Each month, most brokers or banks send a printout of information about your investments, often accompanied by a cover letter and some other documentation. While these statements provide ongoing updates about your investments and how they have performed, the quality and presentation of the information varies. The documents and printouts are frequently unclear and investors often have trouble deciphering what is important and how to interpret the material, even after discussions with a broker. In this article, we'll give you some guidelines for interpreting the important information contained in these brokerage reports. (Make sure your broker is working for you with Is Your Broker Acting In Your Best Interest? and Evaluating Your Broker.)

Tutorial: Brokers and Online Trading

Asset Allocation and Risk
Typically, your portfolio structure is presented as a breakdown of the various asset classes in which it is invested. Your asset allocation includes stocks, bonds, cash equivalents, alternative investments, real estate and natural resources. You may also see a breakdown within a specific asset class, such as segregating equities by market capitalization or bonds according to the type of issuer.

One problem is that the report will often not specify the level of risk you are taking in your portfolio or, even worse, will categorize it incorrectly. A moderate level of risk might entail a roughly even allocation between stocks and bonds, or at most, a 60/40 split. However, brokerage firms often categorize portfolios containing 80% equities as medium risk. Other reports simply do not address the level of risk, or insert the term "medium risk" somewhere discreetly at the top, bottom or side of the page, where the unwary investor barely notices it. You should be kept clearly informed of the level of risk of your overall portfolio, and if your asset allocation seems too aggressive or conservative for you, then talk to your financial advisor about the issue. (To read more on these topics, see Determining Risk And The Risk Pyramid, Risk And Diversification and How Risky Is Your Portfolio?)

Performance of Your Portfolio
Next, look at your portfolio's performance for the most recent period reported, and how it compares with past performance. If returns are not satisfactory to you, talk to the advisor and determine whether any changes may be needed. A simple listing of cost, current value and other figures, with no meaningful analysis or discussion, is not very helpful.

In addition to seeing how your portfolio has performed, you need to know how well, or poorly, it has performed, compared with other investments. Comparing investment performance to benchmarks, such as market indexes or industry statistics, will provide a yardstick for evaluating your own portfolio. (Keep reading about this in Benchmark Your Returns With Indexes.)

For example, the Standard & Poor's 500 Index, a common benchmark for large-cap stocks, is useful for comparing the performance of large-cap stocks or mutual funds in your own portfolio. The stocks your broker selects for you should perform better than their respective benchmarks. If they do not, there is little point in paying someone to select stocks, when you could simply put them in a cheaper index fund. Similarly, it is possible to compare the performance of your bond portfolio with fixed-income indexes. Make sure your broker can explain to your satisfaction why your holdings are better than the other alternatives out there.

Other Information
You should also have detailed information on all the individual stock, bond and other holdings, geographic allocation, and purchases and sales during the period. However, a simple list of various investments and other information is of little use, when you need to know the details and reasoning behind a particular allocation, before you can decide whether it is appropriate or requires change.

Look closely at purchases and sales. Excessive activity could mean costly trading commissions, while too little activity suggests your financial advisor is not bothering to manage your money. Stay informed about the reasons for the various activities and transactions, or the lack of them. (To learn more about portfolio management, see The Cost And Consequences Of Bad Investment Advice and Paying Your Investment Advisor - Fees Or Commissions?)

What do you pay your broker to run your portfolio and give you advice, and what do the individual stocks, funds and other investments cost? This is extremely important information. It should be clear from the documentation, but often it isn't.

Over time, high costs can eat into investment returns. Annual expenses for mutual funds generally average about 1.25%, according to 2007 Lipper Research. Some equity mutual funds have front-end or back-end sales charges, or annual 12b-1 fees, while others do not carry these costs. The cost of buying and selling individual stocks through a discount brokerage firm is low, but can add up. Make sure you know what you are paying for securities and services and be aware of all fees and what they are for.

Normally, fees can be found in contracts, brochures or the summary documentation for a fund. Cost disclosures are often inconspicuous, or incomplete, and can be buried away in thick prospectuses. Hidden costs won't appear on the documentation, and may be hard to detect or may even be deliberately concealed.

The Bottom Line
Before entrusting your money to a financial advisor, ask what kind of information he or she provides and take a look at some sample documentation. If you are already working with someone, and are not happy with the written information you receive, ask for clearer explanations. If the brokerage firm's system cannot provide this, the broker should. There is no excuse for standardized. and essentially useless. cover letters. Regular visits, phone calls and explanatory emails should be able to ensure that you really do understand your investments, their cost and how they are performing. If you need to change brokers, read Shopping For A Financial Advisor and Broker Gone Bad? What To Do If You Have A Complaint.

Related Articles
  1. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  2. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  3. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  4. Bonds & Fixed Income

    High Yield Bond Investing 101

    Taking on high-yield bond investments requires a thorough investigation. Here are looking the fundamentals.
  5. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  6. Retirement

    How Robo-Advisors Can Help You and Your Portfolio

    Robo-advisors can add a layer of affordable help and insight to most people's portfolio management efforts, especially as the market continues to mature.
  7. Investing Basics

    Investing $100 a Month in Stocks for 30 Years

    Find out how you could potentially earn hundreds of thousands of dollars by just investing $100 a month in stocks during your working years.
  8. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  9. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  10. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  1. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  2. Do mutual funds pay dividends?

    Depending on the specific assets in its portfolio, a mutual fund may generate income for shareholders in the form of capital ... Read Full Answer >>
  3. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  4. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  5. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  6. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!