Once you’ve gotten some investments under your belt and established a portfolio, it’s important that you come up with a system and a plan for staying on track toward reaching your financial goals. It can be tempting, especially if your stock investment strategy is long term, to let your portfolio take care of itself.

While that’s understandable—after all, we all are busy—it’s not acceptable. We don’t advise that you spend hours every day poring over your stock portfolio or pestering your broker, but it’s your responsibility to keep up with your statements and maintain a perspective on how you’re doing.

In this chapter, we’ll look at some practical methods of assessing your investment performance. Taking time periodically to review your investment goals will help you to understand where you are on the road leading to them, and whether you should consider altering your course. You’ll learn how to calculate your total return and use indexes to track your performance, and why it’s important to keep an open mind regarding your investments.

Once you’ve gotten started in stock market investing and have an investment portfolio established, you should get comfortable with reading and understanding your account information and statements.

There seems to be different schools of thought regarding the monitoring of investments. While some people obsess over their stocks, others transact the investments and then pretty much ignore them. Neither of these, of course, is a healthy course, and the goal is to fall somewhere in the middle of those extremes.

Understanding your investment portfolio is simply a matter of keeping track of what you have and the activity that occurs within your account. This is easily accomplished by paying close attention to monthly statements from your brokerage, or from the company from which you’ve purchased stock if you bought it direct. We can’t stress enough how important it is to stay on top of your investments by closely monitoring your statements. Regardless if you work with a broker or trade on your own, mistakes happen. It’s a lot easier to take care of a mistake when it’s discovered promptly than to deal with it months later. Little mistakes have been known to become major problems and can cost investors dearly.

Many investors have gone paperless and receive their account statements electronically. If you still receive monthly statements in the mail, make sure you save them in a file—you’ll need them at tax time. When you receive trade confirmations and holding statements, look them over to be sure everything is correct, and contact your broker immediately if there are mistakes or problems. Starting in 2011, brokerage houses that don’t already do so will be required to include the costs of your investment on your monthly statements, as well as on the statement your broker provides for preparation of your tax return.

If there is something about your account information that you don’t understand, or that doesn’t seem right to you, by all means ask. Even if you trade online or use a discount broker, the brokerage firm should have someone available to answer questions.

Never be embarrassed by something you don’t know or understand, and don’t hesitate to question any sort of activity that you don’t recognize. Identity theft is a real possibility, unfortunately, making it imperative that you keep a close eye on your accounts. You’re not expected to be a financial expert, just a diligent monitor of your portfolio.

Your account report will provide an overview of all activity for the month, including deposits, trades, and fees. It will tell you if the value of your account has increased or decreased, and by how much. You should be able to view your asset allocations and see how much cash you have. The statement will list each holding individually and inform you of any transactions that have occurred during the month, whether you have margin capabilities, and if so, which funds are available for use on margin.

Many brokerage statements will include estimated income from your holdings. You should already know which of your stocks pay dividends, but it’s nice to see the totals spelled out from month to month. Your statement should also tell you the amount of dividends and interest you have received for the month and year to date.

Some online tracking services include a feature that allows investors to enter the usernames and passwords for other accounts, even if they’re invested with another institution. The information is gathered and displayed on one screen, allowing you a snapshot of all of your investments. Others provide years of records, allowing you to review—and to download and print if you wish—the account performance and activity.

If you haven’t taken some time with your account statement lately, set aside an hour or so and really delve into the features available, particularly if you use an online version. You might be surprised at how much information you’re able to access in addition to your monthly account activity. It’s particularly important for investors who engage in strategies that have increased potential for risk, such as buying on margin or short selling, to pay close attention to their portfolios.

You should review your statement each month; however, at least twice a year and preferably quarterly, you should conduct a thorough review of your overall portfolio. Assess your risks, take a close look at your allocations, and consider if you need to make any changes. If you have a broker or work with a financial advisor, schedule meetings at least once a year and maintain a good working relationship. If you ever encounter problems, it’s helpful to have your broker know who you are and be able to put a face to the portfolio. Take notes during those meetings to review, and follow up if you have any questions or discover there’s something you don’t understand.

The first thing most investors look at when the statement rolls in is the total return. Let’s take a look at exactly what that means and how you calculate it.

Reviewing the total return for each investment in your portfolio is a good place to begin in order to see how the securities are performing. The total return reflects the change, plus income received, in the overall value of your portfolio over a given period of time.

When you receive a statement from your broker, it normally lists two types of total return: cumulative and average. Cumulative total return reflects actual performance of a particular stock over the time you have held the stock, while average annual total return uses an investment’s cumulative return to indicate what would have happened if the investment had performed at a constant rate over the entire period, usually for the quarter, year to date, or annually. Calculating your total return allows you to assess the performance of your entire portfolio, as well as compare how well one stock performed against another.

To figure out your total return, first figure out the cost of your total investment including expenses. If you bought $1,800 worth of stock and paid $200 in fees, for example, your total investment was $2,000.

If, over a prescribed period of time, the value of your stock has increased to $2,500, you subtract the cost of the investment from the new amount, getting a total of $500. If you’ve received dividends on your investment, you’d have to add that amount to the new value of your stock.

Calculate your total return by dividing the profit by the cost of the investment. In this case, it’s $500 ÷ $2,000 = 0.25, or a 25 percent return on investment. Congratulations!

Unfortunately, your total returns may not always be on the positive side. If you have a loss, that must factor in when you put the returns of each security together to determine total returns on your portfolio.

Once you’ve calculated the returns of each investment, it’s time to calculate the total return for the portfolio for the time period you are interested in. Let’s say you want to determine total return for the quarterly period between January 1 and March 31. You’d start by noting the value of the portfolio as of January 1. Compare that value to the current value (March 31). If you have deposited or withdrawn money from the account during the time period, it becomes a little more complicated, but the calculation is very similar to the total return for one holding.

Using your current statement (March 31), look for the market or current value of the portfolio, then subtract this value from the market value of the portfolio (less additions or withdrawals) at the beginning of the time period (January 1), divided by the beginning value. This will give you your return for the time period.

Let’s say that on January 1 your investments totaled $25,000. On March 31, the portfolio was worth $30,000. To calculate return, you subtract $25,000 from $30,000, for a total of $5,000. Divide the $5,000 by the original market value of $25,000 for a return of .20, or 20 percent—a very nice return. If you use the value from the brokerage statement, dividends and interest are included. If you calculate return on an individual holding, you’ll need to include any dividends during the period.

Calculating total return sounds complicated, and it can be, but it’s important to understand how well each of your holdings is doing because you could have one stock that’s on fire, while others are dragging your performance down. Knowing how each stock is performing in comparison to others in its sector and others in your portfolio will help you understand the bigger picture of your total investments.

Once you’ve figured out your total return, you’ll have a handle on how each stock has performed, as well as your overall portfolio. Then you can assess how well your stocks are working together to increase the overall value of your investments, and if you may need to add or get rid of some.

If you’ve calculated your total return and found that you’re up 8 percent year to date, you’re probably, and understandably, pleased. The question to ask, however, is how well should you have done? How do you know if 8 percent is a great return, just so-so, or maybe even not a good return at all?

To know how your investments are doing, you can compare them to one of the indexes that you read about in Chapter 1. Doing so will give you an idea of how well your stock is performing, as compared to the index stocks.

A guide for which index to use is that, if you’re invested in only U.S. stocks, you should compare your portfolio’s return with the Standard & Poor’s (S&P) 500 for the same time period. Looking at the same time period will provide a comparable return for the indexes.

The Dow Jones Industrial Average gets a lot of publicity, but most investors holding U.S. stocks actually look to the S&P 500 as the benchmark. The NASDAQ is the index to use if you are invested in tech growth stocks.

If you are invested in only small U.S. companies, compare your holdings to those on the Russell 2000. International holdings generally are compared to the stocks on MSCI EAFE, which, as you read in Chapter 1, is an index designed to measure the stocks of developed markets outside of the United States and Canada.

If you pay attention to such things, you might remember a 2004 presidential debate between John Kerry and George W. Bush, during which Kerry cited proceeds Bush had received from his partial ownership of a timber company. Appearing incredulous, Bush responded, “I own a timber company? That’s news to me. Need some wood?”

Fact checkers revealed that Bush did, indeed, have an interest in a timber company, but the point of that story is to illustrate that investors can sometimes lose sight of what they own. A periodic overview of your investment portfolio will remind you of exactly what you own and how much you own, and allow you to assess your asset mix.

If you’ve got exchange traded funds (ETFs) in addition to stock or mutual funds, it’s very possible that you’re not aware of what they contain. Take some time to research exactly what those accounts hold, and compare them to your stock allocation. Are the assets in the funds allocated in a similar fashion to your individual stocks? Does the allocation make sense to you? Check out the percentage of foreign, global, and international funds; large cap versus small cap holdings; and so forth. Knowing what you own helps you to make good decisions when buying additional stock.

There are many thousands of stocks available for sale. If you’ve got one that’s not performing up to your expectations, don’t feel obligated for any reason to hang on to it (except possibly if the fees associated with trading it are too high).

It’s difficult for many investors to accept a loss and move on, but sometimes that’s exactly what needs to be done. If you have a stock that’s declining in value, ask yourself if the reasons that convinced you to buy the stock in the first place still exist. Changes occur among companies and industries, and a good stock can turn into a bad stock. Sometimes the best move is to get rid of it and find something with better value. If the value of a stock you own begins to drop, do a little sleuthing to find out why. Has the company suffered bad earnings, or has there been news that could have negatively affected it? Is the news something that the company can overcome, or is it time to accept your losses and find a better choice? Many investment publications allow you set up investment alerts for stock you own, which can help you keep up with and assess what’s occurring within a particular company or industry.

Investors shouldn’t stop researching companies and stock just because they have a portfolio in place. Don’t be reluctant to consider stock other than what you already own. You’re likely to come across good opportunities as you talk to other investors and read and listen to financial news. Don’t be afraid to take advantage of them.

In Chapter 4, you read about establishing investing goals and timetables based on your age, circumstances, and aspirations. Goals are set by looking into the future and identifying what you anticipate needing money for and how much you think you’ll need. Once those things are determined, you can start figuring out how to fund things like your retirement, your or a child’s college education, and so forth.

As you read, different investment vehicles are recommended for various types of investing. Someone who has years before she’ll need her investment funds should choose different assets than someone who will need his funds in five years.

When evaluating your investments’ progress, take some time to review your goals and timetables. A great time to do this is when you are gathering information for your tax returns. Review your performance for the previous year, and consider if your allocation is in line with your goals. If you established benchmarks for where you wanted to be at certain time intervals, review those to see how you’re coming along. If your goals or circumstances have changed, be realistic about the fact that you may need to make some adjustments or changes to your portfolio. Revisit your goals and be willing to adjust them. We can’t always anticipate the changes that life hands us, but we can remain agile and ready to alter course when necessary.

If you’re saving for retirement, you should be adjusting your stock portfolio as you move closer to the big event. The retirement portfolio of a 30-year-old, in which some aggressive growth stocks are fine, should look much different from that of a 55-year-old, whose collection of stocks should be moving toward income investing.

While you’re reviewing your stocks, also take a good look at other retirement savings vehicles you might have, such as IRAs or a 401(k). If you’re heavily invested in stock and you’re more than halfway to retirement, consider adding bonds or moving assets into cash or money market funds. The stock market can offer significant gains, but if you’re soon going to begin depending on your savings, you need to look at preserving wealth.

Just as with your retirement savings, your college fund portfolio should start looking more conservative as your child gets nearer to needing the money. Hopefully, you invested in a mix of stocks and bonds, beginning when your child was young. As she ages (and it happens quickly), you’ll want to consider the allocation mix and move more toward bonds as the college years get closer.

When you know that you’re going to need the money shortly, move at least part of it into a savings account or money market funds so its value is protected and you have access to funds as you need them. Tuition payments roll around quickly and you’ll want to have money available.

If you’ve accumulated money over the years, your focus should shift toward preserving wealth. That doesn’t mean that you need to move out of the stock market altogether or cash in your investments and hide the money in your freezer, but you definitely should look to investments that incur less risk than those designed for building wealth.

Remember that large cap stocks are considered safer than small cap. Stocks that pay you dividends are desirable, particularly if you can continue to build your nest egg by reinvesting the dividends. Look toward transferring some of the money to cash investments to assure availability.

When the stock market hits a bearish period, many people will begin to re-evaluate their investments and some will determine that real estate is a better place to park their money. If you fall into that category and are considering using some of your investment funds to buy a vacation home or other major purchase, there are some important considerations to keep in mind.

Owning a second home offers the advantages of having a place to visit in an area that you like, and lets you offer the home to family and friends. It can also provide a revenue stream if you’re willing to rent it. Some investors insist that vacation homes can pay for themselves through rentals, but a lot depends on your expenses (the purchase price of the home, taxes, fees, and upkeep), the area in which the home is located, the availability of rental properties, and so forth.

If you’ve accumulated wealth and are considering a vacation home, be sure to take sufficient time and effort to research the subject carefully and decide whether it’s a smart financial move. Never buy a vacation home simply because you like the area in which it’s located, for emotional reasons, or because “everyone else” is buying property there.

From time to time as you evaluate and assess the performance of your investment portfolio, you may notice that your asset allocation mix has become unbalanced. Remember the discussion in Chapter 10 about the need to periodically rebalance your portfolio to bring it back to your original asset allocation mix? Let’s have a look at how you do that.

Your allocation mix gets out of balance because some investments grow faster than others. It could be that you find that stock from one industry or sector becomes overrepresented or weighted too heavily with one type of stock, such as large cap or growth stock.

This increases your risk, and you should look to making some changes. You can rebalance your portfolio in several different ways:

Before you decide how you wish to rebalance your portfolio, consider what fees you might encounter and potential tax consequences, and look for ways to minimize them.

Keeping your portfolio in balance will help to keep you on course and moving toward your investment goals. Other tips for staying on course include the following:

The Least You Need to Know