Build Your Portfolio Dashboard

June 08, 2023

A few years ago, I owned an Audi that seemed like it was built to cruise at 80 miles per hour. Its powerful engine delivered a huge amount of torque across a wide range of engine speeds. No matter how fast I was going, a slight nudge on the accelerator would instantly send the car surging ahead. It was fun to drive, but it was also dangerous. If I did not carefully watch my speedometer, I could (theoretically, of course) hit 100 miles per hour without even noticing. Other gauges on the dashboard helped me know that the engine was performing properly and within safe tolerances.

A well-designed portfolio is a lot like a well-designed automobile. By combining high-quality assets in the right proportions, you can build a high-performing portfolio. Much as the instruments on the dashboard of a high-performance car help the driver operate the vehicle at its highest potential, so too, a simple dashboard of key portfolio metrics can help you get the most out of your investing experience. Here are three metrics to get you started.

Performance vs. benchmark

For most people, portfolio metrics start and end with performance. In last week’s column, we discussed the importance of measuring investment performance using an appropriate benchmark. We showed how using a single index like the S&P 500 can lead to misleading conclusions. Instead, we recommended that investors use custom benchmarks built to reflect their long-term target asset allocation. If you didn’t get the chance to read last week’s article, send me an email and I’ll be happy to send you a copy.

A custom benchmark is to your portfolio what a speedometer is to your car. A speedometer tells you how fast you are going, but it tells you nothing about the state of your engine. Likewise, your portfolio’s performance relative to a benchmark tells you if you are keeping up with the market, but it says nothing about what is really going on in the portfolio itself.

Actual asset allocation vs. target allocation

Numerous academic studies have highlighted the importance of asset allocation in determining investment performance. It pays to keep an eye on your asset allocation.

Over time, some asset classes will outperform others causing your portfolio’s actual asset allocation to drift from your target allocation. This can be especially dangerous when market bubbles develop and can lead to jarring shocks when those bubbles burst. You can avoid this by reviewing your actual portfolio allocation compared to your target asset allocation on a regular basis. Morningstar has some tools that can help you do this, but it may make more sense to enlist your advisor’s help.

Progress toward goal

Have you ever wondered why stock brokers talk about “beating the market” and mutual fund companies tout their performance relative to a benchmark index? It is because focusing on relative performance gives them a sales pitch no matter what is happening in the market. This is not a problem in an up market, but being a little “less bad” in a bad market is cold comfort to someone trying to save for college or retirement or some other important goal. There has long been a saying in the market: “You can’t eat relative performance.”

Progress toward goal is a difficult metric to track for a couple of reasons. First, it requires that we clearly define our goals and our plans to achieve them, something that many people have difficulty doing. Second, it requires us to think about the future in terms of probabilities, something that is not always intuitive.

A well-constructed financial plan authored by a qualified financial planner can be especially helpful when it comes to tracking your progress toward your goals. Few individuals have the resources to create such a plan on their own, but professional financial planners have the expertise plus specialized software and other tools at their disposal. They can help you design a road map to your goals, including realistic portfolio return targets, and estimates of probabilities.

A tool that is particularly valuable for this exercise is something called Monte Carlo analysis. Monte Carlo analysis uses statistical methods to project thousands of potential outcomes based on historical market probabilities. With Monte Carlo analysis, a financial planner can tell you how likely you are to achieve a particular goal at any point in time.

Please see important disclosure information here.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to