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Assessing Portfolio Performance
Assessing Portfolio Performance
You can’t help but hear about the frequent ups and downs of the Dow Jones Industrial Average or the S&P 500 index. The performance of both major indexes is widely reported and analyzed in detail by financial news outlets around the nation.
Like the Dow, the S&P 500 tracks the stocks of large domestic companies. With 500 stocks compared to the Dow’s 30, the S&P 500 comprises a much broader segment of the stock market and is considered to be representative of U.S. stocks in general. Both indexes are generally useful tools for tracking stock market trends, but some investors mistakenly think of them as benchmarks for how well their own portfolios should be doing.
However, it doesn’t make much sense to compare a broadly diversified, multi-asset portfolio to just one of its own components. Expecting portfolio returns to meet or beat “the market” is usually unrealistic, unless you are willing to expose 100% of your life savings to the risk and volatility associated with stock investments.
Asset Allocation: It’s Personal Just about every financial market in the world is tracked by one or more indexes that investors can use to look at current and historical performance. In fact, there are hundreds of indexes based on a wide variety of asset classes (stocks/bonds), market segments (large/small cap), and styles (growth/value).
Investor portfolios are typically divided among asset classes that tend to perform differently under different market conditions. An appropriate mix of stocks, bonds, and other investments depends on the investor’s age, risk tolerance, and financial goals.
Consequently, there may or may not be a single benchmark that matches your actual holdings and the composition of your individual portfolio. It could take a combination of several benchmarks to provide a meaningful performance picture.
Keep the Proper Perspective Seasoned investors understand that short-term results may have little to do with the effectiveness of a long-term investment strategy. Even so, the desire to become a more disciplined investor is often tested by the arrival of your annual financial statements.
The main problem with making decisions based on last year’s performance figures is that asset classes, market segments, or industries that do well during one period don’t always continue to perform as well. When an investment experiences dramatic upside performance, it may mean that much of the opportunity for market gains has already passed. Conversely, moving out of an investment when it has a down year could mean you are no longer in a position to benefit when that segment starts to recover.
There’s really nothing you can do about global economic conditions or the level of returns delivered by the financial markets, but you can control the composition of your portfolio. Evaluating investment results through the correct lens may help you make appropriate adjustments and effectively plan for the future.
Keep in mind that the performance of an unmanaged index is not indicative of the performance of any specific security, and individuals cannot invest directly in an index. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. All investments are subject to market fluctuation, risk, and loss of principal. Shares, when sold, may be worth more or less than their original cost. Investments that seek a higher return tend to involve greater risk.
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.
The Appeal of ETFs
| The Appeal of ETFs
Exchange-traded funds (ETFs) represented 28% of the total trading value on world stock exchanges at the end of June 2015, a 35% increase over the previous year.1 In the United States, 1,502 ETFs held more than $2 trillion in assets at mid-year, up more than 10% and 13%, respectively, over the same period in 2014.2 Why the increased interest in ETFs? The primary factors may be trading flexibility and relatively low costs. Built Like Mutual Funds, Traded Like Stocks An ETF is a portfolio of securities assembled by an investment company, similar to a mutual fund. Yet these two types of funds are traded very differently. Mutual funds are typically purchased from and sold back to the investment company and priced at the end of the trading day, with the price determined by the value of the underlying securities. By contrast, ETFs can be traded throughout the day on stock exchanges, like individual stocks, and the price may be higher or lower than the value of the underlying securities because of supply and demand. The trading flexibility of ETFs is part of their appeal, but it might lead some investors to trade more frequently than may be appropriate for their situations. And while you can usually trade between two mutual funds in the same fund family directly at the end of the trading day, if you want to move assets between two ETFs (without using additional funds), you have to sell the first ETF and then purchase the new ETF. ETFs typically have lower expense ratios than mutual funds, but you must pay a brokerage commission whenever you buy or sell ETFs, so your overall costs could be higher, especially if you trade frequently. Most ETFs are passively managed and track an index of securities, which helps keep fees low. However, a growing number of actively managed ETFs assemble a specific mix of investments reflecting the fund’s objectives. They may have higher fees than passively managed funds. Because ETFs are available across a broad range of indexes, they can help provide cost-efficient diversification. As with any investment, consider the potential risks before making a decision to include ETFs in your portfolio. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. The principal value of mutual funds and ETFs fluctuates with market conditions. Shares, when sold, may be worth more or less than their original cost. Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. 1) CNBC.com, July 2, 2015 2) Investment Company Institute, 2015 The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.
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