Key Metrics for Assessing Portfolio Success
Selected theme: Key Metrics for Assessing Portfolio Success. Welcome to a clear, motivating exploration of the numbers that truly matter for long-term investing outcomes. Dive in, compare your own metrics, and subscribe for practical, data-driven insights that help your portfolio tell a better story.
Define Success and Choose the Right Benchmark
A portfolio designed to fund a home purchase in five years should not be judged by the same yardstick as one meant to endow a scholarship. Write down outcomes, time horizons, and required spending rates so metrics actually reflect your goals.
Define Success and Choose the Right Benchmark
Comparing a balanced 60/40 portfolio to a tech-heavy equity index invites disappointment and bad decisions. Select a benchmark with similar asset mix and risk profile, then stick with it long enough to learn meaningful lessons from deviations.
Measure Returns the Right Way
Time-weighted return for manager skill
Time-weighted return neutralizes the effect of external cash flows and thus isolates the impact of investment decisions. It is ideal when evaluating manager process, not investor timing, and pairs well with benchmark comparisons across periods.
Money-weighted return for investor experience
Money-weighted return, or IRR, weights results by when you added or withdrew capital. It reflects the return you actually lived through. If IRR lags TWR, your timing likely hurt results—an honest signal to automate contributions and rebalancing.
Rolling returns to avoid cherry-picking
Point-to-point figures can flatter or punish depending on start dates. Rolling one-, three-, and five-year returns reveal persistence and seasonality. A reader once realized her “bad fund” was average; her entry date, not the strategy, was the culprit.
Know Your Risk: Volatility, Drawdown, and Recovery
Standard deviation captures average fluctuation, which influences your ability to stay invested. High volatility strategies can look heroic in bull runs but test discipline in turbulence. Align variance with your stomach and your spending obligations.
Know Your Risk: Volatility, Drawdown, and Recovery
Max drawdown shows the worst peak-to-trough fall; recovery time tells you how long patience is required. One retiree discovered a modest 12% drawdown felt harsher than expected because it coincided with a planned home renovation payment.
Sharpe ratio for overall efficiency
Sharpe compares excess return to total volatility, showing how much reward you gain per unit of noise. A rising Sharpe suggests better compensation for risk, while a falling one can flag bloated exposure or decaying edge.
Sortino ratio for downside sensitivity
Sortino focuses on downside volatility, which many investors find more emotionally relevant. If Sortino improves while Sharpe stagnates, your portfolio may be smoothing losses even if upside wiggles remain unchanged—often easier to live with.
Diversification, Correlation, and Concentration
Correlations change with stress. Assets that hedge in calm periods can move together during panics. Monitor rolling correlations and stress scenarios so diversification is real in the moments you need relief most.
Diversification, Correlation, and Concentration
A handful of positions often drive results. Set guardrails for single-name and sector weights, and track contribution to risk. An investor wrote us after discovering two stocks delivered 70% of gains and nearly all of the heartburn.
Costs, Taxes, and Implementation Efficiency
Sum management fees, fund expense ratios, platform charges, and advisory costs. A seemingly tiny 0.60% annual drag compounds massively over decades. Publish your all-in figure and hold your providers to measurable value creation.