Why You should Check Your Portfolio Score
By Pauline Shum Nolan, PhD, Founder and CEO
Most investors – whether experienced or novice – understand the virtue of diversification; that’s why they hold multiple stocks/funds in their portfolios.
Interestingly, while it is not difficult to find individual stock or fund reports (most brokerages provide them), investors have limited access to overall portfolio analysis. The information gap makes it hard for investors to fully understand their portfolios, often leading to questions like: is my portfolio properly diversified? Will it help me achieve my goals? What can I expect in different market cycles? Or I have several balanced funds, what is my net asset allocation?
Whether a portfolio is properly diversified can be assessed in multiple dimensions. The most basic metric is correlation. For example, two securities can be very risky in isolation, but combined in a portfolio, that risk can be mitigated if their returns are negatively correlated. Generally speaking, to effectively diversify your portfolio, you should exclude securities that are highly correlated.
But the pursuit for diversification doesn’t have to stop there. For instance, you should also consider whether your portfolio is diversified across sectors or macroeconomic factors and understand where your risk concentration lies. Using human capital (i.e., the present value of one’s future earnings) as an example, high-tech workers should minimize their portfolio exposure to the technology sector. Same goes for workers in other volatile sectors.
And what about the risk and return of your portfolio as a whole? That has a significant impact on whether you will be able to achieve your retirement or other saving targets.
Most of the investors that we have spoken to have little idea of what to expect of their portfolios. Returns are never guaranteed, of course, but that doesn’t mean you should forgo all information. For example, it is helpful to know how your portfolio is expected to perform over the market cycle and benchmark its performance to a broad index (or a policy portfolio), especially on a risk-adjusted basis.
If you worry about your portfolio falling every time there is market volatility, keeping track of metrics like downside volatility, downside capture and maximum drawdown, can shed light on your downside risk and it should also be benchmarked. Knowing these metrics can ease your concerns, or if not, give you a reason to find a more suitable asset allocation and portfolio.
Other important portfolio information you should know includes fees and income. For example, if you invest in mutual funds and/or ETFs, what is your average management expense ratio? If you rely on income from your portfolio, what is the average distribution yield?
At Wealthscope, our team has leveraged award-winning financial expertise and technology to create our portfolio scorecard. It empowers you to better understand and manage your investments. Six dimensions of your overall portfolio (diversification, performance, downside risk, fees, income, and ESG) are assessed and scored in real time. Then the accompanying analyses are put into context with a view to educate.
You can use Wealthscope to analyze one portfolio at a time, or combine portfolios across different investment accounts and have them analyzed together. We believe that the best investor protection is investor education. Check your portfolio score and see the nutrition facts of your investment.