could rise dramatically in response to positive developments.)

How to get insights into your portfolio?

1. Use a Stock Portfolio Analyzer. You can gain insights into your portfolio by putting your investments into an online investment analysis tool. You may have to enter the data manually, though most will allow you to upload your data from a spreadsheet.

What assets fell in price in response to the financial crisis?

Stocks, bonds, mutual funds, ETFs, gold, commodities, derivatives and real estate all fell in price in response to the crisis. Nevertheless, reducing the correlation among the assets in a portfolio is still the best method we know of for improving the odds of success and lowering risk.