Portfolio analysis is vital in order to meet your investing goals. A periodic analysis of your portfolio will help you understand exactly how your portfolio is performing and whether your investments are properly allocated.
Ensure Proper Allocation Among Asset Classes
Performing a portfolio analysis allows you to ensure that you have the correct balance of stocks, bonds and cash in your portfolio. There are many factors that determine what your asset class allocation should be. Some of the factors are your age, your risk tolerance, your income and the amount of time until you retire.
Ensure Proper Sector Allocation
A portfolio analysis also ensures that you are properly diversified among the sectors of the economy. Your portfolio should not be concentrated in one or two sectors. Instead, investments should be allocated to many sectors of the economy such as technology, health care, transportation, financial services and energy.
Ensure Each Investment is Still Sound
You should periodically analyze each investment in your portfolio to ensure that is still a sound investment. Inspect the financial statements of each company, and read Wall Street research reports about your investments. Consider selling investments that do not meet your criteria.
Many brokers have online tools that can help you analyze your portfolio. These tools will provide a breakdown of the asset classes and diversification of your portfolio. These tools provide a quick and convenient way to keep on top of your investment portfolio.
It is especially important to analyze your investment portfolio during times of turbulence in the stock market. Overall market conditions can change quickly and the health of individual companies can deteriorate fast. Even though it may be painful to analyze your portfolio during a falling market period, it is vital to do so.
- Securities and Exchange Commission - Beginners' Guide to Asset Allocation, Diversification, and Rebalancing
- Investor.gov. "Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing." Accessed Aug. 21, 2020.
- TD Ameritrade. "Modern Portfolio Theory." Accessed Aug. 21, 2020.
- University of California, Berkeley. "Modern Portfolio Theory," Page 5. Accessed Aug. 21, 2020.
- New York University. "Investing on Hope? Small Cap and Growth Investing," Page 13. Accessed Aug. 21, 2020.
- University of California, Berkeley. "Modern Portfolio Theory," Page 7. Accessed Aug. 21, 2020.
- MIT. "Modern Portfolio Theory & Equilibrium Asset Pricing," Page 15. Accessed Aug. 21, 2020.
Eric Scott has been a freelance writer for over four years. He specializes in business, entrepreneurship and investing. Scott received his Master of Business Administration from Loyola University with a concentration in finance and owned and operated a successful business for 10 years.