Carefully picking out all the assets that align with your personal values and investment goals can be incredibly rewarding.
However, what comes next can often be less satisfying — consistently monitoring your investments, no matter how varied they become, to ensure they continue to align with the ideals you originally set.
But with a little understanding around why it’s so important to evaluate portfolio performance and a guide on how to handle it step-by-step, we think we can help take this part of your financial life from an annoyance to something you don’t mind doing every once in a while.
What Portfolio Performance Evaluation Means
Portfolio performance evaluation is exactly what it sounds like: it’s the process of regularly scrutinizing your investment assets to ensure they're meeting your preferences and performance objectives, whether those revolve around diversification, inflation hedging, return generation, personal ideals, and so on.
Why Portfolio Performance Measurement Matters
There are plenty of reasons why every DIY investor should learn how to check in on their portfolio performance and reevaluate their investment strategy every once in a while.
Make Sure Assets Are At The Top Of Their Game
One of the leading reasons why portfolio performance measurement is so key is that it’s pivotal in seeing how each and every one of your carefully-chosen assets is doing!
When you evaluate your portfolio on a regular basis, you’ll be able to quickly identify which assets are doing great — and that you might want to put more money into — and which are draining your funds with little return — which you may decide to divest from.
Get to the Why Behind Portfolio Value Changes
Seeing sudden spikes, or worse dips, in portfolio value?
Without taking the time for investment management, you’ll never know where those changes are coming from.
Being able to identify which assets are rocking the boat, whether in a positive or negative direction, is important to keeping your portfolio balanced and protecting the hard-earned money you’re funneling into your assets.
Determine Where to Free Up Capital for New Investment Opportunities
Amazing new investment opportunity just popped up?
Well, it’s gonna be hard to know whether or not you’re prepared to grab it if you don’t have a detailed understanding of what’s going on with your portfolio and its average return rate.
And if you do decide you want to go for that new investment opportunity, with an organized view of your assets you’ll immediate know what investments can be sold off to free up the capital you need — without scrambling or throwing your whole asset allocation strategy out of whack.
Protect your Portfolio With Diversification
Speaking of new investment opportunities, sometimes they crop up in totally new areas that are new to your investment portfolio — giving you the chance to diversify.
Why does this matter?
Portfolio diversification is the practice of adding investments from different asset classes — think a mix of stocks, cryptocurrency, real estate, gold, etc. — to the same portfolio.
Because most of these asset types aren’t correlated, together they help portfolio value remain stable even when the value of one area — let’s say crypto — drops suddenly. This is how diversification protects investors against impactful and long-term capital losses.
On average, diverse portfolios generate higher returns and experience lower total risk and losses when compared to homogeneous portfolios.
When you take regular stock of your portfolio for investment performance, you’re always aware of what types of assets you have and which types you need. This keeps you ready to grab hold of opportunities to diversify, modernize, and grow as soon as they arise.
Get a Reliable Net Worth Reading
Net worth is a singular number that investors, and anyone really, can use to keep a finger on the pulse of their financial health.
So, of course tracking net worth is just as worthwhile as tracking something like, say, your heart rate! Typically, you want to watch this number get higher over time, as that indicates your “health” is improving.
Since net worth is based on the value of what you own minus the value of what you owe, being intimately familiar with all of your assets and debts is the first, critical step in finding it.
Portfolio Performance Evaluation: A Step-by-Step Guide
Fired up and ready to learn how to measure and monitor your portfolio’s performance?
Amazing! Let us give you an easy step-by-step guide that you can use from here on out anytime you need a fresh portfolio performance evaluation.
Step 1: Set Some Portfolio Performance Goals
Before we dive into exactly how to evaluate relative performance, let’s talk about the different parameters you can set around performance and the ways in which you might judge whether or not it’s up to par.
Long-Term Growth
Some investors, especially those who have plenty of time before retirement or other major cash outlays, take on assets that might not look as attractive immediately with the hope that they’ll gain lots of value in several years.
These types of investors should prioritize assets in their portfolios that have a history of consistent annual returns and the potential for expansion.
Passive Income
On the other side of the coin are investors who would like for their assets to generate ongoing, accessible income. You’ll often see investors who are nearing retirement, moving to part-time work, or just taking a hiatus from their job in this position.
These investors want to make sure their bonds and CDs are hitting decent interest rates and that they’re invested in high-yield stock and mutual funds. And while we don’t recommend that investors nearing retirement go all in on assets with a high measure of risk (and therefore reward), it can be helpful to mix in and monitor alternative assets to bump up the potential for returns.
Read more about why alternative assets really should have a place in most portfolios.
Quick Profit
Then there are investors who are pro at quickly buying and selling assets in order to create an immediate profit.
If you’re looking to turn a profit with a short hold time, you probably want to monitor assets for plateaus or downward slides in value, so you can sell while they’re still high. Alternative assets with lots of variability, volatility, and of course market risk pay off with a high risk premium, making them a good match for this investor type.
Step 2: Calculate Internal Rate of Return with Kubera
To create an easy-to-track number value for your portfolio, you need to create easy-to-track number values for the assets that make it up. Doing this across assets also gives you a way to compare assets on an apples-to-apples basis.
The thing is, with a really well diversified portfolio full of traditional assets as well as crypto, DeFi, NFTs, etc., this can take hours — hours you have to spend over and over again every single time you want to evaluate performance.
Unless you’re able to apply automation to the process, that is.
Welcome to Kubera.
Kubera is personal balance sheet software that we built to make life easier for DIY investors just like ourselves.
Just one of the ways it does that is by automating the process of calculating and monitoring internal rate of return (IRR). IRR is like an advanced version of ROI that takes time as well as cash flow in and out when determining the value of an asset. It’s a valuable metric for evaluating whether an asset is a good investment in the first place, as well as tracking how its value fluctuates over time.
Learn more about why IRR for investments is a critical metric.
With Kubera, you can complete multiple, complicated IRR calculations easily. All you have to do is make sure all the right asset details inside your Kubera dashboard are filled in — including cost, current value, expenditures, and investments.
Our platform takes these metrics into account and rolls in holding time periods to display IRR — in your preferred currency, to boot!
Right alongside this number, we also display the performance of a few leading indices and tickers. These numbers serve as a type of benchmark against which to compare your investment decisions.
Now for another feature that makes Kubera a key portfolio manager for performance evaluation: our net worth recap screen.
No need to keep another separate spreadsheet full of all the numbers you’re monitoring. Our all-in-one wealth tracker crunches the numbers for you so you can see net worth growth and even individual asset performance daily, weekly, monthly, quarterly, and even yearly.
Step 3: Compare Against Appropriate Portfolio Performance Benchmarks
Now that you’ve got a well-managed portfolio and some IRR numbers that can be compared, let’s build on that idea of benchmarks we mentioned.
Kubera displays common indices and tickers for preliminary comparison purposes, but we also recommend that people who are serious about monitoring and growing performance go a little further to understand benchmarks and set goals that align with their assets.
For example, you can certainly compare stock performance to the S&P 500 market index. Say it dropped 5% in the last year, but your stock value dropped 7%. That information can tell you that you may need to spend a little time digging into your stock allocation to see where you’re bleeding cash.
For other benchmark index ideas, you can also compare diverse asset types against the Russell 2000 index, the Morgan Stanley Capital International EAFE index, the Lehman Bond Aggregate Index, etc.
You can also use calculations like Jensen’s alpha (or Jensen’s measure), beta, standard deviation, the Treynor ratio (or Treynor measure), and the Sharpe ratio (or Sharpe measure) to measure actual return and excess return compared to a chosen benchmark. Use the capital asset pricing model (CAPM) to set that benchmark in relation to systematic risk and expected returns.
In addition, your own portfolio can be a benchmark portfolio! Keep an eye on that recap page in Kubera to ensure you’re outperforming yourself.
Kickstart Easy Portfolio Performance Evaluation With Kubera
It’s always going to be a bit of a process, but regularly evaluating your assets to make sure the return of the portfolio and risk of the portfolio is aligned with your goals doesn’t have to fill you with dread.
It’s important to know that your assets are performing as expected, you can identify what makes your portfolio tick and what’s dragging it down, you’re able to free up capital for diversification opportunities, and you can calculate net worth accurately. And you can get started doing all of that today with Kubera.
Learn how to kickstart all of these measures of portfolio performance with Kubera’s IRR calculator here.
Or, you can see it for yourself in just minutes when you sign up for Kubera’s affordable yearly subscription.
Even if you work with a financial advisor, wealth manager, fund manager, or another investment pro, you can still take advantage of all Kubera has to offer! Share us with them and enjoy a new, more streamlined relationship when they start using our platform as part of their client offering.
