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Give your portfolio a reality checkup

News about the stock market plunging or soaring may grab your attention, but what does it mean for your own investment portfolio? Following the Dow Jones Industrial Average (DJIA) and Standard & Poor’s (S&P) 500 can give you a general idea of the direction the stock market is going, but it doesn’t tell the whole story. The DJIA and S&P 500 track a sample of stocks in the market and may not reflect the performance of the investments in your portfolio.

Looking at the rate of return on your investments is a first step in evaluating performance. The total return is the change in value (up or down) from the time you purchased the investment. Your rate of return is calculated by dividing the change in value plus income (i.e., interest or dividends earned) by the amount originally invested. You can view your investment account statements to see this information or ask a financial advisor at United Community Advisory Services for a portfolio review.

Measuring your portfolio performance against benchmarks can also help you understand how your investments are performing compared to the overall market. Following this three-step process is a good starting point for a portfolio checkup.

Step 1: Establish a benchmark portfolio

Before you can assess your portfolio’s relative performance, you need to establish a benchmark. To do this, you must understand your portfolio’s current asset allocation — or the percentage of investments allocated to U.S. stocks, foreign stocks, bonds and cash. Once you know your current asset allocation, use portfolio software to create a corresponding benchmark portfolio. For instance, maybe your allocation is 35% in U.S. stocks, 30% in foreign stocks, 28% in bonds and 7% in cash. Your benchmark portfolio should utilize the same ratios but instead of containing your actual portfolio’s investments, it should track the performance of index funds.

 A financial advisor at United Community Advisory Services can help you determine your current asset allocation and set up a benchmark portfolio using best-in-class index funds that represent each of the asset classes in proportion to your investment holdings.

Step 2: Compare performance

A benchmark portfolio will help you gauge your portfolio’s performance, not only for today, but in the months ahead. It can also enable you to look back and find out how your portfolio has performed compared to its peers. You may find that your portfolio has equaled or exceeded the standard set by your benchmark portfolio, as established in Step 1. If so, you may decide to stay the course. However, if you find that your returns have lagged your initial benchmark over an extended period of time, it may be time to consider changes.

Step 3: Rebalance based on your unique situation

One time-tested strategy for getting a portfolio back on track is to rebalance its asset allocation. When taking this step, be sure to consider your age, goals and risk tolerance. In general, the younger you are and the more time you have to reach your goals, the higher your risk tolerance. Because stocks tend to be more volatile, they are considered the riskiest investment. Bonds are more stable, with modest returns. Cash and cash equivalents are the safest investments but have the lowest return.

As you get older and your goals shift, be sure to rebalance your assets, as necessary. Asset allocation plays a large role in portfolio volatility and projected returns over time. You may also find that certain investments have consistently underperformed in their category, which may require additional research and analysis to determine if a change is needed.

A financial advisor at United Community Advisory Services can help you develop and implement a strategy for your investment portfolio. Contact us for an appointment today at unitedadvisory.com.


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