Keeping a portfolio with a healthy mix of assets that are properly diversified may allow you to weather market shocks more easily.
Evaluating Winning and Losing Investments: It’s All Relative
As you evaluate the investments in your portfolio, you probably shouldn’t expect that everything will move in the same direction at the same time. In fact, if you have a balanced portfolio, with investments representing different types of assets, you probably don’t want all of your investments behaving in the same way.
“A portfolio where all of your investments are moving in the same direction may highlight a lack of diversification,” said Joe Correnti, senior vice president of brokerage product at Scottrade.
It’s also possible that within a balanced portfolio, your losers might actually be winners and your winners might really be laggards in disguise. Performance is a relative thing.
Evaluating Performance with Benchmarks
Whether a stock has lost ground in the last year, or a mutual fund has had a double-digit gain, might be less important than understanding how those securities did relative to similar assets.
One way to evaluate performance is by comparing securities to benchmarks. A large-cap stock mutual fund, for example, could be compared to an index like the S&P 500. An exchange-traded fund that specializes in a particular market sector could be compared to an index tracking that sector. An individual stock could be measured to an index, to competitors or to the performance of its sector.
So, although looking at whether a stock gained ground or lost ground is a good first step in the evaluation process, comparing those securities to benchmarks helps complete the evaluation process.
Other Ways to Evaluate Your Investments
There is a limit to evaluating the performance of your securities by comparing them to benchmarks, sectors and to competitors. All of those comparisons are based on past performances, which might not repeat themselves. Alternatively, you can consider reviewing analyst reports on specific securities, use screening tools, or rely on fundamental and technical analysis.
Evaluating Based on Portfolio Management
Once you’ve evaluated securities, you’ll have to consider what actions to take. One possible course would be to implement a rebalancing strategy for your investment portfolio.
Let’s say, for example, the stock portion of your portfolio rose significantly over the past year and you’re now overweighted in stocks. You might have to sell equities to get your portfolio back in balance.
“This is where your evaluation comes into play,” Correnti said. “You could consider selling equities that have had gains, you can add to your account to bring it back in balance, or you can maintain your existing weightings.”
Correnti explained that investors should probably avoid making knee-jerk decisions to sell all losers and keep all winners.
“You should consider basing those decisions on how they impact your overall portfolio and your overall investment strategy,” he said.
Question: How often do you sell securities in your portfolio?
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Scottrade Brokerage President Peter deSilva was drawn to the firm by its client-first approach. This approach was demonstrated with the company named “Highest in Investor Satisfaction with Self-Directed Services” by J.D. Power.