How to Evaluate Your Current Investments

Regardless of what goals we’re trying to achieve with respect to our finances, or in any other aspect of our lives, being able to evaluate what we’re currently doing is essential to identifying the steps we can take to do things better.

Evaluating your investment portfolio allows you to understand how close (or far away) you are from your goals, whether the investments you’ve selected are meeting your expectations, whether the research you did to select those investments was accurate, and whether you should consider adjusting your investment mix going forward.

Here is some investment advice for making that portfolio evaluation:

• Identify Investment Class Overlaps. Chances are you’re quite familiar with the concept of portfolio diversification. The basic idea is that most investors want to reduce overweighting their portfolio in any single investment type so that they won’t take a catastrophic loss if that investment type falls out of favor. For example, a typical investor probably shouldn’t invest 100% of their portfolio in foreign small capitalization stocks, and would instead be better served by a portfolio that includes other types of equity and non-equity investments.
  

  Unfortunately, with the popularity of mutual funds, as well as variety of markets that large American multinational companies operated, it can take a bit of research to identify exactly what you’re interested in. For example, many would consider McDonald’s and Coca-Cola to be the quintessential American companies, so it may come as a surprise that a majority of each company’s sales occur outside the U.S.

  
  
• Know How You’re Evaluating Your Portfolio. In order to determine whether or not your portfolio is in good health, it’s important to evaluate it against your current needs and overall financial situation. Does your portfolio match your capital growth goals or your current income goals?
• Don’t Forget About Risk. There are different ways to quantify risk and investment volatility. But in general, the less diversified your portfolio becomes, the greater the level of risk it has. If you can match or beat the returns of the broad market by holding diversified mutual funds, then you probably have a healthier investment portfolio than someone who achieves the same level of return by rapidly trading in and out of individual stocks and stock options.
• Don’t Forget to Consider Your Taxes. You’ll also need to take your investment tax burden into account as well, particularly if you’re in one of the higher tax brackets. For example, your investment returns over a particular period may include short-term or long-term capital gains (or both), as well as dividend and interest income. Provided that the underlying investments are held in a taxable account, and not in an IRA or 401(k), all of these gains will be subject to current taxation. You must account for the taxes you pay on your investments in order to come up an accurate measure of investment performance.

Finally, while it’s important to evaluate your current investments periodically, be aware that you probably won’t need to do so any more frequently than once a quarter.