January 16, 2023

Six reasons why every investor should use a portfolio analytics tool

We’ve all heard about portfolio analytics tools, seen the ads and most likely, been urged to start using one if our investments go above a certain threshold. But understanding the importance of how a portfolio analytics tool can help with our investment is vital – not only to our selection process but to how we use the tool in the future.  

At the core, the tool should help, both individual investors and institutions, make better decisions with where to put their money. They do this usually with several different functions, each serving to highlight an important quality of your overall portfolio and helping you look at your investments as a whole, rather than as individual assets. Below are 6 reasons (linked directly to functions) why investors should use portfolio tracker tools. 

One: To see your total wealth 

Most people tend to consider their current retirement account as the main path for their future financial goals to be met. However, it’s possible you could have investment properties, a separate stock trading account, previous employer pension accounts or even crypto. In truth, all of these add up to your financial wellbeing and it’s wise to consider every investment you make as one giant portfolio and manage it accordingly. 

The first step in doing so is to aggregate everything you own under one platform so that you can analyze it as a whole. You can use your portfolio analytics tool to bring in your total wealth either by automating links to all your investment accounts or manually add them. 

This helps you make quicker and more informed decisions over your total wealth. 

Two: To see what good look like  

Whenever you buy something, you usually want to compare it against something else that looks good. For example, if you buy a house, you are likely to compare it against the average house prices in the area to see whether you are underpaying or overpaying. If you are selling your car, you would probably use an online tool to see the average price that other similar cars are selling for. Even if you are buying something on Amazon, you are likely to look at the prices of similar goods as part of your decision-making process.   

Similarly, when  analyzing your investments, you should compare them against what looks good. But what are you comparing? 

The most common thing to compare is performance. A portfolio analytics tool helps you track and measure the performance of your total wealth over time. Once you have a tool that can do this for you, you can then compare your total performance against a chosen benchmark. For example, if you have a portfolio which is a mixture of stocks and bonds, you shouldn’t be comparing that performance against an equity only index. This way, you can better judge your portfolio performance in the context of a viable alternative option. 

You can also use the same tool to compare your portfolio’s asset class diversification, risk and P&L against your chosen benchmark to get different perspectives of how your portfolio behaves.   

Three: To see how concentrated you are in any one asset class 

Diversification is often used by portfolio managers to help spread the risk of any one investment. It’s similar to the concept of not putting all your eggs in one basket. 

You can use your portfolio analytics tool to help identify and manage diversification across your portfolio to see what asset classes or sectors you might be over concentrated in.  

For example, you may have $250k in your retirement portfolio, spread across stocks and bonds. Separately, you may have built up a mini crypto empire of $30k. If you look at your total portfolio of $300k, your allocation to crypto is 10% of your total wealth. Given that Family Offices seem to allocate only 3% of their portfolios to cryptos, you may decide that your portfolio is too concentrated in cryptos. 

Four: To see what kind of risks you currently take to generate a return 

A portfolio analytics tool allows investors to evaluate and manage risk across their portfolio. This can include identifying and monitoring potential risks, such as market fluctuations or changes in the economic environment.  

You can compare key risk metrics against your benchmark, including your risk adjusted return (Sharpe Ratio) and by looking at your Drawdown, you can get a deeper understanding of your performance by highlighting the pullbacks rather than just the return. 

Comparing it this way, helps you picture your portfolio from a risk perspective to see if your current composition is something you are comfortable with. 

Five: To see the impact on your portfolio, if markets move 

Scenario Analysis is the iterative process of changing the expected value of different assets, variables or benchmarks, to determine the impact on your portfolio. This may comprise credit spreads, interest rates, equity prices, volatility and FX to understand their potential impact on your portfolio.  

Seeing how your portfolio responds to market factors helps you decide if you need to make changes to your allocations or implement a hedge. For example, if you are heavily exposed to growth equities and there are signals of interest rate rises, you can use this data to make the necessary changes to reduce your exposure to these assets. 

Six: To see how your own personal views over the Environment are reflected in your portfolio 

Most fund literature will give you an overall ESG score. However, sometimes, they omit the breakdown into the separate components of the Environment, Social and Governance.  

For example, you may invest in a fund which has a high ESG score, but when you look at the Environment factor, it scores less. If this factor is what you care about the most, your portfolio analytics tool can help you align what you invest in, to what your personal preferences are about.  

In summary, using a portfolio analytics tool can help investors to make more informed and data-driven decisions which can lead to increased returns and better risk management.  

If you’re interested in a solution to help you manage your investments and want a product that offers a holistic suite of portfolio analysis tools, have a look at what illio has to offer.  

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