The Enlightened Investor-Understanding Returns

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One thing frustrated investors often lament are their returns. So here’s a question. Do you know what your returns really are?  We think you should. We strongly believe that it is the responsibility of financial advisors to provide you with details about your returns

Ideally, you should be given one return as if all your accounts were a single consolidated portfolio. These returns should be provided to you (on an after fee basis) so that you can see the big picture. Does knowing that your $25,000 TSFA returned 8%, while your $350,000 RSP earned 3.5% and your $250,000 personal account earned 5% often leave you wondering how much your wealth grew by?

Once you do know your consolidated return…are you outperforming or under-performing? Should you keep doing what you’re doing or change strategies or advisors? A pure statistician would argue 20 to 30 years of performance data is required to properly evaluate manager luck versus manager skill.

The choice of hiring a new advisor or changing your current advisor is of immense importance no matter what size of portfolio you have and this should be an educated decision. Practically speaking, you should give your financial advisor at least 3 years in order to assess their investment results.

An easy way to expose poor results is to compare your portfolio return to an appropriate benchmark return. It also shows if your financial advisor’s management is helping or hindering the performance of your portfolio. There are many benchmarks for each of the asset classes: Canadian stocks, U.S. stocks, international stocks and even bonds. Two common benchmarks are:

S&P TSX Composite Index: This index currently consists of 234 Canadian companies chosen from 10 industries. This index provides an indicator of Canadian stock market performance.

S&P 500 Index: This index includes approximately 500 U.S. companies chosen to provide an indicator of U.S. stock market performance. It is one of the most widely followed stock market indices and is considered a good indicator of the U.S. economy.

Benchmarks make it crystal clear whether you are capturing the full returns of the market over time. Mutual fund managers have fared poorly versus their benchmarks. For the five years ending 2011, only 2.7% of Canadian stock mutual fund managers beat the S&P TSX Composite Index return after fees and expenses, and just 11% of U.S. stock funds outperformed the S&P 500 (in Canadian dollar terms).

You have to be careful when choosing or changing a financial advisor, and you should gain as much information about your stock portfolio as you can.  Only then are you truly an enlightened investor able to make educated decisions that bring you desired results.

If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.

Thanks to Chris Turnbull of The Index House for providing much of this content.

The Index House is a division of Polaris Financial Inc.

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