While assessing your investment portfolio, make sure your goals are met, investments are exceeding industry benchmarks and these do not present undue risk to your financial health
By Hemanth Gorur
There is a secret sauce to not worrying about how your investment portfolio is doing. That is to have no portfolio in the first place. Other than that, every investor worries about his or her investments.
However, investors often go wrong in taking investment decisions based on portfolio performance since they use wrong or incomplete criteria to assess performance. There are some non-negotiable performance criteria one must look at while assessing their investment portfolio performance. Let us study them.
Performance against investment goals
The most effective way of judging how your investments are doing is by stacking them up against your investment goals. Why did you invest in those assets in the first place? Was it for wealth creation? Was it for periodic returns? Was it for family occasions like marriage or education? Was it for an emergency or medical corpus? Or a combination of some or all the above? If your investment strategy was to have your overall portfolio meet your overall investment objectives related to returns, risk, or wealth creation, then do not measure each asset’s individual performance against your overall investment objectives. This is a common mistake, and can result in wrong decisions.
Performance against stated investment objectives
Your investments may be meeting your investment objectives but they may still be underperforming with respect to the investment’s stated objectives. For instance, the stated objective of a mutual fund you have invested in may be to “protect investor wealth in the long run”.
However, if the mutual fund has depreciated in value in the long run compared to your costs, then that mutual fund investment has underperformed even though it may have met your investment objectives (which could be different from the fund’s stated objective).
Similarly, your property management firm may have a stated objective of, say, “meeting or exceeding market appreciation in value of property”, but falling short. Your gold ETF may not be tracking gold prices to the paisa as stated in its investment prospectus, owing to NAVs getting discounted in the market. These are red flags for you as an investor and need to be monitored.
Performance against industry benchmarks or standards
Even if your investments are making the cut on the above two criteria, they may be falling short on another criterion. Every investment you make can be assessed against its respective industry’s benchmarks, standards, or top performers.
Bonds have ratings by rating agencies that indicate health and default prospects. Most funds will have a corresponding stock index to benchmark them against. Gold investments can be benchmarked against not only national exchange prices but also global prices.
Your real estate investments too can be assessed by studying the ratings given to your builder and other projects by ratings agencies. Bank deposits can be benchmarked against the rates offered by mid-sized scheduled private banks, which tend to offer higher rates.
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Performance during bearish phases
One important way in which you can assess your portfolio’s performance is by seeing how it does during recessionary or bearish phases of the economy. During bullish times or economy upswings, most asset classes tend to follow the uptrends dictated by the larger economy. However, it is during the leaner phases of the economy that the true colours of your various investments may emerge.
As a thumb rule, any investment or asset class that disproportionately amplifies the downswings of the larger economy and causes disproportionate losses to the investor are to be avoided. In other words, asset classes that are highly volatile and reactive to bearish sentiments are to be avoided.
While assessing your investment portfolio, make sure your investment goals are met, your investments are meeting or exceeding industry benchmarks as well as their own stated objectives, and do not present undue risk to your financial health.
