Evaluating performance of your portfolio
After you have created your portfolio, you will need to evaluate your performance so that you can see if your investing goals are being achieved. Having a benchmark to compare against is important because it allows you to decide whether your time is better used by passive or active investing, it helps you to improve your results and allows you to compare your performance with professional money managers. For a passive investor, your goal will be to match the performance of a benchmark index. Active investors are trying to beat their benchmark.
Which benchmark you choose depends on the type of investments you are making. For example, if you are only investing in large cap companies, you should use an index that only tracks large cap companies. If you are not sure which index to use, the S&P 500 is an appropriate default benchmark. After you have set which benchmark your portfolio will be compared with, it is important not to change the benchmark or you will get misleading results.
Having a benchmark is important, but it means nothing if you never evaluate your performance. You will also want to track your portfolio (and individual investments) periodically and check to see how much money you have made, what your annualized returns have been, and how your returns compare to your benchmark. Percentage returns are a better indicator of performance than absolute numbers.
How you build your portfolio ultimately depends on who you are as in investor. It depends on whether you are aiming for growth or income, whether you are risk-averse or risk-taking, your level of experience, and your investing time frame. Different types of investors require different investing strategies and will come up with different portfolios. There is nothing wrong with this as long as you are aware of your financial health, your investing goals, and your strengths and weaknesses. You should always manage your portfolio in a way that is the most comfortable for you.