What Metrics Should I be Tracking in my Investment Portfolio

Introduction

Everyone who owns a portfolio of investments, however small or large, should be keeping an eye on how it's doing over time (as well as continuously contributing to it). Paradoxically, it can often be the people who pay little heed to constant checking and tinkering that perform the best.

If you choose good stocks or a good index, and sit and leave it for a long time, your pot will grow, and compound significantly over time.

Tracking Your Wealth

That being said, it is also important to many people to see how they're doing - knowing how much wealth we have at any given point and how it's grown gives us peace of mind, and allows us to make decisions in our lives with some degree of comfort.

So the question is, what should we be tracking? Well, dependent on your investing experience and your willingness to dive deep into your portfolio, we've put together some basic metrics to get you started, some of which are already calculated automatically for you on your Strabo dashboard.

How to Choose Metrics

For most people, managing their portfolio isn't a full time job, or even a part time one. So you have to think about what the top line figures you can check quickly are, to give you a fast and insightful idea of how your investments are doing.

For most, this is some sort of data on their returns over various time periods, and a breakdown of the performance of their individual holdings. Much more than that is usually for vanity! Or if it's something a user takes personal interest in - analysing investments is a hobby for many. The important thing is that you know how your holdings are doing, if you need to make any changes and what future prospects look like.

Let's dive in.

Core Metrics

Total Return

This measures the overall loss or gain of the portfolio, including capital gains and dividends over a period of time. This is probably the most important metric you'll track - it is the most obvious and direct indicator of how your portfolio is doing.

It can be calculated as follows:

Total Return = (Ending Value - Initial Value + Dividends) / Initial Value * 100

Diversification Score

Diversification is a measure of how well your investments are spread across different assets. Diversification is a way of spreading your risk without compromising your return. You can read our guide on diversifying your portfolio here.

Reducing concentration in one asset type is a very important part of building a robust portfolio. In simple terms, you should ensure that no one single asset or sector dominates your portfolio, exposing you to unnecessary risk.

A diversification score is quite hard to calculate - you have to look at the historical performance of different asset types, and see how correlated they are to one another. A well diversified portfolio will include assets that are fairly uncorrelated - so that if one goes down, the others won't necessarily follow, protecting your downside.

We've taken the liberty of looking back over many years of historical return data and working out how well correlated your asset classes are, so that you can see a Diversification score immediately on the Strabo dashboard when you connect your accounts.

Diversification is an important part of how you manage your portfolio - for more insights on using this as part of your strategy, check out our guide to Investment Strategies in the UK.

Inflation-Adjusted (Real) Return

When forecasting, you should be adjusting your portfolio's expected return for inflation. This is because inflation will erode the value of your investments over time unless they grow at a rate that outpaces inflation (which is typically 2-3% over the long term).

This is the main reason you shouldn't keep all your savings in cash - over time, their purchasing power will diminish and they will be worth less in real terms. For this reason, we've included a real / nominal switch on the Strabo dashboard to allow you to change between the two seamlessly and work out what your investments will be worth in real time in future.

This can be calculated with simply an adjustment to the APR (Annual Percentage Rate) of growth that your investments will appreciate by.

Time Horizon & Liquidity

Time Horizon and Liquidity are related to the amount of time you plan to hold your investments for and how quickly you can convert them into cash respectively.

These are important because a great portfolio can become a very poor one if the time horizon changes - if you need to access your money in the next year or two to buy a house, having investments in stocks that may go down over that period is not a sensible idea.

The overarching lesson here is that longer time horizons allow for more risk-taking, while liquidity is crucial for short-term goals or emergencies.

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Secondary Metrics

These are probably for the more advanced investor who is looking to get a more detailed insight into their portfolio. There is a long list of things you could look at, but we've condensed them down into 9.

Risk Adjusted Return

Also known as the Sharpe Ratio, this adjusts your portfolio's return based on the level of risk you're taking. A higher Sharpe Ratio indicates better risk-adjusted performance. This is important because it helps you to understand if you're being adequately compensated for the level of risk that you're taking.

It is calculated as follows:

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Standard Deviation

Fortunately, we also calculate this for you automatically on the Strabo dashboard.

Volatility

Volatility, or the standard deviation of a portfolio, measures the price fluctuations over time. Higher volatility implies higher risk, while lower volatility indicates a more stable portfolio that is less likely to experience big changes in price in the short term. This concept is key to understanding the risk involved in your investments.

We calculate this for you using the information uploaded in your Strabo portfolio, but you can do it yourself by calculating the standard deviation of returns of a given portfolio over a period of time.

Asset Allocation

Asset allocation is the proportion of your portfolio allocated to different asset classes - eg stocks, crypto, property, bonds etc. It's important in relation to diversification as above - a balanced asset allocation helps in managing risk and achieving your long term portfolio goals.

It is calculated by simply working out the percentage of your portfolio that is held in each asset class. Again, we do this automatically for you on your Strabo dashboard.

Benchmark Comparison

This is an important performance indicator - by comparing the performance of your portfolio to a relevant benchmark, usually a basket of stocks such as the S&P 500, you can see how well you are performing compared to the wider market.

This is important in that it tells you whether your performance is reasonable and how it compares to a specific sector or the broader market, and hence whether you have a good portfolio or one that needs to be revisited, of course remaining in line with your goals and investing time horizon.

Dividend Yield

Dividend yield is the percentage of a portfolio's value that is returned to investors through dividends. Dividends are the portion of a company's profits that are paid out to shareholders - you can invest in stocks that pay out the dividends into your account, or reinvest them. A strong dividend yield can cause your shareholding to grow much faster, or also provide a steady income.

Formula is as follows:

Dividend Yield = Annual Dividends per share / Price per share * 100

Expense Ratio

The Expense ratio is all about fees, which are an important part of managing your portfolio. The ratio expresses these fees as a percentage of assets under management - important to keep a close eye on as these will eat into your performance. Keep these as low as possible.

Alpha

Alpha is a measure of a portfolio's performance relative to a benchmark, after adjusting for risk. You will often hear this discussed with stock performance. A positive alpha indicates outperformance, while negative alpha indicates underperformance.

Beta

Beta is a portfolio's sensitivity to market movements. A beta of 1 means the portfolio moves with the market; a beta above 1 means that it's more volatile, and less than 1 means that it's less volatile. Beta is useful for helping you understand how much risk you're taking in comparison to the rest of the market.

It is calculated by dividing the covariance of portfolio and market returns with the variance of market returns.

Drawdown

Finally, Drawdown. This is the peak to trough decline in a portfolio over a given period of time. It is useful for calculating the downside risk of your portfolio and how much you might lose in a downturn. Which is vital when constructing and managing a portfolio.

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Where Can I Track These?

This is a lot to take in! The good news is that many of these are already available on the Strabo dashboard. They can often require information to calculate which is quite hard to obtain, so having them updated live in real time makes your life much easier.

These also aren't static measures - it's important to see how these change over time and that will give you a strong indication as to what action needs to be taken to make sure that your portfolio remains in alignment with your long term-strategy, which is largely dictated by both your appetite and capacity for risk.

You can read more about that in our guide here and remember that if you have any doubts, you should contact a professional financial adviser.

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