Investment basics

Four steps to measure progress toward financial goals

investment_goalHow did your investment portfolio do and what progress did you make toward your long-term financial goals? You can do this by doing four key things, according to Rande Spiegelman by Charles Schwab brokerage and banking company.

Long-term financial success depends on a lot more than what ”the market” does from year to year, says Spiegelman. Investors should walk through four key steps to help them to understand just how they are doing vis-à-vis the market and their financial goals.

Here are the four key things.

Step 1: Benchmark your portfolio’s performance

Spiegelman says that you need to assess the performance of your portfolio as a whole, including all your taxable and tax-deferred accounts. Then, compare your portfolio’s actual performance in 2013 (accounting for any deposits or withdrawals during the year) to a benchmark return of appropriate market indexes weighted to match your target asset allocation.

Example: Look up the 2013 return for each asset class’s benchmark index, and multiply it by your percentage weight for that asset class to get a weighted return. Then add up the results for your benchmark portfolio return.

Step 2: Measure the performance of individual investments

According to Spiegelman, once you see the big picture, you’ll want to see how each of your stocks, bonds and mutual funds performed in 2013 relative to their appropriate peer group and index.

Step 3: Assess your personal net worth

Update also your personal net worth statement, Spiegelman says. Start calculating your personal net worth by totaling up all your assets. Examine what you currently owe (a mortgage, credit-card debt and so on) but also what you’ll owe if you sell any of your assets.

You should also complete the picture with a statement of personal cash flows—all sources of annual income minus expenses.

Step 4: Make or update your savings and investment plan

“Putting one in place involves assessing your current situation, identifying your goals—retirement, college funding for children and so on—then formulating a savings and investment plan to help you reach them, as well as a distribution plan to fulfill your goals”, Spiegelman says.

Properly implemented and monitored plan can increase your chances of achieving your goal—as you find the right balance between working toward your future goals, including a secure retirement, and enjoying the here and now, Spiegelman claims.

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