How to Know if Your Investment is Working

Investing your hard-earned money is a crucial step toward building wealth, achieving financial goals, and securing a comfortable future. However, simply putting money into an investment isn't enough—you need to regularly monitor its performance to ensure it’s working for you.

So, how can you determine if your investment is on the right track? This guide provides practical tips and clear indicators to help you evaluate whether your investment is yielding positive results or needs adjustment.

1. Set Clear Investment Goals and Benchmarks

Before you can evaluate your investment’s success, you need to define clear, measurable goals. Different investments serve different purposes, such as long-term growth, income generation, or capital preservation.

a) Define Your Investment Objectives

Ask yourself:

Are you investing for retirement, buying a house, or funding your child's education?
Do you want to achieve capital appreciation or generate passive income?
What is your time horizon—short-term, medium-term, or long-term?

b) Establish Performance Benchmarks

A benchmark helps you measure your investment against a standard reference point. Common benchmarks include:

S&P 500 Index – For US stock market investments.
MSCI World Index – For global equity portfolios.
Barclays U.S. Aggregate Bond Index – For fixed-income portfolios.

Tip: If your portfolio’s annual return consistently outperforms its benchmark, your investment is likely working well.

2. Calculate Your Investment Returns Correctly

Tracking your investment returns accurately ensures you understand your portfolio's growth.

a) Calculate Total Return

The total return reflects how much your investment has grown, including capital gains, dividends, and interest.

Formula:

$Investment)×100\text{Total Return (\%)} = \left(\frac{\text{Final Value} - \text{Initial Investment} + \text{Dividends}}{\text{Initial Investment}}\right) \times 100$

Example:

Initial Investment: $10,000
Final Value: $11,200
Dividends Received: $300

$(%)=(11,200−10,000+30010,000)×100=15%\text{Total Return (\%)} = \left(\frac{11,200 - 10,000 + 300}{10,000}\right) \times 100 = 15\%$

b) Analyze Annualized Return

The annualized return shows the average yearly growth of your investment.

Formula:

$Value)1Years−1\text{Annualized Return (\%)} = \left(\frac{\text{Final Value}}{\text{Initial Value}}\right)^{\frac{1}{\text{Years}}} - 1$

Tip:
Use investment tracking apps like Personal Capital, Mint, or Morningstar to automate return calculations.

3. Monitor Key Performance Indicators (KPIs)

Certain performance indicators help you gauge your portfolio’s health.

a) Portfolio Growth Rate

Tracks how much your investment has grown over time.

Positive growth indicates your investment is performing well.
Flat or negative growth suggests re-evaluation may be necessary.

b) Dividend Yield (For Income Investors)

If you invest in dividend-paying stocks, track the dividend yield.

Formula:

$Price)×100\text{Dividend Yield (\%)} = \left(\frac{\text{Annual Dividend Per Share}}{\text{Share Price}}\right) \times 100$

Example:

Annual Dividend: $2 per share
Share Price: $50

$Yield=(250)×100=4%\text{Dividend Yield} = \left(\frac{2}{50}\right) \times 100 = 4\%$

A stable or growing dividend yield often signals a healthy company.

c) Expense Ratio

Measures investment fees as a percentage of total assets.

Lower ratios (under 1%) are ideal for index funds and ETFs.
Higher ratios may erode returns over time.

4. Track Your Investment Against Inflation

Inflation reduces your money's purchasing power over time. If your investment returns don't outpace inflation, you’re losing money in real terms.

a) Calculate Real Return

Real return adjusts for inflation, giving you a true measure of growth.

Formula:

$(%)\text{Real Return (\%)} = \text{Nominal Return (\%)} - \text{Inflation Rate (\%)}$

Example:

Nominal Return: 7%
Inflation Rate: 3%

$Return=7%−3%=4%\text{Real Return} = 7\% - 3\% = 4\%$

Tip:
Check official inflation rates via the Consumer Price Index (CPI) from sources like the U.S. Bureau of Labor Statistics (BLS).

5. Assess Your Asset Allocation Regularly

Asset allocation refers to how your investment is distributed across asset classes (stocks, bonds, real estate, etc.). A well-balanced portfolio aligns with your risk tolerance and financial goals.

a) Why Rebalancing Matters

Market fluctuations alter your asset mix over time.
Rebalancing ensures you stay aligned with your original investment strategy.

b) How to Rebalance

Check your portfolio’s current allocation (e.g., 70% stocks, 30% bonds).
Compare with your target allocation (e.g., 60% stocks, 40% bonds).
Sell overperforming assets or buy underperforming ones to restore balance.

6. Understand Risk and Volatility

Every investment carries risk. Understanding how much risk you are taking helps you evaluate whether the returns justify the volatility.

a) Measure Investment Volatility (Standard Deviation)

Standard deviation measures how much returns vary from the average.

High deviation: Greater price swings (more risk).
Low deviation: More stable performance (less risk).

Tip:
Use tools like Yahoo Finance or Morningstar to check volatility metrics.

b) Track Maximum Drawdown

This shows the largest percentage loss from a peak to a trough.

A smaller drawdown indicates better downside protection.

Tip:
Evaluate how your investment performed during economic downturns.

7. Compare Against Your Financial Plan

a) Revisit Long-Term Goals

Are your investments on track with your timeline?
If you planned for an 8% annual return but are getting 5%, consider adjusting your contributions.

b) Adjust for Life Changes

Significant life events like marriage, children, or career shifts may necessitate strategy changes.

Tip:
Conduct a full portfolio review annually to align with your evolving goals.

8. Watch for Red Flags: Signs Your Investment Isn’t Working

a) Consistent Underperformance

If your investment consistently underperforms its benchmark, investigate:

High fees or commissions.
Poor management decisions (for actively managed funds).
Market shifts affecting asset performance.

b) Declining Dividends

Dividend cuts may indicate financial trouble for the issuing company.
Compare your dividend stocks to sector averages.

c) High Volatility with Low Returns

If your portfolio is experiencing significant swings without substantial growth, it may be time to reconsider your strategy.

9. Use Investment Tracking Tools

Modern technology makes it easier than ever to track investment performance.

Popular Tools and Apps:

Personal Capital: Tracks investments and calculates performance.
Morningstar: Provides research and investment analysis.
Yahoo Finance: Monitors stocks and portfolio allocations.

What to Track:

Portfolio growth over time.
Investment allocations across sectors.
Returns compared to benchmarks.

10. Seek Professional Advice When Needed

If you’re unsure about your investment strategy or portfolio performance, consult a certified financial advisor.

When to Seek Help:

If you experience significant market losses.
When you’re approaching a major financial goal (e.g., retirement).
If you want a second opinion on your portfolio’s performance.

Regular Monitoring Ensures Long-Term Success

Monitoring your investment’s performance is essential for maximizing returns, managing risk, and staying on track with your financial goals. By calculating returns accurately, comparing against benchmarks, and adjusting strategies when needed, you can confidently determine if your investment is working.

Regular assessments and proactive adjustments will help your portfolio stay resilient and profitable, ensuring you’re making the most of your financial journey.