Financial planning is an exercise that requires patience, persistence, and precision. It's not just about saving money and investing in various assets. Effective financial planning is about making the most of your money to grow a portfolio that suits your needs. Understandably, measuring your financial portfolio isn't easy. You need to consider several factors before you can determine whether your strategic plan is working or if you need to make some tweaks. Here are some pointers on measuring a financial portfolio to know where you stand and what steps to take next.

1. What is a financial portfolio?

The financial portfolio is simply a collection of assets and investments. You can measure your financial portfolio by listing all your assets, from stocks and bonds to real estate and cash. You can also list all your debts, including student loans and mortgages. Some financial experts use the term "asset allocation" to measure your financial portfolio. It all comes down to the percentage of each asset you hold concerning the whole.

2. How to measure your financial portfolio

There are several factors to take into account when measuring your financial portfolio. These include the amount of debt you have, your cash flow, your income, and the amount of risk you're willing to take. To better understand the overall picture, you can use the following table to calculate your situation. 

1. Diversification

This is a crucial part of financial planning because it helps reduce risk and increases the likelihood of a positive investment return. Diversification simply means that you invest in several assets so that if one doesn't perform as expected, you still have others that can bail you out. There are several considerations to take into account when diversifying your portfolio. First, you should invest in assets that are completely different from one another. Secondly, the assets you choose should be able to minimize your risk.

2. Asset allocation

This is one of the most important aspects of measuring your financial portfolio. It refers to the percentage of each asset you hold concerning the whole. For example, if you have $100,000 in your financial portfolio and hold bonds worth $50,000 and stocks worth $30,000, your asset allocation is 50/30/20. Your asset allocation affects your risk as well as your rate of return. The trick is to find the right balance between low risk and good returns. This is why you must carefully measure your financial portfolio to make adjustments.

3. Net worth measurement

The net worth of your financial portfolio is simply the total value of your assets minus the value of your liabilities. For example, if you have $200,000 in stocks and bonds, $100,000 in cash, and $100,000 in mortgages, your net worth is $100,000. The net worth of your financial portfolio also serves as a way to measure your financial health. If you want to improve your financial health, you need to increase the value of your assets. This means that you have to be careful not to increase the value of your liabilities.

4. Portfolio risk measurement

The risk of your portfolio is determined by the volatility of your investments. If you hold only safe investments, your risk is low, but your return is also low. On the other hand, if you invest in riskier investments, your risk is high, but so is your return. The term "risk" is often used to refer to the rate of return on your investment. If you invest in high-risk assets, the rate of return is also high. If you invest in low-risk assets, the rate of return is low. And vice versa. Luckily, there are a few simple ways to measure the risk of your portfolio. One is to calculate the volatility of your assets. Another is to calculate the standard deviation of your portfolio. And the third is to use an asset allocation risk score.

Know the differences between active and passive investing

When you invest in a financial product, you have two options: active or passive. Active investment management means choosing the specific securities or assets to include in a financial portfolio. Passive investment management lets the portfolio track an index or other market benchmark you have no control over. Active investment management is more hands-on, but it comes with more risk. Passive management is hands-off, but it comes with less risk. Active management is best for investors with higher risk tolerance and a long investment timeframe. Passive management is best for investors with lower risk tolerance and a shorter investment timeframe.

Measure investment performance

When you're evaluating your portfolio, you first need to understand a few key performance measurements. Let's start with the time horizon. The time horizon is the length of time you have before you need to start withdrawing money from your portfolio. For example, if you're 40 years old and plan to retire at 65, the time horizon between now and when you begin withdrawing money is 30 years. The next thing to consider is your investment goal. What do you plan to do with your money? Saving for retirement, paying for your child's college education, or purchasing a new home are all common investment goals. Once you know what you're investing for, it's easier to establish investment goals. For example, suppose your goal is to save for retirement. In that case, you'll want to ensure you're investing a significant portion of your income in a retirement account, like a 401(k) or an IRA.

Understanding portfolio risk

Portfolio risk comes with investing in financial assets, which are very different from buying groceries or gas for your car. An investment portfolio comprises different assets, like stocks, bonds, and other types of securities. This variety helps to reduce risk and maximize returns. When you invest in single security (like Google, IBM, or Apple), you take on more risk than you would with a diversified portfolio. A diversified portfolio is a mix of various assets designed to reduce risk while still providing a decent return on investment. The best way to understand portfolio risk is to think about a financial portfolio like a baseball team. Each player on the team has different strengths and weaknesses. Some players are great at hitting, while others are more proficient at pitching. A well-rounded team has players who excel at every position and can cover each other's weaknesses. A diversified portfolio is the same way. It has strong assets in different areas, like cash, stocks, bonds, and real estate investment trusts (REITs). A diversified portfolio reduces risk and makes it less likely that a single event or trend will negatively affect your financial future.

Conclusion

There are several ways to measure a financial portfolio. One is to calculate the net worth of your financial portfolio. Another is to calculate the risk of your portfolio. And the last one is to assess the amount of diversification in your portfolio. One of the best ways to measure your financial portfolio is to use a financial statement template. It helps you identify strengths, weaknesses, opportunities, and threats to make more informed decisions.