Portfolio Return

Key Takeaways

• Portfolio return measures the gain or loss achieved by an investment portfolio over a specific time period.
• Diversification in portfolios helps balance risk and achieve more stable returns.
• Rebalancing a portfolio yearly can align investments with changing financial goals and risk tolerances.
• Young investors may take on more risk for higher returns, while those nearing retirement focus on safer assets.

What Is Portfolio Return?

Portfolio return is the measure of gain or loss generated by an investment portfolio, which consists of various assets such as stocks, bonds, and more. Understanding portfolio return helps investors evaluate the performance of their investments according to their financial goals and risk tolerance. By grasping the concept of portfolio return, investors can make informed decisions to optimize their investment strategies effectively.

How Portfolio Returns Work

Portfolio returns seek to meet the stated benchmarks, meaning a diversified, theoretical portfolio of stock or bond holdings, and in some cases, a mix of the two asset classes. Investors typically have one or more types of portfolios among their investments and seek to achieve a balanced return on investment over time.

There are many types of portfolios available to investors ranging from small-cap stock funds to balanced funds consisting of a mix of stocks, bonds, and cash. Many portfolios will also include international stocks, and some exclusively focus on geographic regions or emerging markets.

Many investment managers choose portfolios that seek to offset declines in certain classes of investments through ownership of other classes that tend to move in opposite directions. For example, many investment managers tend to mix both bonds and stocks, as bond prices tend to rise when stocks experience steep drawdowns. This helps to achieve the portfolio’s desired return over time and to smooth out volatility.

Important

A mix of asset classes that tend to move in opposite directions, such as stocks and bonds, is often a smart way to balance a portfolio.

The Role of Rebalancing in Portfolio Returns

A best practice followed by many investors is to review their portfolios at the end of every year and make adjustments to continue meeting their investment objectives.

For example, an investor might have an exceptional year with a growth fund and decide to transfer some of those gains into a value fund, anticipating that other investors may eventually rotate back into value.

Investor Strategies for Maximizing Portfolio Returns

The age at which an investor intends to withdraw money from a portfolio remains a critical factor in selecting a suitable investment objective. For example, an investor who is only a few years from retirement wants to protect their portfolio earnings and likely will invest in a mix of cash, money markets, and short-term bonds.

Conversely, a young investor typically seeks to take on relatively higher risk, investing in a mix of stocks, high-yield bonds, and perhaps managed futures, each of which has the potential to exceed the rate of inflation over time.

Of note, the advent of the internet age provided investors with near-real-time access to market returns, as well as easily accessible relative performance data. When investing in a mutual fund, investors can pull charts and fund returns versus a benchmark index, as well as a peer group average, typically going back ten years or more, as well as the top asset allocations of particular funds.

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Portfolio Management