Lesson Transcript
Monitoring Portfolio Performance: Techniques & Importance
Portfolio Performance
Kristi is a top performer at her investment firm. She is known for keeping her portfolios on track, often modifying them to garner more financial gains for her customers. Kristi wants to know what is performing well and what isn't. She uses portfolio performance monitoring to gather information about her specific investments (stocks, bonds, cash) and overall portfolios. Kristi wants both ongoing and periodic valuation, and she uses several performance measures to do this. She has several components that are organized to present information to her quickly. This is what Kristi calls her dashboard. It includes:
- Target allocation for each investment
- Threshold to determine low, medium, and high performers
- Target for meeting expected return
- Stock style of holdings
- Stock type
- Trigger levels for rebalancing portfolio
- Historical performance of each investment
To get the data she needs, she generates several reports for each component of her portfolios. These include:
- Allocations
- Individual investment performance
- Portfolio performance
- Hypothetical outcomes of other portfolio mixes
- Expected returns
- Historical performance
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Auditing Techniques
Auditing techniques are comparisons of specific performance measures to their associated projected returns. Kristi uses these techniques to paint a picture of where she is and where she wants to be. She compiles comparisons of:
- Different allocations of investments
- Current investment allocations to her targeted goal
- Investment performance to corresponding low, medium, and high thresholds
- Current performance to expected return
- Current portfolio performance to trigger levels for rebalancing
- Different historical timeframes for specific investments and portfolios.
Kristi also needs to identify if the essence of any of the investments has changed. For example, some clients may only want shares of family-friendly, environmentally sound, U.S.-based companies. So, this is where Kristi has to do some digging. Her assistant, Ben, actually does the research for her, then they talk about whether managers of certain funds have changed their direction, incurred more risk, or are now investing overseas. These conversations help Kristi determine when to rebalance her portfolios.
Strategic Alignment
Portfolio performance monitoring tells an investor what type of investments are doing well, what characteristics of the market need to be avoided, and if there are any changes in the themes of the portfolio. Strategic alignment, or the use of people and processes to streamline the access of information in support of a mission, is the goal. It means that Kristi can use her tools to link data to her reports, auditing techniques, and dashboard. This will make her more effective, giving her the ability to make decisions quickly when the market changes.
Not monitoring this way will only highlight the deficits in her portfolios and cause the bad investments to overshadow those with the most growth. For example, when Kristi see that a stock is climbing, it may be time to invest more. If she notices that a stock has plateaued, it may be time to sell. Finally, if a stock is lagging, Kristi may rebalance her portfolios.
Lesson Summary
Portfolio performance monitoring tracks the performance of specific and portfolio investments. These investments include clients' stocks, bonds, and cash. For someone who manages these portfolios, it's important to prioritize performance measures in a dashboard and look at the details of specific reports, auditing techniques, and conversations. Strategic alignment, or the use of people and processes to streamline the access of information in support of a mission, is important to a portfolio manager's success. Portfolio performance monitoring is a useful tool that provides insight on when and how to rebalance portfolios for the greatest success.
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Monitoring Portfolio Performance: Techniques & Importance
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