How can I evaluate the performance of my investment portfolio?

3 min read

How can you measure the performance of your portfolio and compare it to other alternatives?

One of the most basic ways to measure the performance of your portfolio is to calculate the return on investment (ROI). This is the percentage change in the value of your portfolio over a given period. For example, if you invested $10,000 in a portfolio and grew to $12,000 in one year, your ROI would be 20%. However, this method does not account for the risk involved in your portfolio. Different investments have different levels of risk and expected returns. For example, investing in stocks is generally riskier than investing in bonds but has higher potential returns. Therefore, you need to compare your portfolio's return with a benchmark that reflects your portfolio's risk and return characteristics.

A benchmark is a standard that represents the performance of a similar portfolio. For example, if your portfolio consists mostly of US stocks, you might use the S&P 500 index as a benchmark. The S&P 500 index tracks the performance of 500 large US companies and is widely used as a proxy for the US stock market. By comparing your portfolio's return with the benchmark's return, you can see how well your portfolio performed relative to the market. For example, if your portfolio returned 20% and the S&P 500 returned 15% in one year, your portfolio outperformed the benchmark by 5%. However, if your portfolio returned 10% and the S&P 500 returned 15%, your portfolio underperformed the benchmark by 5%.

Another way to measure the performance of your portfolio is to calculate the Sharpe ratio. The Sharpe ratio is a metric that measures the excess return per unit of risk of your portfolio. The excess return is the difference between your portfolio's return and the risk-free rate. The risk-free rate is the return on an investment with no risk, such as a US Treasury bill. The risk of your portfolio is measured by its standard deviation, which is a statistical measure of how much your portfolio's returns vary from its average. A higher standard deviation means more volatility or uncertainty in your portfolio's returns. The Sharpe ratio is calculated by dividing the excess return by the standard deviation. For example, if your portfolio returned 20%, the risk-free rate was 2%, and the standard deviation was 15%, your Sharpe ratio would be (20% - 2%) / 15% = 1.2. A higher Sharpe ratio means that your portfolio generated more return for each unit of risk taken.

The Sharpe ratio can also be used to compare different portfolios or investments with different levels of risk and return. Generally, a higher Sharpe ratio indicates a better risk-adjusted performance. For example, if Portfolio A has a return of 15%, a standard deviation of 10%, and a Sharpe ratio of 1.3, and Portfolio B has a return of 18%, a standard deviation of 15%, and a Sharpe ratio of 1.07, you can say that Portfolio A performed better than Portfolio B on a risk-adjusted basis.

That's why we recommend using Xillion's Portfolio Analyzer, which helps you evaluate your investment portfolio easily and intuitively. Xillion's Portfolio Analyzer lets you connect your investment accounts and see how your portfolio has performed against the benchmark. With Xillion's Portfolio Analyzer you can get insights into how your stocks, bonds, and funds perform against the market.

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