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As humans, we’re inclined to measure everything. Our waistline, height, gas mileage, square footage… It’s a part of life. The same holds true for investments. But which measurements should you use? And how can you use them to make informed financial decisions?
Combining helpful technology, expert advice and your own observations can give you the data points needed to make key decisions (i.e when it’s time to buy and sell). Throughout this article, we will provide tips, tools and resources you can use to measure investments and gather valuable insights about your portfolio.
It’s critical to track the overall performance of a portfolio, a collection of investments held by an individual or organization. This means monitoring how much your investments have grown (or shrunk), represented by the percentage growth or loss in value over a given time period. It can be helpful to monitor portfolio returns over a specific timeframe, such as a year or month, to compare it against historical data.
Observing changes in portfolio performance will allow you to dive deeper into your holdings to determine what might be dragging down your overall performance and what is delivering high returns.
If you observe persistent losses or negative returns, you may need to reevaluate your holdings. Consistently positive returns may cause you to leave your portfolio untouched.
Helpful tools to track performance include portfolio management software and applications like Morningstar or Seeking Alpha. If you use a brokerage, they should have a platform to track your portfolio performance.
AVANA’s Chief Lending Officer, Sanat Patel adds: “Your investment strategy should be tested annually against the actual results unless your account is actively managed by an investment advisor. As human beings, we naturally tend to think the greater the gain, the better we feel. So losses can lead to feelings of failure – with the exception of weight loss! I contend that if you compare to the market then even in a loss, you have the potential of outperforming the market.”
It’s important to monitor the total return of your portfolio. Furthermore, measuring those returns against relevant industry benchmarks offers a more complete picture of how your portfolio is performing. In other words, it shows the performance of your portfolio relative to the market.
Comparing your portfolio performance to a benchmark takes into account the market forces that are at play across the entire economy, which may cause your portfolio to experience growth or losses regardless of the strength of the individual investments within your portfolio.
For instance, if your portfolio is down (5%) year-to-date but the comparable benchmark index is down (8%), your portfolio is performing relatively better and you may be better off leaving your portfolio as is. This is something you might see in recessionary periods when the market as a whole is down, not just certain assets, sectors or individual holdings.
When tracking this, you can choose to benchmark individual investments within your portfolio or utilize an index that is similar to the asset makeup of your portfolio. Many financial websites and news platforms like Yahoo Finance or Business Insider have data easily available on the world’s major indices for benchmarking, or comparing investments to the market as a whole or to a selected index.
Measuring the risk profile of your portfolio helps you understand where your exposure is, plus create strategies to mitigate it. You may consider tracking the following metrics to get a better idea of your portfolio risk:
The calculations for these metrics can be a bit more complex, so you’ll likely want to use risk analysis tools or portfolio management platforms, again such as Morningstar or Seeking Alpha, to help you evaluate risk more effectively.
Understanding the risk profile of a portfolio can help you determine whether you’re overexposed to certain asset types (such as stocks, bonds or real estate), sectors and more. After performing a risk analysis, you may decide you want to sell certain investments to reduce your overall exposure. In general, the more diversified your portfolio is, the lower risk you’ll have.
With AVANA Companies, we help our investors easily monitor their portfolio AND diversify, including into private credit opportunities via mortgages secured by commercial real estate. Our transparent, thorough oversight includes monthly reporting on portfolio performance.
“Lending is an art and not a science,” Sanat explains. “Innovations in AI will further allow data analysis of trends, performance and market sales comparisons where the output is a decision based on input variables. However, debt is repaid by the individual, whereas the asset supports the action of cash flow to repay the debt. This, therefore, requires the gut check or “character” check of your borrower, which can only be done one-on-one by a human. So, debt investment should be made where your interests are aligned with the lender, who also commits their capital and takes on the risk of repayment. That’s exactly how AVANA Companies does it.”
Tracking the above metrics can help you feel empowered to make data-based investment decisions. This goes beyond simply gauging if you lost or gained money over the past quarter. Instead, those metrics offer a more comprehensive understanding of how to better optimize your holdings and align your portfolio with financial goals.
AVANA Companies is a comprehensive impact lending and fractional investment asset management platform serving entrepreneurs and investors. Comprised of a dedicated and diverse team with a unified mission – to create jobs, stimulate economies and contribute to clean energy – AVANA’s Family of Companies is focused on supporting American businesses and providing impactful, socially-driven investment opportunities that preserve wealth and create growth.
Ready to take control of your investment journey and need more personalized advice? Connect with our expert advisors today.