By Warren Mackenzie on December 8, 2013
Investors are making a mistake if they assume that the information on their monthly investment statement is sufficient to allow them to determine how well their portfolio is being managed. Most statements are inadequate for this purpose. If you’re not sure how you’re doing, it is not your fault.
Investment statements are cleverly designed to provide just enough information so that most investors will think they have what they need and they will be discouraged from asking for the important information.
One key bit of missing information is the rate of return expressed as a percentage return over one, three and five years. The other critical missing information is how the rate of return you earned compares with the return of a composite benchmark (i.e., what you should have earned). It is practically impossible to manage your money wisely if you have no way of telling whether your advisor is delivering value or if he or she is simply an additional cost, which means you will have less to spend in your retirement.
There is some good news, however. The banks and mutual fund companies have the information you require – you simply have to ask for it. It is a simple question: “How am I doing compared to the composite benchmark?” Get the answer to this question in writing. Over the phone, an advisor might say, “Don’t worry – you’re doing fine,” or “It’s been a tough year and all investors’ portfolios are down,” or “Don’t worry – we’re all in the same boat.” These are unsatisfactory answers, but if you ask for it in writing you’ll usually get the information you require.
Asking this question puts you in control. Getting this information allows you to manage your money like a professional. To manage your money wisely, you don’t need to know a lot about individual stocks or bonds – it’s your advisor’s job to know those details. All you want to do is to act like a manager and demand that those who you pay to manage your money are doing their job.
If you have verified that your performance matches the benchmark, then your work is done. On the other hand, if you have underperformed by 1% or 2%, you need to get an explanation of why you’ve underperformed in the past and why things will be different going forward.
At HighView, we find that those investors who have been kept in the dark regarding their performance usually have poor performance. Our experience is that investment managers who are able to add value usually advertise this fact. They are quick to let you know; they do not hide their lantern under a bushel.
Unfortunately, investors who are invested in high-fee mutual funds usually underperform by 1% to 2% per annum. Even worse, some of our research on investor returns shows that investor returns are even skinnier. Is it worth spending the time to find out how you’re doing? If you are 65 and retired and you have $500,000 of investments, a 1% underperformance will cost you over $250,000 by the end of your life. This is enough to pay for a winter home in a warmer climate. If you are in your early 40s, a 1% underperformance could mean working five years longer than necessary.
Making the decision to take control and to find out whether or not your advisor is adding value may be your most important investment decision.
We recommend you put this question to your advisor, but if you do not want to get into this discussion, you can get the answer by going to www.showmethereturn.ca and calculating your return yourself.
With investments (or with anything), it is impossible to avoid making a decision. It is obvious that taking control is a decision. It is less obvious, but doing nothing also is a decision; in this case it is a decision to stay with the status quo. In some cases the decision to do nothing may be the worst investment decision you can make.
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