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How to Evaluate the Return on an Investment Portfolio

Home » blog » How to Evaluate the Return on an Investment Portfolio

Evaluating the profitability of an investment portfolio allows you to see the results, not just expectations. Numbers determine efficiency, point out mistakes, and indicate where the set of assets is performing poorly. Without accurate calculations, it’s impossible to adapt or forecast a strategy.

What Does Evaluating the Profitability of an Investment Portfolio Show

Evaluating investment results reflects the actual capital growth over a selected period, taking into account profits, losses, and all invested funds. The method captures the real returns from instruments, including stocks, bonds, futures, ETFs, and other assets.

The indicator links three key factors:

  • market value dynamics of assets;
  • holding period;
  • receipts from coupons, dividends, and other payments.

An asset pool yielding +14% annually with average risk and inflation below 5% operates efficiently. However, without analyzing the results for each quarter, evaluating the profitability of an investment portfolio loses its meaning — money doesn’t like blind management.

Formulas Are Important, But Not All-Encompassing

Precise calculation requires specific data. The basic formula looks simple: Profit (%) = [(End-of-period value – Beginning value + Income received) / Beginning value] × 100.

For a diversified portfolio, the correct result comes from weighted profit, considering the proportional weight of each asset. Without it, the numbers distort the picture.

The asset pool includes:

  • 50% of stocks yielding 10% profit;
  • 30% of bonds providing 6% income;
  • 20% of futures resulting in -4%.

Only a weighted calculation reflects reality: 0.5×10 + 0.3×6 + 0.2×(–4) = 6.4%. And only such a calculation of the profitability of an investment portfolio will provide an objective benchmark.

How to Calculate Investment Returns

Linking the calculation to a specific time frame is crucial. The same portfolio can show +18% for a quarter and -3% for half a year if the market corrects. The period affects the perception of efficiency.

For assessing an annual term, internal rate of return (IRR) or modified IRR are often used, especially with irregular investments. These formulas are more complex but reflect the dynamics of fund movement. Without IRR, it’s impossible to correctly calculate the result when funds are irregularly invested and payments vary.

Yield and Profit: Understanding the Difference

Investment profit is an absolute value. Yield is relative. The first depends on the investment amount, the second on the effectiveness of placement. An asset pool with a 7% yield may bring in more money than one with 12% if the investment amount is significantly higher.
Real profit from investments is higher in the first case, despite the lower percentage. Here, the analysis of investment portfolio efficiency should consider the goal: maximizing profit or investment efficiency.

Key Steps in Calculation

Precise calculation starts with a clear action plan. Each step affects the outcome — even the slightest deviation distorts the true picture of investment benefits.

Calculating profit percentage involves the following algorithm:

  1. Choose the calculation period. Start and end dates are fixed. The more accurate the data, the more correct the result.
  2. Evaluate the initial asset value. All assets are recorded at the beginning date based on market price.
  3. Gather income data. Include dividends, coupons, option premiums, and transaction incomes.
  4. Calculate the end-of-period asset value. Market evaluation of all positions, including unrealized profit or loss.
  5. Compute the yield. Apply a formula or automated calculation through services (e.g., Quik, TradingView, Excel with XIRR).
  6. Compare with benchmarks and adjust the strategy. Moscow Exchange indices, S&P 500, Central Bank rate — the basis for efficiency analysis.

Only a comprehensive analysis of financial results will provide a precise understanding of how the set of assets is performing.

Evaluating the Profitability of an Investment Portfolio: Factors Affecting the Final Result

Evaluating the profitability of an investment portfolio depends not only on numbers. The key role is played by investment instruments, their combination, volatility, and holding time. Large-cap stocks provide stability but lag in growth compared to venture assets. Bonds mitigate fluctuations but limit investment benefits. Futures accelerate results but involve risks.

A portfolio consisting of 60% stocks, 30% bonds, and 10% derivatives demonstrates moderate profitability with limited drawdown. Meanwhile, the S&P 500 growth in 2023 was 24.2% — above average. However, high-tech company stocks yielded up to 70% profit, while oil futures resulted in a 12% loss.

Each structure requires adjustments. For high-risk levels and long horizons, it’s more beneficial to hold assets with variable yields. For short-term goals, it’s rational to choose instruments with fixed coupons or high liquidity.

Why Calculate the Profitability of an Investment Portfolio

You can’t manage what you don’t measure. Without understanding the current profitability of a securities portfolio, it’s impossible to make informed decisions: buy more assets, move to cash, hedge positions, or change strategy.

For example, during ruble instability, analyzing the profitability of portfolio investments in currency shows real results, not illusory growth against inflation. In 2022, the Moscow Exchange index decreased by 43%, but when recalculated in dollars, the decline was nearly 60%. This example proves that calculations are necessary in both absolute and relative terms.

Tools for Evaluating the Profitability of an Investment Portfolio

Manual calculation is suitable for simple structures. However, for complex portfolios with numerous positions and different holding periods, specialized platforms are required.

Popular solutions include:

  1. Excel with XIRR function — convenient for accounting for periodic contributions and withdrawals.
  2. Broker’s personal account (Tinkoff, VTB, BCS) — displays asset dynamics online.
  3. Platforms like Black Terminal, Fin-Plan — provide analysis, comparison with indices, and automatic indicator calculation.

Each tool provides information with varying levels of detail. It’s important to cross-check results, eliminate errors, and not rely solely on graphs.

Errors Distorting Results

Mistakenly accounting for losses, double-counting dividends, ignoring fees and taxes are common causes of distortions. Also, evaluating returns without considering inflation is unacceptable: 12% annually with official inflation at 9% yields a real profit of only 3%. Only calculating the profitability of portfolio investments considering these factors reflects reality.

Conclusion

Evaluating the profitability of an investment portfolio allows you to see the efficiency of investments and adjust actions promptly. In a dynamic market with constant changes in securities, those who calculate accurately win, rather than just taking risks.

Related posts

the main asset classes for an investment portfolio: from equities to real estate

There are several critical factors to consider for the assets in an investment portfolio: return, risk and liquidity. These factors have a direct impact on the effectiveness of an investment strategy. To put together a successful investment portfolio, investors not only need to know what asset classes exist, but also understand their dynamics on the global stage. in 2023, for example, the stock market was volatile and many were revising their strategies to reflect the new economic reality.

Equities: opportunities and risks

Equities are one of the most prevalent asset classes in an investment portfolio. in 2023, the US stock market continued to recover from the 2020 economic downturn and attracted new investors. equities offer opportunities for dividends and capital appreciation, but come with high risks due to price volatility. in 2021-2022, technology stocks (Tesla, Apple, Microsoft) showed growth of 25-30%, but in 2023, the same giants faced sharp corrections.

characteristics:

  1. returns: historically, equities have offered returns of 7-10% a year for long-term investments.
  2. equity risk is high, especially for smaller companies or stocks in fast-moving sectors. Meta stocks, for example, fell 60% in 2022, underlining their vulnerability
  3. liquidity: extremely high, as shares are traded on exchanges around the world

bonds: protection and stability

bonds are debt instruments that provide investors with a fixed income. in a rising interest rate environment in 2023, fixed-rate bonds have become less attractive, as rising interest rates reduce the price of bonds in the secondary market. in the long term, however, bonds remain a stable asset in an investment portfolio.

characteristics:

  1. yield: in 2023, 10-year US government bonds will yield between 3.5% and 4%, while lower-rated corporate bonds could exceed 8%.
  2. risk: depends on the issuer’s rating. Bonds of Apple or Microsoft, for example, are considered almost risk-free, while emerging market bonds can be riskier.
  3. liquidity: medium. although debt can be sold on the secondary market, liquidity depends on the rating and market conditions.

bonds are ideal for long-term investors looking for stable income with moderate risk.

funds: convenience and accessibility

mutual funds are a professionally managed pool of assets. in recent years, interest in index funds and ETFs has been particularly strong. 2023 S&P 500 ETFs have provided investors with returns of between 15% and 20%, which is particularly attractive given inflation and market volatility.

characteristics:

  1. performance: depends on the type of fund. for example, Vanguard’s 2023 S&P 500 ETF achieved returns of 17%, while more aggressive growth funds achieved returns of up to 30%.
  2. risk: medium. the funds spread risk by including a large number of assets in the portfolio.
  3. liquidity: high. the funds are traded on an exchange and can be bought and sold at any time. for example, the Vanguard Total Stock Market ETF can be bought intraday on the NYSE or NASDAQ.

an ideal option for those who do not want to manage their assets themselves but want access to a wide range of securities and diversification.

real estate: sustainability and long-term returns

real estate remains an important asset in an investment portfolio, especially against the backdrop of rising inflation and economic volatility. in 2023, the US real estate market saw prices continue to rise despite rising interest rates. the value of owner-occupied homes increased by 7-10%, while commercial property yields rose to 5-6% per annum.

real estate:

  1. returns: in 2023, residential property in major US cities, such as New York or Los Angeles, yielded 4-6%. commercial property in the centre of big cities could yield up to 7-9% a year.
  2. risks: low. Real estate is less sensitive to short-term market fluctuations, but can be affected by long-term economic downturns or changes in tax policy.
  3. liquidity: low. selling property takes time and can take months or even years. stable prices per square metre and possible increases in value keep this asset class attractive.

gold: a sustainable investment

in an environment of economic uncertainty and high inflation, the precious metal has seen its value rise by 12-15%, making it attractive to investors looking to avoid the risks of other assets.

characteristics:

  1. yield: gold does not offer regular income, but it can increase in value in times of crisis. in 2023, the gold price was around $2,000 per ounce, up 12% from 2022
  2. risk: low. the precious metal is a stable asset in the long term, but the price can fluctuate sharply in the short term, as in 2022, when the price fell 5% due to a sharp increase in dollar tightness
  3. liquidity: high. The metal can be sold quickly on global markets through platforms such as the London Metal Exchange or COMEX.

investing in gold remains a good way to diversify a portfolio, especially in times of financial crisis.

portfolio assets: conclusion

The right spread of assets in an investment portfolio ensures stability and high returns in different economic conditions. stocks, bonds, real estate, gold, equities: each category has its own characteristics and risks. To build a successful portfolio, it is important to take a holistic approach, including the right spread and selection of assets based on investment objectives and time horizon.

 

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What is investment portfolio rebalancing and how to do it

Financial markets are constantly moving. Asset prices change, portfolio relationships distort. The initial structure no longer reflects the original goals. It is in these moments that the key management mechanism is activated – portfolio rebalancing. The process of adjusting assets maintains a balance between return and risk. Without regular review, the capital structure deviates from the planned trajectory, reducing the effectiveness of the strategy.

Essence and goals: what is portfolio rebalancing

Adjusting an investment portfolio involves redistributing shares between assets to restore target distribution parameters.

Why the need arises:

  1. The growth of one group of assets increases its share above the norm.
  2. The decrease in the value of another group leads to imbalance.
  3. The current structure does not correspond to the changed risk level.

Portfolio rebalancing restores the initially embedded investment logic, reduces imbalances, maintains control over returns and volatility.

How to conduct portfolio rebalancing: action algorithm

The correct procedure starts not with emotions, but with numbers and strategic analysis. Basic steps:

  1. Determine current asset allocations. Calculate how many percent each asset class occupies in the actual portfolio structure.

  2. Compare with the target model. Check the deviation from the planned ratio: stocks, bonds, gold, funds, real estate, etc.

  3. Calculate the necessary volume of redistribution. Determine how much to sell or buy to restore proportions.

  4. Assess the market and choose the entry point. Consider liquidity, commissions, taxation.

  5. Fix the structure and set a time reference for the next review

Portfolio rebalancing requires discipline and cold logic. Only such an approach ensures the preservation of the investment trajectory.

Frequency of portfolio rebalancing: how to choose the frequency

The choice of interval depends on the strategy, asset volatility, and investor’s goals. Frequent correction enhances control but increases costs. Rare correction reduces accuracy and increases risk.

Main formats:

  1. Calendar rebalancing. Carried out at equal time intervals: quarterly, semi-annually, annually.

  2. Threshold rebalancing. Assets are adjusted when the share deviates from the target by a certain percentage (e.g., 5–10%).

Situational portfolio rebalancing: unplanned intervention

Sometimes the market situation requires immediate intervention. The calendar and percentages lose relevance – it’s time for situational rebalancing.

Reasons for unplanned correction:

  • significant price changes in key assets;

  • change in investment goal (approaching deadline, change of strategy);

  • change in economic conditions (crisis, geopolitics);

  • increase in volatility or sharp decrease in returns.

Example: portfolio rebalancing in practice

Initial structure:

  • stocks — 60%;

  • bonds — 30%;

  • gold — 10%.

After 6 months:

  • stocks — 72% (significant growth);

  • bonds — 22%;

  • gold — 6%.

Actions:

  • sell some stocks, buy bonds and gold;

  • restore proportions to the original.

Portfolio rebalancing allows you to lock in profits from overheated assets and add capital to undervalued directions.

When reviewing an investment portfolio becomes mandatory

Some signals require immediate action. Delay results in lower returns or increased risk.

Reasons for review:

  • change in investor’s life stage (retirement, birth of a child);

  • change in investment horizon;

  • rise in interest rates, inflation, or decrease in global liquidity;

  • radical market trends;

  • sharp imbalance between expected and actual returns.

Types of assets involved in rebalancing

Key asset classes:

  1. Stocks. Provide capital growth but are characterized by high volatility.

  2. Bonds. Add stability and fixed income. Often act as a counterbalance.

  3. Precious metals (gold, silver). Used as protection against inflation and currency instability.

  4. Funds (ETFs, index funds). Allow diversifying investments in one click.

  5. Real estate. Provides a real asset, stable rental income, low correlation with the stock market.

  6. Cryptocurrencies. High potential returns and risk. Suitable only for a certain portion of the portfolio.

  7. Cash and short-term instruments. Create a liquidity cushion and protect against losses in crisis phases.

Portfolio rebalancing works more efficiently with a clear understanding of the function of each asset type.

Mistakes in portfolio rebalancing and how to avoid them

Even with a clear investment plan, investors make actions that can undermine the effectiveness of the strategy. Mistakes occur either due to emotional pressure or technical incompetence. To ensure that portfolio rebalancing fulfills its tasks, it is necessary to eliminate typical miscalculations in advance:

  1. Emotional decisions. Panic on a decline or euphoria at a peak provoke unfounded transactions. Instead of preserving the investment structure, the investor chases short-term returns. This disrupts risk management logic and reduces portfolio stability.
  2. Ignoring commissions and taxes. Mechanical selling and buying of assets without calculating costs leads to a loss of part of the income. When rebalancing at short intervals, it is especially important to consider commissions, spreads, and capital gains tax.
  3. Lack of strategy. Rebalancing without a clearly defined portfolio model turns into chaos. Without pre-selected proportions, an acceptable deviation range, and review rules, it is impossible to maintain a systematic approach.
  4. Violation of investment logic. Often, after the share of a particular asset increases, the investor leaves it hoping for the trend to continue. This contradicts the principle of selling overvalued assets and buying undervalued ones. Violating logic disrupts goals and structure.

Connection with investment policy: not just correction, but a strategic tool

Financial goals require specific parameters: risk level, expected return, investment horizon. All this is formalized in the investment policy. Portfolio rebalancing acts as a tool that aligns practice with this document.

What ensures consistency:

  • maintaining the specified asset share depending on goals (accumulation, capitalization, passive income);

  • reducing the risk of deviations from the planned trajectory;

  • controlling volatility without losing potential returns.

If the portfolio structure deviates from the logic of the investment policy, the strategy loses its meaning. Only regular redistribution can maintain focus on the goal.

Impact on risk and return

Changing the asset structure directly affects portfolio behavior. Skewing towards stocks increases volatility, towards bonds – reduces returns. Maintaining balance allows controlling both.

Main impact mechanisms:

  • Redistribution reduces the risk of portfolio overheating;

  • Realizing profits protects against a collapse of overheated assets;

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