The first thing you will notice is that the spread sheet contains many of the same topics we discussed last week in the trading diary. This is no coincidence, as these two tools are designed to complement each other.
By entering the information from the diary to the spreadsheet, you will be able to examine and review five separate components to your portfolio:
Performance: Knowing how well you are doing -- on both a relative and absolute basis -- will help you determine if you need to make major or minor course corrections.
Asset Allocation: You can very easily see when a position becomes too large relative to the rest of the portfolio. If most of the asset percentages are between 1% to 5%, that one stock or fund that's 14% really sticks out like a sore thumb. Recognizing this at least gives you the opportunity to decide if you want that much risk in a given stock.
It's easy to see when your portfolio is being dominated by a given sector. In the 1990s, it was tech and telecom; these days, it seems to be energy and housing that are slowly taking over portfolios. There's a reason you want balance, especially after an outsized move in an extended sector.
Data Mining (Strategy review): Price-to-earnings, P/E-to-growth, market cap, growth rate, beta, dividend yield. These are just some of the criteria you can keep track of. This allows you to determine what criteria are working best, just at a glance. Are high P/E and big beta stocks doing well? Or are low P/E stocks with good dividend ratios what's working? Either way, that tells you something about your holdings -- and the overall market as well. It also shows you where some tactical adjustments might be necessary.
Charts & Graphics: If a picture is worth a 1,000 words, then a spreadsheet must be worth a million: That's because you can take any and all of the entered data and turn it into a pie chart or graphic.
Let's do a quick experiment: look at columns L and M, and rows 35-44. It's the sector totals for both your portfolio and the S&P 500. Highlight column L, rows 35-44, then click on the chart wizard button -- it looks like a chart with a wand. Select a chart type (I like the pie chart), and then a sub type (my favorite is the 3D exploded chart). Click your way through the four steps. On the last one, select new sheet. Then click finish. Do the same thing for column M. The tabs at the bottom of the spreadsheet will let you switch back and forth between charts.
Look at your sector holdings breakdown, and then the relative weighting of sectors in the S&P 500. Are you comfortable with how similar or different your holdings are from the index?
Record Keeping: Your spreadsheet becomes a backup to your regular statements. Trust me when I tell you, this is often a lifesaver in a pinch. Your purchase price, date of buy, quantity and commissions all have tax implications. Keeping a spreadsheet creates a powerful record-keeping system, including cost basis. When some crucial brokerage statement turns up missing around tax time, your accountant will be relieved you have a back up (he can thank me then).
Using a spreadsheet gives you the ability to see these items across your entire portfolio, and then to make whatever adjustments are necessary. You can "play with the numbers," to see how different alterations affect your overall holdings in real time.
The bottom line is that unless you know what the bottom line was, you cannot make adjustments. It's the key to good performance.