Investors say the darndest things.
Like the woman who claimed her adviser had done well for her over the longer term, but was letting her down in the current year because her portfolio was off 3 per cent. As mutual fund executive Tom Bradley recalls that conversation with a prospective client a few years ago, the reality was that the woman’s portfolio had underperformed over the past five years while producing comparatively good short-term numbers.
Many times over the years, Mr. Bradley has come across badly informed people making erroneous pronouncements about their investments. And so, he’s written a guide for investors called How Is My Portfolio Doing … And What Should I Do About It? (read it here)
“The level of understanding on how people are doing is abysmally low,” said Mr. Bradley, president of Steadyhand Investment Funds. “I just got sick of hearing [complaints] when I knew darn well the person was off base.”
The investment industry deserves a lot of the blame for this situation, a point Mr. Bradley does not dispute. He says there’s too much emphasis on marketing and keeping clients, and too little personalized return information provided in client account statements.
But investors themselves have to take some responsibility for monitoring their returns. Year-end account statements should be rolling in, so now’s an ideal time to get started with the comprehensive annual review suggested by Mr. Bradley.
“I want you to do this once per year, but do it thoroughly,” he said. “If you try to do it every quarter or even semi-annually, you’ll cut corners.”
Reviewing on an annual basis also addresses what Mr. Bradley describes in his guide as a tendency for people to monitor their portfolios too frequently and thus make themselves vulnerable to bad news.
He quotes Nassim Taleb, author of the influential book The Black Swan, as saying that people beat themselves up about bad news 2 to 2.5 times more than they celebrate good news. And he cites data from the investment analysis firm Morningstar showing the S&P/TSX composite index has been up 74 per cent of the time over one-year periods, but up only 54 per cent of the time on a daily basis.
Investment statements are often issued every three months, but Mr. Bradley says quarterly performance data is irrelevant. “Quarters add up to be years, but we try to make the point that there’s virtually no useful information in how you’re doing in quarterly returns.”
For a couple of reasons, Mr. Bradley’s preference is the five-year view. Five-year data is readily available online, and the period is long enough for money managers with distinctive styles to strut their stuff.
Now for your numbers. Grab a copy of your account statement and find the annualized five-year performance numbers. What, they’re nowhere to be found? The sad reality in Canada’s investment industry is that this level of information is not commonly offered.
Dalbar, a financial services market research firm, has found that overall rate of return is one of the top five most important statement elements that investors look for on their statements. And yet, “the majority of segments in the financial services industry are performing poorly in this category,” Anita Lo, vice-president at Dalbar’s Canadian division, said in an e-mail.
Mr. Bradley has found an online calculator from a financial advice firm called Weigh House Investor Services that can help investors find their personal rates of return (bit.ly/cpjXCH). Just type in the start and end values for your account and your contributions and withdrawals along the way; at the end you’ll get an average annual rate of return.
Now, by themselves, performance numbers mean little. Only when you have the correct context can you properly assess how you’re doing.
Mr. Bradley’s suggestion is to create what he calls a default portfolio, against which you can measure your own holdings. Start by noting the percentage of your portfolio in five key asset groups: Cash, bonds, Canadian stocks, U.S. stocks and international stocks. Then, find the correct benchmark indexes for each of these assets and build your default portfolio by adding them in the same proportion they hold in your portfolio.
